NC pass-through entity tax election
Explore: well supported, often missed.
The federal government limits how much state and local tax you can deduct on your personal return. North Carolina, like most states with an income tax, offers a way around it for owners of S corps and partnerships: the company can elect to pay the owners' state income tax itself.
The company deducts that tax on its federal return, which the limit doesn't touch, and the owners get a credit on their North Carolina returns for the tax already paid. The result is a federal deduction that would otherwise be lost.
How it works
NC lets an S corp or partnership pay the owners’ state income tax itself. The company deducts it on the federal return, which gets around the federal limit on deducting state taxes. The owners get a credit on their NC return.
What makes it hold up
- The election made each year on the company’s NC return
- Estimated payments made by the company
- The credit carried to each owner’s NC return
Risks
Low. It’s worth less if your state taxes aren’t limited on your federal return, or if you take the standard deduction anyway.
Questions to ask your CPA
- Is the election still worth it for this year?
- Are the company’s NC estimates on track?
Common questions
Who can make the election?
S corps and partnerships doing business in North Carolina. It's made each year on the company's NC return, so it can be decided year by year.
Is it still worth it now that the SALT cap is higher?
Often yes. The 2025 tax law raised the federal cap, but the higher cap shrinks for higher incomes. Owners above that range, and owners whose other state and local taxes already fill the cap, still benefit.
When is it not worth it?
If your state taxes aren't limited on your federal return anyway, or you take the standard deduction, the election adds little.
Do other states have this?
Most states with an income tax have a similar election. The rules differ by state, so check each state where your company owes tax.
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Education, not advice. Tax law changes and every situation is different, so confirm the details with your CPA or tax advisor before acting. This page was last checked against tax law as of October 2026, including the 2025 tax law, in October 2026.