North Carolina Revises Passthrough Entity Tax

• April 28, 2023
• Carey M. Heyman, CPA

Earlier this month, North Carolina Governor Roy Cooper signed Session Law 2023-12 (Senate Bill 174), which revised several key aspects of the state’s elective passthrough entity tax (“PET”). Here are some key takeaways:

Tiered partnerships are now allowed to make the PET election. Prior to Senate Bill 174, only partnerships owned by individuals, estates, trusts, and certain tax-exempt organizations could make the PET election in North Carolina. Retroactive to January 1, 2022, entities classified as partnerships for federal income tax purposes and S-corporations, as defined in G.S. § 105-131(b)), are now eligible to make the PET election. The presence of any other owners, including C-Corporations, will still preclude the passthrough entity from making the election.

Credit for taxes paid to another state for resident partners. Before Senate Bill 174, North Carolina’s laws did not allow for a resident partner in a partnership to claim a credit for their share of tax imposed directly on a partnership in another state, though this was otherwise allowed for a resident
shareholder in an S-Corporation. Retroactive to January 1, 2022, this has been corrected and resident partners of a partnership (as well as S-Corporation shareholders) are now permitted a credit for such entity level taxes.

Tax base for the PET revised for income of resident owners. Prior to Senate Bill 174, the tax base for the PET in North Carolina included income attributable to North Carolina for all owners, as well as income attributable to other states for resident owners. Effective January 1, 2023, the tax base will no longer include income attributable to other states for resident owners. In other words, the taxable income base will only be composed of North Carolina sourced income, regardless of individual residencies. There will be two North Carolina deductions available to owners of passthrough entities that have made the PET election: (1) a deduction for the North Carolina income taxed at the PTE level; and (2) a deduction for income taxed by another state at the PTE level.

The North Carolina Department of Revenue subsequently shared that:

• A partnership that has already filed its tax year 2022 North Carolina tax return and has become eligible under the new law to make a 2022 PET election will be permitted to amend its 2022 tax return (Form D-403) in order to make the election. This must be filed by the due date of the return, including extension, in order to qualify for a valid election.
• Individuals who have already filed their tax year 2022 tax returns (Form D-400) and have become eligible under the new law to claim a credit for taxes paid to other states that were not already claimed should file amended tax returns within the general statute of limitations in order to obtain a refund.

Thanks to our National Tax and State and Local Tax teams for their assistance with this post.

Source: North Carolina Department of Revenue

Tags: North Carolina, Passthrough Entity Tax, PET, PTE, Federal and state taxation, including proposed regulations, Year-end tax planning | Comments Off on North Carolina Revises Passthrough Entity Tax