North Carolina allows certain subtractions from federal adjusted gross income (AGI) when calculating North Carolina taxable income. These subtractions are reported on Schedule S and help account for differences between federal and North Carolina tax law.
Important: Eligibility requirements apply to many of the subtractions listed below. Review the applicable instructions and retain any supporting documentation.
Taxable Retirement Benefits That Qualify for the Bailey Settlement
Certain retirement benefits may qualify for a North Carolina subtraction under the Bailey v. North Carolina decision. Eligible retirees and beneficiaries may exclude qualifying retirement benefits from North Carolina taxable income if all Bailey requirements are met.
Generally, taxpayers must have had vested rights in the applicable retirement system as of August 12, 1989 to qualify for the Bailey deduction.
Retirement systems commonly associated with Bailey eligibility include:
- North Carolina Teachers' and State Employees' Retirement System
- North Carolina Local Governmental Employees' Retirement System
- North Carolina Consolidated Judicial Retirement System
- Federal Employees' Retirement System (for qualifying participants)
- United States Civil Service Retirement System
Important: The exclusion does not apply solely because the retirement benefits are paid by another state or local government.
Retirement Benefits Received by Retired Members of the United States Uniformed Services
You may deduct qualifying retirement benefits received from the United States Uniformed Services if:
- You served at least 20 years in the Uniformed Services, or
- You were medically retired from the Uniformed Services, or
- You are a qualifying beneficiary receiving payments from the Survivor Benefit Plan.
Important: Retirement income already deducted under the Bailey settlement cannot also be deducted under the military retirement subtraction.
Recognized IRC Section 1400Z-2 Gain
You may subtract a recognized IRC Section 1400Z-2 gain included in federal AGI to the extent the gain was previously included in North Carolina taxable income.
Bonus Asset Basis
Enter the portion of gain attributable to prior North Carolina bonus depreciation adjustments that may now be recovered through basis differences.
Gain From Disposition of Exempt North Carolina Obligations Issued Before July 1, 1995
Enter gain from the sale or disposition of qualifying North Carolina obligations that are exempt from North Carolina income tax.
Exempt Income Earned or Received by a Member of a Federally Recognized Indian Tribe
Enter qualifying income that is exempt from North Carolina taxation under federal law or applicable tribal agreements.
State Basis Exceeds Federal Basis for Property Disposed
Enter the amount by which the North Carolina basis of property exceeds the federal basis when the property is sold or otherwise disposed of. This adjustment helps prevent income from being taxed twice because of differences between federal and North Carolina depreciation rules.
Ordinary and Necessary Business Expenses Reduced or Disallowed Due to a Federal Credit
Enter otherwise deductible business expenses that were reduced or disallowed on the federal return because a federal tax credit was claimed.
Personal Education Savings Account Deposits
Enter qualifying deposits that are eligible for a North Carolina subtraction.
State Emergency Response and Disaster Relief Fund Payments
Enter qualifying disaster relief payments that are deductible under North Carolina law. [
Certain Economic Incentives
Enter qualifying economic incentive payments that North Carolina excludes from taxable income.
Certain North Carolina Grant Payments
Enter qualifying North Carolina grant payments that are not subject to North Carolina income tax.
Certain NOL Carryback
You may deduct an amount equal to 20% of the net operating loss carryback previously added to federal AGI, subject to North Carolina limitations.
Certain NOL Carryforward
You may deduct an amount equal to 20% of the excess net operating loss carryforward deduction previously added to federal AGI, subject to North Carolina limitations.
Excess Business Loss
You may deduct an amount equal to 20% of the excess business loss previously added to federal AGI, subject to North Carolina limitations.
Business Interest Limitation
You may deduct an amount equal to 20% of the business interest limitation previously added to federal AGI, subject to North Carolina limitations.
North Carolina-Sourced Taxed Pass-Through Entity (PTE) Income
Enter income from a pass-through entity that has already been taxed at the entity level in North Carolina. This subtraction helps prevent double taxation.
Non-North Carolina-Sourced Taxed Pass-Through Entity (PTE) Income
Enter qualifying pass-through entity income sourced outside North Carolina that was:
- Included in the entity's taxable income reported to another state or the District of Columbia, and
- Subject to an entity-level income tax.
Adjustment for Bonus Depreciation Added Back in Prior Years
You may subtract 20% of the bonus depreciation add-back amount in each of the five taxable years following the original add-back, subject to North Carolina rules.
Section 179 Expense Deduction Added Back in Prior Years
You may subtract 20% of the Section 179 expense add-back amount in each of the five taxable years following the original add-back, subject to North Carolina rules.
Interest Income From U.S. Obligations
You may subtract qualifying interest received from obligations of the United States Government, including certain notes and bonds, to the extent the interest was included in federal AGI.
North Carolina Net Operating Loss
North Carolina does not fully conform to federal net operating loss (NOL) provisions. Taxpayers with allowable North Carolina net operating losses may qualify for a subtraction as permitted under North Carolina law.
Other Subtractions From Income
Additional subtractions may be available depending on your circumstances and the applicable tax year. Refer to the subtraction section of the 2025 D-401 Individual Income Tax Instructions for a complete list of available subtractions and eligibility requirements.
Schedule K-1 Considerations
Some subtraction adjustments may be reported on a North Carolina Schedule K-1 or NC K-1 Supplemental Schedule received from a partnership, S corporation, estate, or trust. Enter these items exactly as reported on the North Carolina schedules provided by the entity.
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