Earlier this year, we informed clients that North Carolina had not yet adopted many provisions of the federal legislation commonly known as the “One Big Beautiful Bill Act,” or “OBBBA,” signed into law on July 4, 2025. As such, we recommended extending returns where appropriate. The General Assembly has now enacted conformity legislation, and the North Carolina Department of Revenue has issued guidance explaining how these changes affect taxpayers.
North Carolina Issues Guidance on Recent Tax Law Changes
Following enactment of Session Law 2026-31 and 2026-41, the North Carolina Department of Revenue (NCDOR) has issued an Important Notice explaining how these new laws affect North Carolina individual and corporate income tax returns. The guidance addresses several significant changes, including North Carolina’s updated conformity to the Internal Revenue Code, new state decoupling rules for research expenditures, and new deductions available to certain taxpayers.
What Changed
North Carolina Updates IRC Conformity Date
North Carolina has updated its reference date to the Internal Revenue Code from January 1, 2023, to July 5, 2025, adopting many, but not all, federal tax law changes enacted through that date. As a result, many provisions of the One Big Beautiful Bill Act (OBBBA) are now incorporated into North Carolina law. However, the General Assembly chose to decouple from certain federal provisions.
North Carolina Decouples from Federal Immediate R&E Expensing
One of the most significant differences involves domestic research and experimental (R&E) expenditures.
While federal law generally allows taxpayers to immediately deduct qualifying domestic R&E expenditures under IRC Section 174A, North Carolina does not conform to this provision.
Instead, taxpayers who claim the federal deduction must add back 80% of the federal domestic R&E deduction on their North Carolina return, and then deduct that add-back evenly over the next four taxable years (25% per year).
These rules apply retroactively in certain situations for taxpayers electing retroactive federal treatment and prospectively beginning with the 2025 tax year for others. Businesses that amended federal returns or claimed immediate R&E expensing should evaluate whether North Carolina amended returns are also necessary.
New Deduction for Certain Hurricane Helene Timber Losses
North Carolina created a new deduction for qualifying timber casualty losses resulting from Hurricane Helene.
Eligible taxpayers may deduct qualifying losses for 2024, or may elect to claim the deduction on an amended 2023 North Carolina return if still within the statute of limitations. Specific eligibility requirements apply, including acreage limitations and FEMA disaster area requirements.
New Itemized Deduction for Gambling Losses
Beginning with 2025 returns, North Carolina now permits taxpayers who itemize North Carolina deductions to deduct gambling losses to the extent allowed under IRC §165(d), provided those losses are not already reflected in federal adjusted gross income.
What This Means for Taxpayers
The NCDOR has indicated that taxpayers affected by these legislative changes should file or amend North Carolina income tax returns, where appropriate. Because several provisions are retroactive, some taxpayers may be entitled to refunds, while others may need to report additional tax depending on their circumstances. Amended returns claiming refunds must be filed within the applicable statute of limitations.
What We Will Do
Our tax professionals are reviewing these changes as we prepare 2025 returns and evaluate prior-year filings.
We will determine whether these law changes affect your individual or business tax situation, including whether:
- amended North Carolina returns should be filed,
- additional North Carolina adjustments are required,
- previously anticipated conformity issues have been resolved, or
- new planning opportunities are available.
If we identify an opportunity or filing requirement, your engagement team will discuss the recommended approach with you.
We will continue monitoring additional guidance from the North Carolina Department of Revenue, including anticipated FAQs and future instructions implementing these legislative changes.
As always, please contact your engagement team if you have questions regarding how these changes may affect you or your business.
