A recent North Carolina legislative change (Senate Bill 105) allows certain pass-through entities (Partnerships and S-Corporations) to pay and deduct North Carolina state income taxes at the pass-through entity level. This workaround to the Federal $10,000 state and local tax (SALT) individual itemized deduction limit is an elective change, effective for tax years beginning January 1, 2022. Similar to taxes paid by C-corporations, the pass-through entity state taxes should be paid on a quarterly basis with estimated tax payments. The NC tax rate for the pass-through entity tax for year 2022 will be 4.99%, the same as the individual income tax rate.
The North Carolina election to be taxed at the pass-through entity level will be made on an annual basis. Once the election is made for that year, it cannot be revoked. Partnerships that have a partner who is not an individual, estate, trust or exempt organization are not allowed to make this election. Publicly-traded partnerships are also excluded from the elective treatment. North Carolina joins twenty other states that have recently adopted similar pass-through entity taxes as SALT limitation workarounds. If you believe this election would benefit your partnership or S-corporation, please contact our office.