NC Pass-Through Entity Tax: Election, Calculation, and Credits

The North Carolina pass-through entity tax election lets an S-Corporation or partnership pay state income tax at the business level, in place of passing that liability through to individual owners. The entity elects on its timely filed annual North Carolina return, pays tax at the individual income tax rate (3.99% for 2026), and each owner then subtracts the same income from their personal North Carolina return so it isn’t taxed twice.¹ The election is voluntary and must be made fresh every year. Miss the filing deadline or skip an extension, and the election is invalid for the entire tax year with no retroactive fix.²

Which Entities Qualify

Two entity types can elect: S-Corporations and partnerships, including LLCs taxed as partnerships. The ownership rules differ between them.

S-Corporations follow the federal shareholder eligibility rules already built into IRC Section 1361: shareholders must be individuals, certain trusts, or estates, and no corporate shareholders are permitted.³

Partnerships have broader eligibility after Session Law 2023-134. A partnership can elect even if its partners include other partnerships or entities classified as corporations for federal purposes. Trusts qualify as partners if they are either trusts described in IRC Section 1361(c)(2) or trusts whose beneficiaries are limited to individuals, estates, other trusts, or certain tax-exempt organizations.⁴ This is much more permissive than the original 2021 rules.

Verify the ownership structure each year before electing. A mid-year change that disqualifies the entity can put the election at risk.

How To Make the Election

The election is made on the entity’s annual North Carolina return. S-Corporations file Form CD-401S; partnerships file Form D-403. There is no separate advance-election form.²

Three rules govern the mechanics:

The return must be filed on time, including extensions. An election on a late-filed return is not valid.
The election can be revoked, but only before the return’s due date including extensions. After that, it is locked in for the year.
The election is annual. It does not carry forward, so the entity must affirmatively elect each year.

The election is all-or-nothing at the entity level. Once made, it applies to every owner for the entire year, and individual owners cannot opt out.² Get buy-in from ownership before the return goes in.

How the Entity’s Tax Is Calculated

The taxed pass-through entity pays North Carolina income tax at the individual rate under G.S. 105-153.7. For 2026 that rate is 3.99%.¹

For an S-Corporation, North Carolina taxable income equals the sum of each shareholder’s pro rata share of income or loss attributable to North Carolina, adjusted for state-required additions and deductions under G.S. 105-153.5 and 105-153.6, plus each resident shareholder’s share of income not attributable to the state.³ Partnerships follow a parallel calculation under G.S. 105-154.1.

Watch out for one detail: separately stated items under IRC Section 1366, such as capital gains, charitable contributions, and Section 179 deductions, are excluded from the entity-level taxable income calculation. Those items still pass through to owners and are handled on their individual returns.³

Form NC-PE is a supporting schedule the entity uses to report North Carolina-specific additions to and deductions from federal income. It is not the election itself.

How Owners Avoid Being Taxed Twice

Once the entity pays tax on its owners’ shares of income, the owners need a way to keep the state from taxing that same income again on their personal returns. North Carolina handles this through a deduction, not a credit. Under G.S. 105-153.5(c3), shareholders and partners subtract the portion of their income that was included in the taxed entity’s North Carolina taxable income from their own North Carolina adjusted gross income.⁵

If an S-Corporation includes $200,000 of an owner’s pro rata share in its taxed PTE income and pays 3.99% on it, that owner subtracts the same $200,000 on their personal North Carolina return. The entity-level payment replaces the personal state tax on that income.

The entity should give each owner documentation showing their allocated share of the entity-level tax payment, which the owner needs to calculate the deduction correctly.

Resident Owners With Multi-State Income

North Carolina residents who are owners of a pass-through entity that also pays entity-level tax in another state get an additional deduction. Under G.S. 105-153.5(c3)(1a) and (3a), resident owners can deduct income that was included in the entity’s taxable income in the other state, provided that state imposed an entity-level tax on it.⁵

Estimated Payments

A taxed pass-through entity that expects to owe at least $500 in North Carolina income tax must make quarterly estimated payments. S-Corporations use Form CD-429 PTE; partnerships use Form NC-40 PTE.⁶

The four installments are due on the 15th of the fourth, sixth, ninth, and twelfth months of the taxable year. For calendar-year filers, that’s April 15, June 15, September 15, and December 15, with each installment roughly one-quarter of the expected annual liability.⁷

Underpayment of estimated tax triggers interest under Article 4C of Chapter 105. This is interest, not a flat penalty, so the cost grows the longer the shortfall persists.

Filing Deadlines and Extensions

The entity’s return and full tax payment are due by the 15th day of the fourth month after the close of the taxable year. For calendar-year entities, that’s April 15. The full tax shown on the return must be paid by that date even if the entity requests a filing extension.³

S-Corporations can request a six-month extension by submitting Form CD-419 before the original due date, pushing the filing deadline to October 15 for calendar-year filers.⁸ Partnerships follow a similar extension process. The extension buys time to file the return and make the election. It does not extend the payment deadline. Tax owed is still due April 15, and late payment triggers penalties and interest.

Because the election must be made on a timely filed return, securing an extension is essential if the entity isn’t ready to file by April 15 but wants to preserve the option to elect. A return filed late without an extension is a late return, and any election on that return is automatically invalid.²

Credit for Taxes Paid to Other States

When a taxed entity earns income in multiple states, who claims the credit depends on the entity type.

For taxed partnerships, the partnership itself claims the credit for taxes paid to other states on income included in its North Carolina taxable income. Individual partners cannot claim that credit on their personal returns, because the income is being taxed at the entity level in North Carolina.⁹

For taxed S-Corporations, shareholders also cannot take a direct credit for taxes the entity paid to another state. But each shareholder’s pro rata share of the entity’s income is treated as income taxed to the shareholder, and their share of the tax imposed under G.S. 105-131.1A is treated as tax imposed on the shareholder, for purposes of any credit computation on their personal return.⁹

What Happens if the Entity Doesn’t Pay

Electing without paying is worse than not electing at all. If the taxed entity files a return showing tax due but fails to pay within 60 days of a collection notice from the Department of Revenue, the Department strips the G.S. 105-153.5(c3) deduction from every shareholder and sends each one a proposed assessment for the tax that should have been covered.³ Owners who structured their personal returns around the deduction then owe the tax individually, plus accrued interest and penalties.

Beyond the deduction loss, North Carolina imposes a failure-to-pay penalty of 2% of the tax due for the first month of delinquency, with an additional 2% for each additional month, up to a maximum of 10%.¹⁰

One last constraint: only the taxed entity itself can request a refund of overpaid entity-level tax. Individual owners cannot claim the refund directly, even though the tax was economically borne on their behalf.³

1
NCDOR. Tax Rate Schedules
2
NCDOR. Important Notice Regarding North Carolina’s Recently Enacted Pass-Through Entity Tax
3
North Carolina General Assembly. North Carolina Code 105 – Taxation of S Corporation as a Taxed Pass-Through Entity
4
NCDOR. Directive TA-23-1
5
North Carolina General Assembly. North Carolina Code 105-153.5 – Modifications to Adjusted Gross Income
6
NCDOR. Updated Forms CD-429 PTE and NC-40 PTE
7
NCDOR. NC-40 PTE Taxed Partnership Estimated Income Tax
8
NCDOR. CD-419 Information
9
North Carolina General Assembly. North Carolina Code 105-153.9 – Tax Credits for Income Taxes Paid to Other States by Individuals
10
North Carolina General Assembly. North Carolina Code 105-236 – Penalties