How to Make a North Carolina Taxed PTE Election

Say a dentist runs her practice as an S-corp in Charlotte and it throws off $300,000 of North Carolina profit. Her household income is well into the mid-six figures, so the federal deduction for state and local taxes is already gone. She pays North Carolina income tax on the practice profit and gets nothing for it on her federal return. The North Carolina Taxed PTE election is the fix, and it costs no extra state tax to use. This owner is theoretical, not an EntityIQ client, but the setup is the most common one I see in the state.

What the North Carolina Taxed PTE election is

North Carolina calls its pass-through entity tax the "Taxed PTE" regime. For an S-corp, the authority is G.S. 105-131.1A, added by Session Law 2021-180 and effective for tax years beginning on or after January 1, 2022. When an eligible S-corp elects, it becomes a "Taxed S Corporation" and pays North Carolina income tax at the entity level. The owners then deduct that income on their own returns, so it is not taxed twice.

The whole point is the federal SALT cap. The One Big Beautiful Bill Act raised the cap under IRC §164(b)(6) to $40,400 for 2026, but that larger cap phases back down toward $10,000 once modified adjusted gross income passes $505,000. A tax the entity pays and deducts never touches Schedule A, so it sidesteps the cap and the phaseout. That treatment rests on IRS Notice 2020-75, which confirmed a state income tax paid by the entity is deductible in figuring the entity's income, with no cap applied.

The rate ties to the individual rate

The Taxed PTE pays North Carolina's individual income tax rate for the year, not a separate corporate number. North Carolina has been cutting that flat rate on a schedule, and you can see the steps on the NCDOR rate schedule. It ran 4.99% in 2022, 4.75% in 2023, 4.5% in 2024, and 4.25% in 2025, and it lands at 3.99% for 2026 and later years. So an S-corp electing for the 2026 year pays 3.99% on the taxed income.

Who is eligible and what income gets taxed

An S-corp can elect only if every shareholder is an individual, an estate, a permitted trust, or an organization described in IRC §1361(c)(6). Federal S-corp rules already bar corporate and partnership shareholders, so nearly every S-corp clears this without a second thought.

The taxed income base is the sum of two pieces. It includes each resident shareholder's entire share of the S-corp's income, and each nonresident shareholder's share of income sourced to North Carolina. That resident piece matters. If a North Carolina resident owns a slice of a business with income earned in other states, their full share still lands in the Taxed PTE base at 3.99%, which is a wrinkle to model before you elect. There is an upside for out-of-state owners. When the S-corp pays the tax on a nonresident's behalf, that nonresident does not have to file a North Carolina individual return if their only North Carolina income is the share from the S-corp.

How to make the election on Form CD-401S

There is no standalone election form to mail in. You make the election by marking it on a timely filed Form CD-401S, the North Carolina S-corporation return, for the year. The return, including any valid extension, is due the 15th day of the fourth month after the year closes, which is April 15 for a calendar-year S-corp. The election applies to that one year, and once the filing period has run it is binding for the year. You can only back out by filing an amended return before the original or extended due date, so this is an annual decision you confirm on the return, not a one-time switch you flip and forget.

Estimated payments and the franchise tax

A Taxed S-corp that can reasonably expect a North Carolina income tax liability of at least $500 has to make estimated payments the same way a C-corporation does. Miss those and the entity owes an underpayment penalty, so I treat the estimates as due once the decision looks likely rather than waiting for the return.

Keep the franchise tax in view too. North Carolina charges S-corps a franchise tax regardless of the election, at $200 on the first $1,000,000 of the tax base and $1.50 per $1,000 above that, with a $200 minimum. The election does not change that bill, but owners coming from a no-franchise-tax state often forget to budget for it.

The owner side is a deduction, not a credit

Here is the piece people get wrong when they move from a credit state. Arizona and Utah hand the owner a credit for the entity-level tax. North Carolina instead gives the owner a deduction. Each shareholder deducts their share of the Taxed PTE income on their North Carolina return, reported through the NC K-1 and Form NC-PE, so the income the entity already taxed gets subtracted back out and is not taxed again at the individual level. The total North Carolina tax is the same, but because it runs through a deduction, a resident owner with income taxed by another state should run the interaction with the credit for taxes paid to other states before electing.

The math, side by side

Back to the theoretical Charlotte dentist. Her S-corp has $300,000 of North Carolina income allocable to her, she is a resident, and her federal marginal rate is 35%. Her household income has already phased the personal SALT cap down to the $10,000 floor, and her property tax uses it up, so state income tax on the practice buys her nothing on Schedule A. The North Carolina tax owed is the same either way. The only thing that moves is the federal deduction.

The swing is about $4,190 a year on one election, and the only thing separating the two columns is whether the North Carolina tax sits on the business return or on Schedule A. The state tax is identical. The federal deduction is the whole game. For an owner whose SALT cap is already gone, the Taxed PTE is often the only way left to get any federal value out of state income tax on the business.

When it is not worth the paperwork

The election is not free. It means estimated payments to the state and a deduction to track on each owner's return. If your income sits under $505,000 and your total state and local taxes come in under the $40,400 cap, the larger federal cap may already capture everything, so the election adds work for little gain. It earns its keep when the North Carolina tax on business profits is large, your income is high enough to shrink the personal cap, or both.

If you want to see whether an S-corp election makes sense in the first place, the EntityIQ calculator models the self-employment tax side, and our guide on the PTET SALT cap workaround walks through the federal mechanics. For how other states run their version, compare the Arizona PTE election.

This article is educational and is not legal or tax advice. The figures above are 2026 amounts, and the dentist is theoretical. North Carolina rules change, and the deduction interacts with multistate credits, so please consult a qualified CPA before making the election.