How to Make a South Carolina PTET Election: Form I-435 and the 3% Rate

A Greenville software reseller runs as an S corporation and clears about $300,000 of profit after paying its owner a reasonable salary. The owner itemizes, and between property tax and the state income tax already withheld on her wages, she has used up the federal SALT cap before the business income even shows up on her return. Every dollar of South Carolina tax she pays on that $300,000 is, federally, a dollar she cannot deduct. South Carolina's pass-through entity tax election is built for exactly that problem. This owner is theoretical, not an actual client, but the mechanics are the ones I walk South Carolina owners through every spring.

What the I-435 election actually does

South Carolina Code Section 12-6-545(G), added by Act 61 of 2021, lets a partnership or an S corporation pay South Carolina income tax on its active trade or business income at the entity level at a flat 3%. The entity figures the tax on Form I-435, Active Trade or Business Income for Electing Partnerships and S Corporations, and pays it with its own return.

Here is the part most write-ups skip. The election does not lower your South Carolina tax. South Carolina already taxes a pass-through owner's active trade or business income at a reduced flat 3% at the individual level, well below the state's 6% top rate for 2025. Pay that 3% yourself or have the entity pay it, the state rate is the same. What changes is federal. Under IRS Notice 2020-75, the entity-level tax is deductible by the entity as a business expense and is not subject to the federal SALT cap. So the election moves that 3% from a capped itemized deduction to a fully deductible business expense. That is the entire trade, and it is worth understanding before you file, because a few owners talk themselves into the election expecting a state tax cut that is not there.

Who can elect, and on what income

The election is only available if every owner is a qualified owner, which South Carolina defines as an individual, an estate, or a trust. A single owner that is a corporation, or an owner that is itself a pass-through entity, disqualifies the whole entity for that year. If you have a holding company or another LLC sitting in your ownership chart, check it before you count on the election.

The election also reaches only the entity's active trade or business income. Passive investment income and capital gains still pass through on the SC K-1 and are taxed at the owner's rates. For most operating businesses that distinction does not matter much, but a company sitting on a large investment account or selling off a piece of itself will see only part of its income run through the I-435.

How to file the election

You make the election by filing Form I-435 with the entity return, an SC1120S for an S corporation or an SC1065 for a partnership, by the return due date including any extension. For a calendar-year entity that is March 15, 2026, or September 15, 2026 on the automatic six-month extension. There is no separate application, and the election is made fresh each year, so you are free to elect in a profitable year and skip it in a lean one. If the entity-level tax will be large, plan on estimated payments during the year rather than one lump sum with the return.

The savings, with a theoretical S corp

Take that Greenville S corporation with $300,000 of South Carolina active trade or business income after a reasonable salary, a single resident owner in the 32% federal bracket who has already filled the SALT cap with property and wage-withholding taxes. The South Carolina tax is $9,000 either way. The only question is whether that $9,000 is deductible on the federal return. The numbers below are 2026 figures, rounded, and the business is theoretical.

The $2,880 is the federal tax saved on a $9,000 business deduction at a 32% rate. There is a catch worth naming. The entity-level tax reduces the qualified business income that flows to the owner, so the §199A deduction drops by 20% of $9,000, or $1,800, which costs about $576 of federal tax back. Net, the owner keeps roughly $2,300. Every honest PTET calculation carries that §199A trim, and most online summaries leave it out. For a specified service business already phased out of §199A, there is no trim and the full $2,880 stands.

When the election is not worth the trouble

The 2025 tax law raised the federal SALT cap to $40,400 for 2026, up from the old $10,000, and it only phases down above $505,000 of modified adjusted gross income. A good number of South Carolina owners can now deduct their state income tax personally without any election, which shrinks or erases the benefit. Before you file the I-435, add up your property tax and your personal state income tax and see whether you are actually over the cap. If you are comfortably under it, the election buys you little. I walk through that threshold in detail in the $40,000 SALT cap guide, and the broader mechanics live in the PTET SALT cap workaround explainer.

Two more cautions. A nonresident owner has to check how their home state credits the South Carolina entity tax, since a few states are stingy about crediting tax paid by the entity rather than by the individual. And the election is all or nothing for the year, so run the math before March 15 rather than after. If you are still deciding whether an S corporation makes sense in the first place, start with the federal payroll-tax question using the EntityIQ S-Corp tax calculator, then layer the state election on top once the entity is in place and profitable.

This article is educational and is not legal or tax advice. The figures are 2026 amounts, the business is theoretical, and South Carolina adjusts its forms and rates often. Please confirm the current rules with the South Carolina Department of Revenue and a qualified CPA before filing.