If you’re a partnership or S-corporation in North Carolina, tax help is on the way. After the SALT cap limited your deductions for state income taxes, new tax options help you get your deductions back.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
Pass-Through Entity Tax Overview
The pass-through entity tax gives North Carolina S-corporations and partnerships an option to file entity tax returns and pay tax as a business instead of passing taxes through to the owners. This can give these entities a larger federal tax deduction.
- Normal rule: Partnerships and S-corporations don’t pay income taxes. Each owner reports their share of the profit on their personal income tax return and pays their personal income tax rate.
- New option: Partnerships and S-corporations can opt to pay income taxes at the state level. The business taxes become a business deduction instead of a personal tax.
SALT Deduction Limit
The new tax law is in response to the federal SALT deduction limit. Federal tax law limits state and local tax deductions to $10,000 per year. The limit includes both income taxes and property taxes.
Business owners often have far more than $10,000 in state and local taxes each year. Because the limit only applies to individual income tax returns, business owners can take a full tax deduction when they’re able to pay state taxes as a business tax instead of a personal tax.
Making the PTE Election
To make the PTE election, you need to file a timely tax return. Timely includes properly filed extensions. The deadline to file is April 15th.
You can change your mind and not take the election up until the due date of your tax return. You can make a different election each year.
PTE Tax Rate
The tax rate for a pass-through entity choosing to file a separate tax return is the North Carolina personal income tax rate. The rate is currently 5.25%.
The business’s taxable income is:
- All of its income or loss earned in North Carolina
- A portion of its income or loss earned outside of North Carolina based on what percentage of the business is owned by North Carolina residents (e.g., if North Carolina residents own half, half of its profit or loss)
PTEs that expect to owe taxes in the amount of $500 or more need to make estimated tax paymnets. Use Form NC-429 PTE.
The deadline to pay estimated taxes is the same as for the IRS. North Carolina estimated taxes are due on April 15th, June 15th, September 15th, and December 15th. If the 15th is a weekend or holiday, taxes are due on the following business day.