Small Business Capital Improvement Account.

2025-2026 Session Introduced by Val Applewhite and 5 co-sponsors

NC allows small businesses to deduct deposits into a capital improvement account used for long-lasting property upgrades, with AGI-based limits.

Passed 1st Reading

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Purpose and intent

Establishes a new deduction for small businesses to encourage capital improvements.

Allows a portion of a small business’s North Carolina taxable income to be deposited into a capital improvement account, with the deposit providing a tax deduction in the current year.

The bill aims to incentivize investment in real property improvements by offering favorable tax treatment for funds set aside for approved capital improvements.

Key provisions

Section 1: Modifications to adjusted gross income (G.S. 105-153.5)

Creates new deduction (subdivision 7a) for deposits into a capital improvement account (CIA) by a small business.

Deduction limits (sliding scale by adjusted gross income, AGI):

5% of the taxpayer’s AGI up to $1,000,000 AGI
2% of AGI above $1,000,000 up to $2,000,000 AGI
1% of AGI above $2,000,000 up to $3,000,000 AGI

Eligibility criteria for “small business”:

Cumulative gross receipts from business activity in the taxable year do not exceed $10,000,000.

Definition of “capital improvement account”:

An account at a federally insured banking institution into which deposits are made.
Funds used solely for improvements that add value to real property owned and used exclusively by the small business.
Improvements must prolong the useful life of the property by at least 10 years or adapt the property to new uses for the business.

The section also revises the calculation of taxable income to include this deduction under the specified conditions.

Section 1 (continued): Clarifying definitions

Ensures the terms “capital improvement account” and “small business” align with the described criteria for the deduction and deposits.

Section 2: Effective date

The act applies to taxable years beginning on or after January 1, 2026.

Who would be affected

Small businesses in North Carolina that:

Have cumulative gross receipts in the taxable year ≤ $10,000,000 (to qualify as “small business”).
Engage in capital improvements that meet criteria (value-adding, long-lived, or re-purposing real property used in the business).

Taxpayers with eligible deposits into a CIA could lower their NC taxable income in the year of the deposit, subject to the AGI-based limits.

Financial institutions (federally insured banks) acting as the custodians of the CIA.

Procedural and timeline aspects

Effective for taxable years beginning on or after January 1, 2026.

Requires taxpayers to establish a capital improvement account at a federally insured institution and to deposit eligible amounts to claim the deduction.

If a prior-year deduction was claimed under subdivision (7a) and later withdrawn (but not used for improvements), the amount must be added back to income in the following year (repeats/clarifies the “additions” provision).

Practical implications

Provides a tiered deduction tied to AGI, potentially encouraging larger deposits from mid-range AGI taxpayers up to a $3,000,000 AGI threshold.

Creates an ongoing mechanism to fund long-lived improvements to real property through a tax-advantaged vehicle.

Businesses must track deposits, allowable uses, and the life-extension/adaptation criteria to ensure compliance.

Note: The bill text specifies the structural changes to the NC income tax code and does not address broader implications beyond the stated deduction and capital improvement account framework.

Bill