Governor Roy Cooper signed into law NCACPA’s top legislative priority of the 2023 session on March 3, concluding a legislative journey that began almost one year ago. Session Law 2023-12 makes several taxpayer-friendly changes to the state’s Pass-Through Entity (PTE) tax law.
The PTE changes were part of a much larger bill that makes various technical and administrative changes to the state’s tax laws, including updating the state’s Internal Revenue Code conformity date to January 1, 2023. The bill, SB 174, received unanimous approval from lawmakers at every step of the process.
Below is a summary of the new PTE provisions:
- Creates a credit for taxes paid in another state for resident partners – Previous law provided that where another state imposes tax directly upon an S-corporation rather than upon its shareholders, a resident shareholder may claim a credit for their pro rata share of tax paid by the S-corporation. No such benefit existed for resident partners of multi-state partnerships. S.L. 2023-12 corrects this flaw and provides a corresponding benefit to resident partners of a partnership. This provision is retroactive to January 1, 2022.
- Allows tiered partnerships to become a Taxed PTE – Previous law limited the election to become a Taxed PTE to those partnerships wholly owned by individuals, estates, trusts, and certain tax-exempt organizations. The new law adds entities classified as partnerships for federal income tax purposes and S-corporations (as defined in G.S. § 105-131(b)) to the list of eligible owners. This provision is retroactive to January 1, 2022.
- Creates two deductions for Taxed PTE owners – Effective January 1, 2023, a Taxed PTE will no longer include income attributable to other states in the calculation of the tax due for its North Carolina resident owners. There will be two deductions available to Taxed PTE Owners: (1) A deduction for the North Carolina income taxed at the PTE level, and (2) a deduction for income taxed by another state at the PTE level (in lieu of a tax credit).
NCACPA had first detailed the shortcomings in the PTE law in a letter to the Senate and House Finance Committee chairs in May 2022. The association had been working with the NC Department of Revenue and state lawmakers ever since to craft legislation that creates equity in the PTE tax law for organizations regardless of their entity type.
As with most legislative victories, this was a team win that merits numerous accolades. NCACPA appreciates the members of the Tax Resource Group, Advocacy Resource Group, and the Key Person Program for their hard work. We also thank our bill sponsors—Sen. Paul Newton, Sen. Bill Rabon, and Sen. Jim Perry—for their support.
NCACPA is especially grateful to Kelli Knoble and Tom Coley of Grant Thornton LLP. Were it not for their technical expertise, tenacious dedication, thought leadership, and countless hours spent discussing potential solutions with legislators and regulators, these PTE tax law changes would not have been possible.
The NCDOR is expected to release updated regulatory guidance on the changes contained in S.L. 2023-12 soon.
If you have questions about this issue or other policy matters, please contact NCACPA Director of Advocacy Robert Broome, CAE.