Questions and Answers About the Impact of Federal Law on N.C. Individual and Corporate Income Tax Returns for Tax Year 2025
Issued by: Tax Administration
Date: February 9, 2026 (Updated February 27, 2026)
This Fact Sheet provides answers to frequently asked questions (FAQs) about the impact of federal law on North Carolina individual and corporate income tax returns for tax year 2025.
These FAQs are being issued to provide general information to taxpayers and tax professionals as expeditiously as possible. Accordingly, these FAQs do not address any taxpayer’s specific facts and circumstances, and they may be updated or modified upon further review. If an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer’s case, the law will control the taxpayer’s tax liability.
Any later updates or modifications to these FAQs will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made.
On January 8, 2026, the North Carolina Department of Revenue (“NCDOR” or “Department”) issued an important notice to provide guidance to taxpayers on how differences in the Internal Revenue Code (“Code”) in effect for tax year 2025, and the North Carolina Revenue Act (“Revenue Act”) may impact the filing of the 2025 North Carolina income tax return. Below are answers to some questions about the notice.
Q1. What is state income tax conformity?
A1. State income tax conformity refers to the process by which a state aligns their income tax law with the Code.
Q2. Why do states conform to the Code?
A2. States generally conform to the Code to simply the calculation of a taxpayer’s state income tax and to increase taxpayer compliance with tax law.
Q3. How do states conform to the Code?
A3. States can choose to conform to the Code through different methods, such as rolling conformity, static conformity, or selective conformity. Each method has its own implications for the timing of when changes to the Code impact a state’s tax calculations.
Q4. What conformity method does North Carolina use to align its income tax laws with the Code?
A4. North Carolina is a static conformity state. As a static conformity state, updates made to the Code are not incorporated into North Carolina income tax law until the North Carolina General Assembly enacts legislation to update the date referenced in the Revenue Act.
Q5. What is the date of the Code referenced in the Revenue Act.
A5. The Revenue Act currently references the Code as of January 1, 2023.
Q6. What do North Carolina taxpayers need to know about how the conformity differences affect the 2025 tax season?
A6. The starting point for determining North Carolina income tax for individuals and corporations is adjusted gross income (“AGI”) and federal taxable income (“FTI”), respectively, as determined under the Code as of January 1, 2023. Because the General Assembly has not enacted legislation to reference the Code after January 1, 2023, an individual cannot include in AGI and a corporation cannot include in FTI the federal tax changes included in the Federal Disaster Tax Relief Act of 2023, the One Big Beautiful Bill Act (“OBBBA”), and the Disaster Related Extension of Deadlines Act, (collectively, “Federal Legislation”).
Q7. What does it mean that “an individual cannot include in AGI and a corporation cannot include in FTI” the federal tax changes included in the Federal Legislation?
A7. North Carolina income tax law has not adopted the federal tax changes made to the Code after January 1, 2023. If a taxpayer is required to file a NC income tax return and taxpayer’s federal AGI (for individuals) or FTI (for corporations) is affected by a provision in the Federal Legislation, the taxpayer must compute AGI or FTI using the Code as of January 1, 2023.
Example 1:
Joe Smith, a NC resident and small business owner, incurred research and experimental (R&E) costs in 2025. Under federal law, Joe Smith qualifies for immediate expensing of the R&E costs, reducing Joe Smith’s AGI for tax year 2025.
When Joe Smith files his 2025 NC individual income tax return, Joe Smith must compute AGI using the provisions of the Code as of January 1, 2023, which required R&E costs to be capitalized and amortized over several years.
Example 2:
ABC Corporation purchased and placed in service an asset in 2025. Under federal law, the asset qualifies for the 100% bonus depreciation deduction, reducing ABC Corporation’s FTI for tax year 2025.
When ABC Corporation files its 2025 NC corporate income tax return, ABC Corporation must compute FTI using the provisions of the Code as of January 1, 2023, which limited the bonus depreciation deduction to 40%.
Q8. Can I deduct the new federal deductions for tips, overtime pay, car loan interest, and the new senior deduction (collectively “New OBBBA Deductions”) on my 2025 North Carolina individual income tax return?
A8. No. The New OBBBA Deductions are taken after a taxpayer calculates AGI and therefore do not affect North Carolina taxable income. The General Assembly must enact legislation to allow taxpayers to reduce AGI for similar adjustments.
Q9. My federal standard deduction amount increased for tax year 2025. Did the North Carolina standard deduction amount also increase?
A9. No. The federal standard deduction amount is taken after a taxpayer calculates AGI. The General Assembly determines the North Carolina standard deduction amount. (See G.S. 105-153.5(a)(1)(1)). The North Carolina standard deduction amount can only increase if the General Assembly enacts legislation to increase the amount.
Q10. My federal itemized deduction amount increased for tax year 2025 because I was entitled to increase my state and local taxes (“SALT”) deduction. Can I deduct the increased SALT amount on my North Carolina income tax return?
A10. No. The federal itemized deduction amount is taken after a taxpayer calculates AGI. The General Assembly determines the North Carolina itemized deduction amount. (See G.S. 105-153.5(a)(1)(2)).
Under G.S. 105-153.5(a)(1)b, an individual may deduct qualifying mortgage expenses and property taxes. The property tax deduction is determined “under section 164 the Code for that taxable year”. However, because the Revenue Act references the Code as of January 1, 2023, the property tax deduction must be computed using the limitations in effect on January 1, 2023. Therefore, an individual who files a 2025 NC income tax return may deduct the following:
- Up to $10,000 if the individual files the NC income tax return using the filing status of single, joint, or head-of-household filer.
- Up to $5,000 if the individual is lawfully married but the individual files separately from their spouse.
Q11. Can you provide an example on how the conformity differences impact North Carolina modifications to AGI and North Carolina adjustments to FTI? (Added February 27, 2026)
Example:
On January 19, 2025, Corporation ABC acquired and placed in service a five-year asset (“Asset”) for $150,000 and incurred $60,000 in research and experimental expenditures (“R&E”).
For federal income tax purposes, Corporation ABC elects to claim 100% bonus depreciation on the Asset and elects to fully expense R&E. For purposes of this example, assume the Asset is “qualified property,” pursuant to IRC § 168(k), and R&E is domestic research or experimental expenditures pursuant to IRC § 174A.
For taxable year 2025, Corporation ABC has taxable income of $500,000 before deducting bonus depreciation on the Asset (“Bonus Depreciation”) and before expensing R&E (“R&E Expense”).
For federal income tax purposes, Corporation ABC's federal taxable income is $290,000 calculated as follows:
Taxable Income (Before Bonus Depreciation and R&E Expense): $500,000
Minus Bonus Depreciation (OBBBA): $150,000
Minus R&E Expense (OBBBA): $60,000
Equals Federal Taxable Income: $290,000
For North Carolina income tax purposes, Corporation ABC's federal taxable income is $416,000 calculated as follows:
Taxable Income (Before Bonus Depreciation and R&E Expense): $500,000
Minus Bonus Depreciation (pre-OBBBA) ($150,000 x 0.40): $60,000
Minus MACRS (pre-OBBBA) (200% Declining Balance – half-year convention)
($90,000 x 0.20): $18,000
Minus R&E Expense (pre-OBBBA) (60-month amortization – half-year convention) ($60,000/60 x 6 months): $6,000
Equals Federal Taxable Income: $416,000
Corporation ABC's North Carolina adjustment to federal taxable income is $51,000 calculated as follows:
Adjustments to Federal Taxable Income (2025 Form CD-405, Schedule H)
Additions: Bonus Depreciation ($60,000 x 0.85): $51,000
Total Additions: $51,000
Deductions: $0
Total Deductions: $0
Adjustments to Federal Taxable Income: $51,000
Corporation ABC's North Carolina income tax is $10,508 calculated as follows:
Computation of Corporate Income Tax (2025 Form CD-405, Schedule B)
Federal Taxable Income Before NOL: $416,000
Add Adjustments to Federal Taxable Income: $51,000
Equals Net Taxable Income: $467,000
NC Net Income Tax ($467,000 x 2.25%): $10,508
Q12. The important notice dated January 8, 2025, requires individuals and corporations that file a 2025 NC Income Tax Return (“Return”) prior to a Code update to “complete and attach a schedule to the Return that reconciles AGI or FTI as calculated under the Code in effect for tax year 2025 with the Code as of January 1, 2023.” (Added February 27, 2026)
Can you provide specific guidance and a detailed example of the preferred content and format of the schedule?
Individuals and corporations (collectively, “Taxpayers”) required to file a Return for tax year 2025 and whose federal adjusted gross income (“AGI”) or federal taxable income (“FTI”) is impacted by differences between the Code for tax year 2025 and the Code referenced in the Revenue Act must include a supplemental reconciliation schedule (“Schedule”) with the 2025 NC income tax return (“Return”). The purpose of the Schedule is to reconcile AGI or FTI calculated under the Code after the enactment of the Omnibus Budget and Business Act (“OBBBA”) with AGI or FTI calculated under the Code as of January 1, 2023.
No specific format is required for the Schedule. However, the Schedule must fully disclose all income and deduction items that differ between federal and North Carolina calculations of AGI or FTI. The Department recommends using headings and explanatory notes to highlight the differences. (See example of recommended format, below.)
Note: Taxpayers and preparers who use tax preparation software should contact their software provider with questions.
Supplemental Reconciliation Schedule – Tax Year 2025
Taxpayer Name: Corporation ABC
FEIN: 56-1234567
NC Income Tax Return: CD-405
| Item | IRC 7/4/2025 (OBBBA) | IRC 1/1/2023 (Revenue Act) | Reconciliation |
|---|---|---|---|
| Taxable Income (Before Conformity Differences) | $500,000 | $500,000 | $0 |
| Bonus Depreciation | ($150,000) | ($60,000) | $90,000 |
| MACRS Depreciation | $0.00 | ($18,000) | ($18,000) |
| R&E Expenses | ($60,000) | ($6,000) | $54,000 |
| Federal Taxable Income | $290,000 | $416,000 | $126,000 |
Q13. Is the Code as referenced in the Revenue Act inclusive of regulations, notices, and other information published by the Internal Revenue Service, or simply to the Code itself? (Added February 27, 2026)
Except as otherwise expressly provided or clearly appearing from the context, any term used for North Carolina (NC) personal and corporate income tax purposes has the same meaning as when used in a comparable context in the Code, or in any statute relating to federal income taxes, in effect during the taxable period. In addition, due consideration must be given in the interpretation of NC income tax statutes to applicable sections of the Code in effect and to federal rulings and regulations interpreting those sections, except where the Code, ruling, or regulation conflicts with the provisions of NC income tax statutes.