On July 2, 2026, North Carolina enacted Senate Bill 595, which updates the State’s reference to the Internal Revenue Code and addresses how North Carolina will treat certain federal tax changes enacted last year under H.R. 1, commonly referred to as the One Big Beautiful Bill Act.
This legislation is important because North Carolina previously conformed to the Internal Revenue Code as of January 1, 2023. As a result, federal tax changes enacted after that date did not automatically apply for North Carolina income tax purposes. In a previous alert, NCDOR Issues Important Notice Impacting 2025 North Carolina Returns, BRC discussed this uncertainty and had generally recommended extending 2025 North Carolina tax returns for taxpayers affected by H.R. 1 while waiting for North Carolina conformity legislation.
Senate Bill 595 provides some of that needed clarity by updating North Carolina’s conformity date to July 5, 2025. However, the bill does not fully conform to every federal tax change. North Carolina continues to require separate state adjustments in several important areas, meaning taxpayers should not assume the North Carolina result will automatically match the federal return.
The following summarizes North Carolina’s treatment of several key H.R. 1 tax provisions.
Business Tax Provisions
H.R. 1 generally restored 100% federal bonus depreciation for qualifying property acquired after January 19, 2025. This is a significant federal benefit for businesses making capital investments because it may allow the full cost of qualifying property to be deducted more quickly for federal income tax purposes.
North Carolina, however, has long decoupled from federal bonus depreciation, and Senate Bill 595 does not change that approach. As a result, businesses should continue to expect a difference between federal and North Carolina depreciation deductions.
In general, North Carolina requires an addback of 85% of the federal bonus depreciation deduction in the year the deduction is claimed federally. The addback is then recovered through North Carolina deductions over the following five years.
This remains one of the most common areas where federal taxable income and North Carolina taxable income may differ.
H.R. 1 also increased the federal §179 expensing limits. §179 allows businesses to immediately expense the cost of certain qualifying property, subject to annual dollar limits and other restrictions.
Similar to bonus depreciation, North Carolina has also historically decoupled from federal §179 expensing. As a result, North Carolina’s prior addback rules continue to apply. In general, North Carolina requires an addback for 85% of the federal §179 deduction that exceeds the $25,000 threshold. The addback is then recovered through North Carolina deductions over the following five years.
The practical takeaway is that businesses may receive a larger federal deduction under H.R. 1, but a portion of that deduction may be deferred for North Carolina purposes.
H.R. 1 made a taxpayer-favorable federal change to the §163(j) business interest expense limitation. For federal purposes, taxpayers may now add back depreciation, amortization, and depletion when calculating adjusted taxable income, or ATI. Because deductible business interest expense is generally limited to 30% of ATI, this higher ATI may allow taxpayers to deduct more business interest expense federally.
North Carolina conforms to this federal change. As a result, North Carolina will also include depreciation, amortization, and depletion in the calculation of ATI for purposes of determining the §163(j) business interest expense limitation.
In practical terms, North Carolina’s conformity will allow taxpayers to calculate the §163(j) limitation using the same ATI approach as federal law, reducing or eliminating a state-level difference in the amount of deductible business interest expense.
A notable conformity difference under Senate Bill 595 involves domestic research and experimental expenditures under IRC §174A.
For federal purposes, H.R. 1 generally restores current deductibility for domestic R&E expenditures for tax years beginning after December 31, 2024. As a result, many taxpayers may again deduct domestic R&E costs in the year paid or incurred, rather than capitalizing and amortizing those costs over five years.
North Carolina does not fully follow the federal treatment. Under Senate Bill 595, taxpayers that deduct domestic R&E expenditures federally under IRC §174A must add back 80% of the federal deduction for North Carolina purposes. The addback is then recovered as a separate North Carolina deduction over the following four taxable years.
In effect, North Carolina generally creates a five-year deduction pattern: 20% in the federal deduction year, plus 20% per year over the next four years. For additional background on the federal R&E provisions and IRS procedural guidance, please see BRC’s prior alert on this topic: Procedural Guidance for Treatment of R&E Expenditures Under §174A.
H.R. 1 generally restored 100% federal bonus depreciation for qualifying property acquired after January 19, 2025. This is a significant federal benefit for businesses making capital investments because it may allow the full cost of qualifying property to be deducted more quickly for federal income tax purposes.
North Carolina, however, has long decoupled from federal bonus depreciation, and Senate Bill 595 does not change that approach. As a result, businesses should continue to expect a difference between federal and North Carolina depreciation deductions.
In general, North Carolina requires an addback of 85% of the federal bonus depreciation deduction in the year the deduction is claimed federally. The addback is then recovered through North Carolina deductions over the following five years.
This remains one of the most common areas where federal taxable income and North Carolina taxable income may differ.
H.R. 1 also increased the federal §179 expensing limits. §179 allows businesses to immediately expense the cost of certain qualifying property, subject to annual dollar limits and other restrictions.
Similar to bonus depreciation, North Carolina has also historically decoupled from federal §179 expensing. As a result, North Carolina’s prior addback rules continue to apply. In general, North Carolina requires an addback for 85% of the federal §179 deduction that exceeds the $25,000 threshold. The addback is then recovered through North Carolina deductions over the following five years. The practical takeaway is that businesses may receive a larger federal deduction under H.R. 1, but a portion of that deduction may be deferred for North Carolina purposes.
H.R. 1 made a taxpayer-favorable federal change to the §163(j) business interest expense limitation. For federal purposes, taxpayers may now add back depreciation, amortization, and depletion when calculating adjusted taxable income, or ATI. Because deductible business interest expense is generally limited to 30% of ATI, this higher ATI may allow taxpayers to deduct more business interest expense federally.
North Carolina conforms to this federal change. As a result, North Carolina will also include depreciation, amortization, and depletion in the calculation of ATI for purposes of determining the §163(j) business interest expense limitation.
In practical terms, North Carolina’s conformity will allow taxpayers to calculate the §163(j) limitation using the same ATI approach as federal law, reducing or eliminating a state-level difference in the amount of deductible business interest expense.
A notable conformity difference under Senate Bill 595 involves domestic research and experimental expenditures under IRC §174A.
For federal purposes, H.R. 1 generally restores current deductibility for domestic R&E expenditures for tax years beginning after December 31, 2024. As a result, many taxpayers may again deduct domestic R&E costs in the year paid or incurred, rather than capitalizing and amortizing those costs over five years.
North Carolina does not fully follow the federal treatment. Under Senate Bill 595, taxpayers that deduct domestic R&E expenditures federally under IRC §174A must add back 80% of the federal deduction for North Carolina purposes. The addback is then recovered as a separate North Carolina deduction over the following four taxable years.
In effect, North Carolina generally creates a five-year deduction pattern: 20% in the federal deduction year, plus 20% per year over the next four years. For additional background on the federal R&E provisions and IRS procedural guidance, please see BRC’s prior alert on this topic: Procedural Guidance for Treatment of R&E Expenditures Under §174A.
Individual Tax Provisions
H.R. 1 increased the federal itemized deduction cap for state and local taxes, or SALT, from $10,000 to $40,000 for 2025, subject to income limitations. This allows some individual taxpayers to claim a larger federal itemized deduction for federal purposes.
North Carolina does not allow a deduction for state income taxes as part of the North Carolina itemized deduction and has historically decoupled from the federal SALT deduction in this respect. As a result, the federal increase to the SALT cap does not expand the deductions allowed for North Carolina purposes.
For North Carolina purposes, the allowable itemized deduction remains limited to qualifying mortgage interest and real estate taxes, subject to North Carolina’s existing $20,000 limitation. Therefore, while some taxpayers may receive a federal benefit from the higher SALT cap, the change does not increase the North Carolina itemized deduction and may result in higher North Carolina taxable income compared to federal taxable income.
H.R. 1 increased the federal standard deduction and made changes to certain federal itemized deduction rules.
North Carolina has its own standard deduction amounts and its own rules for determining the itemized deductions allowable when calculating NC taxable income. As a result, the increased federal standard deduction, and the other changes made to the federal calculation of itemized deductions, do not impact the North Carolina standard deduction or North Carolina itemized deduction calculation.
Because North Carolina’s standard deduction is lower than the increased federal standard deduction, and because North Carolina’s allowable itemized deductions may differ from federal itemized deductions, some taxpayers may have higher North Carolina taxable income than federal taxable income, even when the same income and deduction information is used.
H.R. 1 created several new federal deductions for individuals, including deductions related to tip income, overtime pay, certain car loan interest, and a temporary deduction for certain senior taxpayers.
North Carolina Senate Bill 595 did not adopt these new federal deductions for North Carolina purposes. As a result, these deductions will not be recognized on the North Carolina return and will not reduce North Carolina taxable income.
H.R. 1 adds a limited federal charitable deduction beginning in 2026 for individuals who do not itemize deductions. The federal deduction is limited to $1,000, or $2,000 for married couples filing jointly, for qualifying cash contributions. H.R. 1 also modifies certain federal rules for itemized charitable deductions, including a new 0.5% floor for individuals who itemize.
For North Carolina purposes, these federal charitable deduction changes generally do not impact the calculation of North Carolina taxable income because that calculation begins with federal adjusted gross income, not federal taxable income. Since the new non-itemizer charitable deduction is claimed after adjusted gross income, it does not directly reduce North Carolina taxable income unless specifically adopted by the State. As of the date of this article, North Carolina has not adopted these federal changes.
H.R. 1 also includes changes to the Qualified Business Income (QBI) deduction under §199A, including a new $400 minimum deduction beginning in 2026. However, this change generally does not impact North Carolina taxable income because North Carolina begins with federal adjusted gross income, not federal taxable income. Since the federal QBI deduction is taken after adjusted gross income, it does not reduce North Carolina taxable income.
H.R. 1 modifies the qualified small business stock gain exclusion rules under §1202 for stock acquired after July 4, 2025. The revised federal rules provide a tiered exclusion based on the holding period, allowing a 50% exclusion after three years, a 75% exclusion after four years, and a 100% exclusion after five years. H.R. 1 also increases the per-issuer dollar limitation and the aggregate gross asset ceiling for qualifying stock.
For North Carolina purposes, the State adopts this provision, meaning taxpayers are not required to add back the excluded gain in the year the gain is excluded federally. However, the excluded gain is added back for purposes of calculating a North Carolina net operating loss.
H.R. 1 increased the federal itemized deduction cap for state and local taxes, or SALT, from $10,000 to $40,000 for 2025, subject to income limitations. This allows some individual taxpayers to claim a larger federal itemized deduction for federal purposes.
North Carolina does not allow a deduction for state income taxes as part of the North Carolina itemized deduction and has historically decoupled from the federal SALT deduction in this respect. As a result, the federal increase to the SALT cap does not expand the deductions allowed for North Carolina purposes.
For North Carolina purposes, the allowable itemized deduction remains limited to qualifying mortgage interest and real estate taxes, subject to North Carolina’s existing $20,000 limitation. Therefore, while some taxpayers may receive a federal benefit from the higher SALT cap, the change does not increase the North Carolina itemized deduction and may result in higher North Carolina taxable income compared to federal taxable income.
H.R. 1 increased the federal standard deduction and made changes to certain federal itemized deduction rules.
North Carolina has its own standard deduction amounts and its own rules for determining the itemized deductions allowable when calculating NC taxable income. As a result, the increased federal standard deduction, and the other changes made to the federal calculation of itemized deductions, do not impact the North Carolina standard deduction or North Carolina itemized deduction calculation.
Because North Carolina’s standard deduction is lower than the increased federal standard deduction, and because North Carolina’s allowable itemized deductions may differ from federal itemized deductions, some taxpayers may have higher North Carolina taxable income than federal taxable income, even when the same income and deduction information is used.
H.R. 1 created several new federal deductions for individuals, including deductions related to tip income, overtime pay, certain car loan interest, and a temporary deduction for certain senior taxpayers.
North Carolina Senate Bill 595 did not adopt these new federal deductions for North Carolina purposes. As a result, these deductions will not be recognized on the North Carolina return and will not reduce North Carolina taxable income.
H.R. 1 adds a limited federal charitable deduction beginning in 2026 for individuals who do not itemize deductions. The federal deduction is limited to $1,000, or $2,000 for married couples filing jointly, for qualifying cash contributions. H.R. 1 also modifies certain federal rules for itemized charitable deductions, including a new 0.5% floor for individuals who itemize.
For North Carolina purposes, these federal charitable deduction changes generally do not impact the calculation of North Carolina taxable income because that calculation begins with federal adjusted gross income, not federal taxable income. Since the new non-itemizer charitable deduction is claimed after adjusted gross income, it does not directly reduce North Carolina taxable income unless specifically adopted by the State. As of the date of this article, North Carolina has not adopted these federal changes.
H.R. 1 also includes changes to the Qualified Business Income (QBI) deduction under §199A, including a new $400 minimum deduction beginning in 2026. However, this change generally does not impact North Carolina taxable income because North Carolina begins with federal adjusted gross income, not federal taxable income. Since the federal QBI deduction is taken after adjusted gross income, it does not reduce North Carolina taxable income.
H.R. 1 modifies the qualified small business stock gain exclusion rules under §1202 for stock acquired after July 4, 2025. The revised federal rules provide a tiered exclusion based on the holding period, allowing a 50% exclusion after three years, a 75% exclusion after four years, and a 100% exclusion after five years. H.R. 1 also increases the per-issuer dollar limitation and the aggregate gross asset ceiling for qualifying stock.
For North Carolina purposes, the State adopts this provision, meaning taxpayers are not required to add back the excluded gain in the year the gain is excluded federally. However, the excluded gain is added back for purposes of calculating a North Carolina net operating loss.
What This Means for Taxpayers
Senate Bill 595 provides welcome clarity by updating North Carolina’s conformity date and addressing several major H.R. 1 provisions. However, the bill does not make North Carolina law identical to federal law. Taxpayers should continue to evaluate federal and North Carolina tax treatment separately, particularly in areas where the State continues to require specific adjustments.
Taxpayers who extended their 2025 North Carolina returns while waiting for conformity legislation should soon be able to move forward with a clearer understanding of the State’s treatment. Taxpayers who already filed 2025 North Carolina returns may need to evaluate whether any updates, amended returns, or additional analysis are necessary once final implementation guidance is available.
Senate Bill 595 also includes other North Carolina tax law changes that are not directly related to H.R. 1 or conformity. Many of these changes apply to future tax years or are expected to impact a narrower group of taxpayers. BRC will provide additional updates on those provisions in the near future.
BRC will continue monitoring guidance from the North Carolina Department of Revenue and will provide additional updates as needed. Please reach out to your trusted BRC tax advisor if you have questions about how these changes may affect your 2025 North Carolina tax return or impact future tax planning.