The Senate Finance Committee voted unanimously on March 1 to approve a bill containing NCACPA’s top legislative priority of this session.
SB 174 makes several taxpayer-friendly changes to the state’s Pass-Through Entity (PTE) tax law. The measure will:
- Create a credit for taxes paid in another state for resident partners – Current law provides 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 exists in the current law for resident partners of multi-state partnerships. Our proposal corrects this flaw and provides a corresponding benefit to resident partners of a partnership. This provision will be retroactive to January 1, 2022.
- Allow tiered partnerships to become a Taxed PTE – Current law limits the election to become a Taxed PTE to those partnerships wholly owned by individuals, estates, trusts, and certain tax-exempt organizations. Our proposal 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 will be retroactive to January 1, 2022.
- Create 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).
Other sections of the bill make 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. SB 174 is sponsored by the three chairs of the Senate Finance Committee: Sen. Paul Newton, Sen. Bill Rabon, and Sen. Jim Perry.
NCACPA has been working with the NC Department of Revenue and state lawmakers for several months to craft legislative language that promotes equity in the PTE tax law for organizations regardless of their entity type.
Legislative leaders understand the urgency involved with these retroactive changes, and NCACPA has stressed the importance of swift passage. The bill is on track to be approved by the Senate and House during the week of March 6, and we expect Governor Cooper to sign it into law.
If you have questions about this issue or other policy matters, please contact NCACPA Director of Advocacy Robert Broome, CAE.