The South Carolina PTE election lets a qualifying partnership, S corporation, or LLC pay state income tax at the entity level at a flat 3% rate on its active trade or business income. Because the entity pays the tax as a business expense, it reduces the income flowing through to owners on their federal returns, sidestepping the federal SALT deduction cap that applies to individuals. The cap rose from $10,000 to $40,000 in 2025 and increases 1% annually after that, but phases out for filers earning above $500,000, so the election still matters for many South Carolina business owners. The 3% flat rate also comes in below South Carolina’s graduated individual rates, which top out around 6%.
Which Businesses Qualify
Two conditions have to line up. The entity itself must be a partnership, S corporation, or LLC taxed as one of those for federal purposes. C corporations and sole proprietorships are out.
Every owner must also be a “qualified owner,” which South Carolina defines as an individual, estate, or trust. Partnerships can be owners too, but only if their own partners are qualified owners, so tiered structures work as long as the ownership chain eventually reaches individuals, estates, or trusts.1South Carolina Department of Revenue. SC Revenue Ruling 22-5 – Income Taxes Paid by a Pass-Through Entity
A single disqualified owner kills eligibility for the entire entity that year. C corporations, banks, insurance companies, electing small business trusts, and tax-exempt organizations cannot be qualified owners. An S corporation with a corporate shareholder, or a partnership with a tax-exempt partner, cannot make the election.
What Income the 3% Rate Covers
The election reaches only the entity’s South Carolina “active trade or business income” under South Carolina Code Section 12-6-545. Several categories are carved out and continue to pass through to owners at their personal rates:1South Carolina Department of Revenue. SC Revenue Ruling 22-5 – Income Taxes Paid by a Pass-Through Entity
- Capital gains and losses, including Section 1231 gains
- Passive investment income such as interest, dividends, rents, and royalties
- Amounts reasonably related to the personal services of an owner
The personal-services piece is the one people miss. If part of the entity’s income traces to an owner’s own labor, that part doesn’t get the 3% rate. South Carolina offers a safe harbor: owners may treat 50% of their qualifying income as not reasonably related to personal services, rather than calculating the exact split.2South Carolina Department of Revenue. Form I-335 Active Trade or Business Income Investment income gets allocated to the state where the partner or shareholder is domiciled, not apportioned through the entity.
How to Make the Election
The election is annual and made on the entity’s return. There is no separate application. Partnerships check the active trade or business election box on SC Form 1065; S corporations check it on SC Form 1120S.3South Carolina Department of Revenue. Partnership Income Tax
The deadline is the due date of the return, including extensions. For a calendar-year S corporation, that’s March 15, or September 15 with a valid federal extension. Partnerships also have a September 15 extended deadline. The election can be made or revoked on an original or amended return, but only before the extended due date passes. After that, the choice is locked for that year.3South Carolina Department of Revenue. Partnership Income Tax
One decision covers everyone. The election applies to all owners at once, so an entity with owners in different tax situations should model the impact on each person first. One owner may benefit substantially while another sees little, and there is no way to elect for some owners and not others.
Rate, Apportionment, and Estimated Payments
The rate is a flat 3%, applied to active trade or business income apportioned to South Carolina.1South Carolina Department of Revenue. SC Revenue Ruling 22-5 – Income Taxes Paid by a Pass-Through Entity Apportionment uses the single sales factor formula under South Carolina Code Section 12-6-2252, which looks at the share of the entity’s sales sourced to South Carolina.4South Carolina Legislature. South Carolina Code Title 12 Chapter 6 Section 12-6-2252
Electing entities make quarterly estimated payments under the same framework as other South Carolina taxpayers, governed by South Carolina Code Section 12-6-3910. Partnerships and S corporations follow slightly different fourth-installment dates, but both file three payments across the year and one at year-end or shortly after.5South Carolina Legislature. South Carolina Code Title 12 Chapter 6 Section 12-6-3910 Underpayment penalties track Internal Revenue Code Sections 6654 and 6655, with a South Carolina-specific small-amount threshold: if the tax still owed after estimated payments and withholding is less than $100, no underpayment penalty applies.6South Carolina Legislature. South Carolina Code Title 12 Chapter 54 Section 12-54-55
Overpayments go back to the entity, not the owners. If estimated payments exceed the final liability, the entity can request a refund or carry the excess forward against next year’s estimates. Owners do not receive a personal credit for entity-level overpayments.7South Carolina Legislature. South Carolina Code Title 12 Chapter 8 Section 12-8-2020
What Owners Do on Their SC1040
South Carolina uses a direct exclusion, not a tax-credit mechanism. When the entity properly files and pays the 3% tax, each qualified owner removes their share of active trade or business income from South Carolina taxable income entirely. It never hits the graduated rates on the personal return.1South Carolina Department of Revenue. SC Revenue Ruling 22-5 – Income Taxes Paid by a Pass-Through Entity
The exclusion is conditional. The entity has to actually file the SC return and pay the tax. If it fails to do either, the income flows back to owners at their normal rates. Owners work the numbers on Form I-335, which calculates the active trade or business income deduction and the flat-rate tax that feed into the SC1040.8South Carolina Department of Revenue. 2025 Individual Income Tax Instructions
The Federal Deduction and the Basis Trade-Off
The federal benefit is the reason to bother. Because the entity pays the South Carolina tax as a business expense, ordinary income flowing to owners on their federal K-1s is lower by the amount of the state tax. The IRS confirmed this treatment in Notice 2020-75 in November 2020, and every state PTE regime is built on that guidance.9Internal Revenue Service. Notice 2020-75 Final regulations have not been issued.
There is a cost to weigh. Because the entity-level tax reduces income allocated to owners, it also reduces each owner’s basis in their partnership interest or S corporation stock, through Section 705(a)(1)(A) for partnerships and Section 1367(a)(1) for S corporations.9Internal Revenue Service. Notice 2020-75 Usually harmless, but owners already close to their basis limit, especially S corporation shareholders taking distributions, should check whether the election would trigger a taxable event.
Nonresident Owners and Home-State Credits
The election does not release nonresident owners from their South Carolina filing obligation. A nonresident either files an SC nonresident return or is included in the entity’s composite return.1South Carolina Department of Revenue. SC Revenue Ruling 22-5 – Income Taxes Paid by a Pass-Through Entity
The bigger question for nonresidents is whether their home state will grant a credit for the 3% South Carolina entity-level tax against home-state income tax. Treatment varies by state and changes often. If the home state denies the credit, that income is effectively taxed twice. Check the home state’s rules before the entity elects.
South Carolina’s own credit for taxes paid to other states under Code Section 12-6-3400 is not available to nonresidents, whether or not the PTE election is made.1South Carolina Department of Revenue. SC Revenue Ruling 22-5 – Income Taxes Paid by a Pass-Through Entity
How Losses Work
Active trade or business losses from an electing PTE pass through with a restriction: they can only offset income taxed at the 3% flat rate. An owner cannot use those losses to shelter income that would otherwise be taxed at South Carolina’s higher graduated rates. That prevents pairing a profitable electing entity’s low rate with another entity’s losses for a bigger deduction on personally-taxed income.