In November 2021, North Carolina enacted Senate Bill 105 which includes a new elective pass-through entity tax (“PTET”) filing options for certain NC companies. This law change allows entities taxed as partnerships or S-corporations to elect to pay an entity level state income tax for taxable years beginning on or after January 1, 2022.
Owners of an electing pass-through entity would then be eligible to deduct their share of income subject to the PTET when computing their NC personal income tax. The key benefit to the owner is that any NC income taxes paid directly by the pass-through entity will not be subject to the owner’s federal itemized tax deduction limitation (currently limited to $10,000). NC joins a number of states (including GA, SC, VA, and 20+ additional states) in creating a workaround to pass-through business owners for this federal deduction limitation.
In late April 2022 the NC Department of Revenue released “Important Notice Regarding North Carolina’s Recently Enacted Pass-Through Entity Tax”. The Notice provides several areas of guidance regarding the NC pass-through entity tax. This guidance applies to qualifying pass-through entities for tax years beginning on or after January 1, 2022. This guidance covers several areas including the following:
- Types of entities that qualify to make a NC PTET election
- Deadline to qualify for tax year 2022 (on the timely filed 2022 return)
- How to revoke an election
- How to file your PTET return
- When 2022 PTET estimated tax payments due (potentially not until later)
- How to report PTET income for nonresident owners
- How NC residents receive credit for PTET taxes paid to other states
For more information and to read the notice, visit the NCDOR website.
The enactment of S.B. 105 and the recent administrative guidance from NCDOR provide an opportunity for profitable pass-through businesses and their owners to reduce 2022 federal income tax costs. If your pass-through entity operates in other states, there are similar opportunities to utilize this tax savings mechanism in other jurisdictions as well.