For tax years beginning January 1, 2012, North Carolina offers a new deduction for taxpayers who include net business income in their Adjusted Gross Income (AGI) as reported on their North Carolina individual income tax return. The statute allows a deduction of up to $50,000 of net business income included in AGI that is not considered passive under Internal Revenue Code (IRC). For married couples filing a joint return where both spouses report a net business income, the maximum amount applies separately to each spouse’s net business income included in AGI, not to exceed a total of $100,000.
Net business income that is not considered passive is the total of all business incomes and losses (excluding passive incomes and passive losses) reported on Federal Schedules C, E, & F. For income or loss reported on Schedule E Part II, non-passive business income or loss is computed by subtracting non-passive loss and deductions allowed under IRC Section 179 (with respect to non-passive income) from non-passive income.
IRC Section 469 and Treasury Regulation §1.469 provide the official interpretation on when income or loss is considered passive. Generally real estate rental income or loss is considered passive – whether individually owned and reported on Schedule E Part I or reported on Schedule E Part II from a pass-through entity. There are however cases where taxpayers may qualify and subsequently the real estate rental income or loss may be recharacterized from passive to non-passive (i.e. taxpayer considered to be a real estate professional); in this instance the taxpayer is entitled to the net business income deduction.
If you need help in determining the amount of the net business income deduction to which you are entitled, please contact our office.