North Carolina Department of Revenue Issues Guidance & Updated FAQs on the State’s Pass-Through Entity Tax

Contributor:
Tony Konkol | Manager, State & Local Tax

As part of the state’s recently enacted budget legislation – Senate Bill 105 (Session Law 2021-180), enacted on November 18^th, 2021, North Carolina joined an already extensive list of states that have established elective entity-level tax regimes for pass-through entities as a workaround to the Federal SALT deduction cap on individuals created by the TCJA.

Background

Eligible partnerships and S-Corporations may elect the North Carolina Pass-Through Entity Tax (PTE Tax) starting tax years beginning on or after January 1, 2022. Eligible PTEs do not include publicly traded partnerships, or any partnership with a partner that is not an individual, estate, or taxpayer that would otherwise be a qualified S-Corporation shareholder under the IRC.

The NC PTE Tax election is made annually on the entity’s timely filed (including extensions) return for the tax year, and once made on an original return, may be revoked with an amended return filed prior to the regular or extended due date for the same tax year. The PTE Tax is calculated at the state’s individual income tax rate for tax year (4.99% for 2022, and as part of the same legislation, will be incrementally reduced to 3.99% for 2027 and later years).

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Department of Revenue Guidance

Since the enactment of S.B. 105 in November 2021 that established the state’s PTE Tax, the North Carolina Department of Revenue had yet to issue substantive administrative guidance until its April 14^th, 2022 release of Important Notice Regarding North Carolina’s Recently Enacted Pass-Through Entity Tax, which the Department updated soon after on April 27^th.

The Notice provides answers to frequently asked questions regarding the eligibility, mechanics, payment, and return filing matters of entities electing the PTE Tax and their owners. Among the topics the Notice provides clarification to are: computation of state taxable income of electing PTEs and their owners; the manner which the PTE Tax election may be revoked; key dates for estimated payments of PTE Tax; E-Filing electing PTE returns and making payments; and the procedure and eligibility of PTEs and their owners to claim a credit for income taxes paid to other states. The April 27^th, 2022 update to the Notice further clarifies that electing entities must use Form NC-429 PTE, Pass-Through Entity Estimated Income Tax voucher to make estimated payments of PTE Tax.