The North Carolina PTET election lets an eligible S corporation or partnership pay state income tax at the entity level instead of passing that tax through to its owners. For many profitable pass-through businesses, it creates a federal deduction that is not limited by the SALT cap on owners’ personal returns.
Whether it helps your owners in a given year depends on their income, where they live, and how they file. Because the election is made on the 2026 return, now is the time to run the numbers.
Below, we explain how the election works, how the 2025 federal tax law changed the math, and when the election may not be worth making.
What the North Carolina Pass Through Entity Tax Election Does
The election moves the state tax bill from the owners to the business. North Carolina created the taxed pass-through entity option for tax years beginning on or after January 1, 2022. The rules for partnerships are in N.C. General Statutes G.S. 105-154.1, with a parallel provision for S corporations in G.S. 105-131.1A.
When a business elects, it pays North Carolina tax on its taxable income at the individual income tax rate, which is 3.99% for 2026 and is scheduled to fall to 3.49% for 2027. Owners then deduct their share of that income on their own North Carolina returns, so the income is not taxed twice at the state level.
The federal benefit comes from IRS Notice 2020-75. Under that notice, state income tax paid by a partnership or S corporation is deductible by the entity in computing its federal income, rather than being treated as an itemized deduction subject to the owner’s SALT cap.
Who Can Make the Election
Not every pass-through business qualifies. Based on the NCDOR notice on the pass-through entity tax, the main eligibility rules are:
- The business must be an S corporation or a partnership, including an LLC taxed as a partnership, that is required to file a North Carolina return.
- Every partner must be an eligible owner. Individuals, estates, qualifying trusts and organizations, other partnerships, and entities taxed as corporations all qualify, although income allocated to partnership and corporate partners is not included in the entity-level tax.
- Publicly traded partnerships cannot elect, and investment partnerships that are not doing business in North Carolina generally do not qualify.
How and When the Election Is Made
The election is made each year on a timely filed North Carolina return. There is no separate form. The business marks the taxed pass-through entity election on the front of Form CD-401S or Form D-403, and the return must be filed by its due date, including extensions.
For calendar-year businesses, that means April 15, 2027 for the 2026 tax year, or the extended due date if the business has a valid extension. For tax years beginning on or after January 1, 2023, the statute says the election cannot be made or revoked after the return is filed.
A business that expects at least $500 of North Carolina tax as a taxed pass-through entity must also make estimated payments, according to NCDOR. Planning the election late in the year can leave the business short on those payments.
How Federal SALT Cap Changes Affect the Decision
The 2025 federal tax law raised the SALT cap, which changes the math for some owners. Under the law enacted in July 2025, the cap on itemized state and local tax deductions rose from $10,000 to $40,000 for 2025 and $40,400 for 2026, according to an analysis in The Tax Adviser, the AICPA’s journal. The higher cap phases down by 30% of modified adjusted gross income above a threshold, starting at $500,000 for 2025, and it cannot fall below $10,000.
The same analysis notes that the final law kept the PTET workaround intact. In practice, that creates three broad groups of owners:
- Owners with income above the phase-down range. Their cap falls back toward $10,000, so the entity-level deduction often carries the most value for them.
- Owners below the phase-down range who itemize. With a $40,400 cap, they may be able to deduct much of their state tax personally, so the added benefit from the election may be smaller.
- Owners who take the standard deduction. They get no personal benefit from state taxes they pay, so an entity-level deduction can still help.
The cap is scheduled to return to $10,000 in 2030, which means the analysis may shift again. This is a decision to revisit every year.
Situations Where the Election May Not Help
The election works well for many businesses, but not for every owner group. Here are situations where we look closely before recommending it:
- Owners in other states. A nonresident owner’s home state may or may not give a credit for tax the business paid to North Carolina, which can leave that owner worse off.
- Owners with different goals. One owner may benefit while another gains little, and the election applies to the whole entity, so it needs owner agreement and a clear operating or shareholder agreement.
- Thin or uneven profits. If the business expects a loss or very modest income, the benefit may not justify the cash it takes to make entity-level payments.
- Other tax interactions. The entity-level tax lowers the business income reported to owners, which can affect other calculations such as the qualified business income deduction.
None of these rule the election out on their own. They are the reasons the decision should be modeled owner by owner rather than assumed.
Coordinating the Election with Owners’ Personal Returns
The election only works when the business and personal plans move together. Once a business elects, owners need to adjust their own North Carolina estimated payments, since part of their state tax is now paid by the entity.
Owners also need accurate K-1 information to claim their deduction and report the right adjustments. If the business does not pay the tax it owes within 60 days of a notice, NCDOR says owners lose the deduction, which makes timely entity payments essential.
This is where integrated planning matters. Our business tax return preparation and compliance team and our individual tax planning and consulting team work from the same numbers, so the entity return and each owner’s return tell the same story.
Model the Decision Before You File
The PTET decision is one example of using your financial data to plan ahead instead of reacting at filing time, a theme we explore in turning your financial data into a growth strategy. As an independent, partner-led firm in the Raleigh area, we model the election for each owner before the return goes out.
If your S corporation or partnership is weighing the election for 2026, schedule a consultation with our team. We will show you what the election means for each owner and help you file with confidence.
Frequently Asked Questions
What Is the North Carolina PTET Election?
It is an annual election that lets an eligible S corporation or partnership pay North Carolina income tax at the entity level. Owners then deduct their share of that income on their personal state returns, and the entity can generally deduct the tax for federal purposes.
How Do I Make the PTET Election in North Carolina?
The business marks the taxed pass-through entity election on its timely filed Form CD-401S or Form D-403. There is no separate form, and the election cannot be made or revoked after the return is filed.
What Tax Rate Applies to a Taxed Pass-Through Entity?
An electing entity pays tax at North Carolina’s individual income tax rate. For 2026, that rate is 3.99%, and it is scheduled to fall to 3.49% for 2027.
Does the Higher SALT Cap Make the Election Unnecessary?
Not necessarily. The cap rose to $40,400 for 2026, but it phases down for higher-income owners and offers no benefit to owners who take the standard deduction. The election still helps many owners, but the value now varies more from person to person.
Can Any Partnership Make the Election?
No. Publicly traded partnerships cannot elect, and investment partnerships that are not required to file a North Carolina return cannot elect. Partners that are partnerships or corporations no longer make a business ineligible, but their shares of income are not included in the entity-level tax.