By Matt Rubush, CPA, Operating Partner
If you own an S Corporation or a partnership in North Carolina, you should be aware of a new way to make estimated tax payments that will potentially save you money. It's called the pass-through entity tax.
The 2017 Tax Cuts and Jobs Act (TCJA) limited deductions for state and local taxes for individuals to a $10,000 cap. Since then, many states have been looking for workarounds. While some efforts did not hold up in court, the pass-through entity tax (PTE) has been shown to be acceptable.
It works like this. A pass-through entity will pay its state taxes directly from the company on a different form. Then in the 2023 filing season, it will elect to be taxed at the entity level. The taxes paid by the company are then all deductible for federal income.
If you're capped at the $10,000 limit or do not have enough itemized deductions, this could save you money. A business deduction is worth the amount paid times your marginal tax rate. If your marginal tax rate is 32% and you pay $10,000 in state income tax, then you would save $3200 on your federal taxes. That's a pretty nice savings just for filing a couple extra forms.
You can go the NCDOR website to find out the details: https://www.ncdor.gov/important-notice-regarding-north-carolinas-recently-enacted-pass-through-entity-tax-0
If you have any questions on this, please don't hesitate to reach out to me.