North Carolina (NC) follows the same as federal law for passive activity losses in the year of disposition. The federal Form 8582 is part of the NC return as well to show the loss carryforward to 2022. There should not be a separate entry in the state section of the return.
- NC FAQs Regarding Deduction for Net Business Income
- Question 3:
- If there is a passive activity with losses that are carrying forward and there is a complete disposition of that passive activity, under IRC 469(g) the carried-forward losses are treated as “not from a passive activity.” In this situation, if the taxpayer also has substantial nonpassive business income, would those freed-up passive losses count against him and offset his nonpassive business income, thereby reducing or eliminating the North Carolina business deduction of up to $50,000?
- For purposes of this deduction, passive income means the income generated from the conduct of an activity of a trade or business that satisfies the definition in IRC section 469. Likewise, a passive loss means the loss generated from the conduct of an activity of a trade or business that satisfies the definition in IRC Section 469. Treasury Regulation §1.469 provides official interpretation on when income or loss is considered passive. We follow the treatment of classifying income or loss as passive or nonpassive based on this treasury regulation and IRC Section 469. Because IRC Section 469(g) treats the disposition of the entire interest in a passive activity as “a loss which is not from a passive activity,” the loss must be offset against any current nonpassive business income in determining the North Carolina business deduction available.
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