You Wrote Off All Your Research Costs on the Federal Return. North Carolina Wants 80% Added Back, Going Back to 2022
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North Carolina did not adopt full federal R&E expensing. Businesses add back 80% of the section 174A deduction and deduct it over four years, and the change reaches back to 2022 for some filers.
The 2025 federal tax law gave businesses something they had wanted for years: domestic research and experimental (R&E) costs can again be deducted in full in the year they're paid, instead of spread over five years. Small software companies in Durham, product developers in Raleigh and engineering firms in Charlotte took the deduction on their federal returns.
North Carolina didn't follow. In July 2026 the General Assembly passed a law that makes most of that deduction go back into North Carolina income, then lets it out again over the next four years. The change is retroactive, so it can reach 2025 returns that are already filed and, for some businesses, returns as far back as 2022. This guide covers how the new adjustment works, which years it reaches, where it goes on each North Carolina form and what to do now. The rules come from the North Carolina Department of Revenue's Important Notice on the impact of recently enacted laws, dated July 23, 2026 and updated July 29, 2026 and October 9, 2026, and the NCDOR press release announcing it. Examples use businesses in Durham, NC, Raleigh, NC and Charlotte, NC.
What North Carolina changed
Two laws signed in July 2026, Session Law 2026-31 and Session Law 2026-41, changed the state's Revenue Act. For income tax, two pieces matter most to businesses.
The IRC reference date moved
North Carolina taxable income starts with federal adjusted gross income (AGI) for individuals and federal taxable income (FTI) for corporations, figured under the Internal Revenue Code as of a fixed date in state law. Session Law 2026-31 moved that date to July 5, 2025, from January 1, 2023. So to the extent North Carolina conforms, it now follows the Code as of July 5, 2025, which includes the 2025 federal law.
The notice points out that S corporations, partnerships, estates and trusts also can't use federal changes made after the reference date until the General Assembly adopts them.
But it decoupled from R&E expensing
The Code as of July 5, 2025 allows eligible taxpayers to fully expense domestic R&E costs under new section 174A(a). The General Assembly didn't adopt that provision. Session Law 2026-31 created a new adjustment instead: N.C. Gen. Stat. § 105-153.6A for individuals and § 105-130.5C for corporations.
How the adjustment works
The rule has two parts:
- Add back 80%. A taxpayer that deducted domestic R&E costs under section 174A(a) adds 80% of that deduction to AGI or FTI for the same year.
- Deduct it over four years. The taxpayer then deducts 25% of the add-back in each of the first four tax years after the year of the add-back.
In other words, North Carolina lets 20% of the federal deduction through in the first year, and the remaining 80% comes back in equal pieces over the next four years. Over five years you still deduct 100% of the cost in North Carolina. The timing is what changes.
NCDOR's own example
The notice uses a C corporation, ABC Corporation, that spent $100,000 on domestic R&E in tax year 2025 and deducted all of it federally.
| NC tax year | Adjustment | Amount |
|---|---|---|
| 2025 | Add to FTI ($100,000 x 80%) | +$80,000 |
| 2026 | Deduct 25% of the add-back | -$20,000 |
| 2027 | Deduct 25% of the add-back | -$20,000 |
| 2028 | Deduct 25% of the add-back | -$20,000 |
| 2029 | Deduct 25% of the add-back | -$20,000 |
Which years it reaches
The effective date depends on what you did on the federal side:
- You elected federal retroactive expensing for 2022, 2023 or 2024. The 2025 federal law lets eligible small businesses apply section 174A(a) retroactively to tax years beginning in 2022, 2023 and 2024. If you made that election, the North Carolina adjustment applies for tax years beginning on or after January 1, 2022.
- You didn't make that election. The adjustment applies for tax years beginning on or after January 1, 2025.
- You deducted leftover unamortized costs. If you elected under the transition rules in section 70302(f)(2)(A) of the 2025 law to deduct the remaining unamortized R&E costs, the adjustment applies to the first tax year, or first two tax years, beginning on or after January 1, 2025.
The notice says plainly that the General Assembly changed North Carolina law retroactively.
Where it goes on the forms
For tax years 2022 through 2025, the notice tells you which line to use and to write "Domestic R&E" in the space provided, with documentation attached as needed.
| Filer | Tax year | Addition | Deduction |
|---|---|---|---|
| Individual (all residency types) | 2022 | Form D-400 Schedule S, Part A, Line 15 | None for 2022 |
| Individual (all residency types) | 2023 to 2025 | Form D-400 Schedule S, Part A, Line 15 | Form D-400 Schedule S, Part B, Line 40 |
| Part-year resident and nonresident | 2022 to 2025 | Schedule PN-1, Part A, Line 11 | Schedule PN-1, Part B, Line 29 (2023 to 2025) |
| C corporation | 2022 | Form CD-405 Schedule H, Line 1(h) | None for 2022 |
| C corporation | 2023 to 2025 | Form CD-405 Schedule H, Line 1(h) | Form CD-405 Schedule H, Line 3(g) |
| Partnership or S corporation | 2025 | Form NC-PE, Part A, Line 15 | None for 2025 |
For tax year 2026, NCDOR says the guidance will be in the 2026 return instructions, and it plans to publish an FAQ on the recent changes.
Do you have to amend?
Yes, if it changes your North Carolina taxable income. The notice says an individual or corporation whose NC taxable income is affected by either law, for a tax year beginning on or before January 1, 2026, should file or amend the North Carolina return.
- Additional tax due: penalties and statutory interest apply to tax not paid by the original due date, not counting extensions. You can ask for a waiver under NCDOR's Penalty Waiver Policy.
- Overpayment: a return showing a refund has to be filed within the statute of limitations for refunds.
- Documents: the return has to follow the instructions for that year and include support for the change.
For most businesses, the R&E add-back raises North Carolina income for the add-back year, so an amended 2025 return will usually show tax due.
Examples
A Durham software corporation
For example, a C corporation in Durham spent $300,000 on domestic software development in 2025 and deducted all of it on its 2025 federal return. It didn't make the retroactive election.
- 2025 North Carolina add-back: $300,000 x 80% = $240,000
- Deductions for 2026 through 2029: $60,000 a year
If its 2025 CD-405 is already filed without the add-back, it amends to report $240,000 on Schedule H, Line 1(h), and pays the extra tax with interest.
A Raleigh S corporation owner
A product design firm in Raleigh is an S corporation. It deducted $80,000 of domestic R&E in 2025 federally.
- On its 2025 Form NC-PE, the add-back goes on Part A, Line 15: $80,000 x 80% = $64,000.
- That flows through to the owners' North Carolina returns.
- The 25% deductions, $16,000 a year, start in 2026.
A Charlotte engineering firm that elected retroactively
A small engineering corporation in Charlotte elected federal retroactive expensing and amended its 2022, 2023 and 2024 federal returns to deduct R&E costs it had been amortizing. Because it made that election, the North Carolina adjustment reaches back to 2022. It needs to look at each of those North Carolina returns, add back 80% of the amount it deducted under section 174A(a) for each year, and take the 25% deductions in the years after.
The other changes in the same notice
The same notice covers two individual changes that won't affect most businesses, but may affect owners:
- Timber casualty losses from Hurricane Helene: a new deduction, for 2024 with an election to take it on 2023, for losses on 20 to 2,000 acres of North Carolina timberland in counties covered by FEMA disaster declaration 4827, for damage between September 24, 2024 and October 31, 2024.
- Gambling losses: a new North Carolina itemized deduction from 2025, limited to the losses allowed under section 165(d) that weren't already deducted in AGI.
A checklist for North Carolina businesses
- Find every year you deducted domestic R&E under section 174A(a), including any retroactive election for 2022 to 2024.
- Figure the 80% add-back for each year and the 25% deductions for the four years after.
- Amend any North Carolina return already filed without the add-back, using the lines in the notice.
- Set up a schedule to track the four-year deductions so none get missed.
- Consider asking for a penalty waiver if the amendment shows tax due.
- Watch for the 2026 instructions and NCDOR's FAQ.
Common questions
Does North Carolina follow the 2025 federal tax law?
Mostly, through the July 5, 2025 reference date, but not for domestic R&E expensing under section 174A(a).
Do I lose 80% of the deduction?
No. You add 80% back in the first year and deduct it at 25% a year over the next four years. Over five years, the full cost is deducted.
My 2025 North Carolina return is already filed. What now?
If you deducted domestic R&E costs federally, you'll likely need to amend it to add back 80%. Tax paid late carries interest, and you can ask for a penalty waiver.
I'm a sole proprietor with R&E costs on Schedule C. Does this apply?
Yes. The individual version, § 105-153.6A, applies to individuals, and the add-back goes on Schedule S of Form D-400.
This guide is general information about North Carolina's 2026 law changes for domestic R&E costs, not tax advice for your business. NCDOR says more guidance and an FAQ are coming, and the 2026 instructions will cover tax year 2026, so check for updates before you amend.
North Carolina businesses with research costs often have their bookkeeper keep the four-year deduction schedule with the books; more on how we handle NC returns at rkubeservices.com.