The Tax Cuts and Jobs Act (TCJA) imposed limits on deducting State And Local Taxes (SALT) on personal tax returns for taxpayers who itemize deductions. Since the passing of the TCJA, many states have worked on ways to circumvent this SALT limitation. Thanks to the IRS blessing the Pass-Through Entity Tax Election through Notice 2020-75, more and more states have passed laws and regulations to allow this wonderful workaround.
In a nutshell, an eligible Pass-Through Entity (PTE) is able to pay estimated state income taxes on behalf of partners/shareholders of the eligible PTE and take a deduction for these payments on the PTE’s federal income tax return. To simplify this, an eligible Pass-Through Entity is a Partnership or S-Corporation that passes through its income, deductions, credits, etc. to partners or shareholders.
While this sounds very straightforward, it is not. After all, we’re talking about tax law. The complexities come from the way each state has written its PTE laws, meaning there is no uniformity in how to elect and pay the PTE tax, or how a partner/shareholder gets credit for nonresident PTE elections. This blog post won’t go into the details of every state.
If you want to find out if your state has a PTE law or a proposed PTE law, click here for a regularly updated list of states with pass-through entity laws. Do note that the SALT cap is set to expire at the end of 2025. Most PTE laws will also expire at that point. So, this may be a temporary solution.
Anyway, if your state has a PTE law and you would like to make the Pass-Through Entity Tax Election, it is important to check your state’s rules. Since most of our clients are in North Carolina and South Carolina, we will touch on these two states.
In North Carolina and South Carolina, the Pass-Through Entity Tax Election can be made proactively by having the entity make estimated tax payments throughout the year. The Pass-Through Entity Tax Election can also be made retroactively when filing the business tax return, and having the entity pay the state income taxes for partners/shareholders. The big consideration is whether tax payments are counted on a cash basis and deductible in the year they are paid, or if tax payments can be accrued to the corresponding tax year. There isn’t a whole lot of clarity on this. We recommend that clients follow the rules for their entity’s tax filing election. This means that if the tax return is a cash basis tax return, the client should assume that the tax payments are counted on a cash basis.
North Carolina has a simple process for making Pass-Through Entity estimated tax payments. Eligible Pass-Through Entities can go to the NC Department of Revenue’s website and follow the links to make a Corporate Income Estimated Tax Payment (CD-429). As of this writing, you can click here to go directly to the payment form. Don’t blame us if NC DOR changes the link…
South Carolina has a slightly more complex process. Eligible PTEs are required to register on the SC DOR’s MyDORWAY portal (https://mydorway.dor.sc.gov/_/). Once registered, PTEs will log in and make an estimated payment. The upside to the portal is that it is easy to track estimated payments as well as save a payment method for the future.