North Carolina's Taxed PTE Election for 2026: the 3.99% Rate, Electing on the D-403 or CD-401S, and Whether It Still Pays

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North Carolina's Taxed PTE election for 2026: the 3.99% rate, how to elect on the D-403 or CD-401S, what changed with the higher federal SALT cap, and when the election still pays.

North Carolina has let partnerships and S corporations pay state income tax at the entity level since tax year 2022. The state calls a business that does this a "Taxed PTE." The point was the same as in the other 30-plus states with a similar law: when the entity pays the state tax, the business can usually deduct it on its federal return, which works around the federal cap on the state and local tax (SALT) deduction that individuals face. The IRS confirmed that treatment for entity-level state taxes in Notice 2020-75.

Two things changed the math recently. North Carolina's individual rate, which is also the rate a Taxed PTE pays, is scheduled at 3.99% for 2026, down from 4.25% for 2025. And the federal SALT cap itself went up from $10,000 to $40,000 for 2025, with small increases after that and a phase-down for higher incomes. Owners in Raleigh, Charlotte, Durham and Greensboro who elected without much thought in 2022 or 2023 should look at it again before the 2026 returns are filed.

This guide covers how the election works, what it costs, who it still helps, and the dates that matter.

How the North Carolina Taxed PTE election works

Most of what follows comes from the NC Department of Revenue's notice and FAQ on the pass-through entity tax, which the Department updated after the law (Session Law 2021-180) took effect.

  • Who can elect. An S corporation that has to file a North Carolina S corporation return, and a partnership (including an LLC taxed as a partnership) that has to file a North Carolina partnership return. That includes rental real estate partnerships doing business in the state.
  • Who can't. Publicly traded partnerships, investment partnerships (they aren't treated as doing business in North Carolina), and any partnership that had a partner during the year who wasn't an individual, an estate, or certain trusts and exempt organizations. A partnership with a corporate or LLC partner is out.
  • Where you elect. On the front of the entity's own timely filed return: Form CD-401S for an S corporation, Form D-403 for a partnership.
  • For how long. One year at a time. The election covers only the tax year on that return.

Single-member LLCs that are disregarded for federal tax aren't partnerships or S corporations, so they can't elect. If you own one and you've been told about the "PTE workaround," the usual first step is an S corporation election, which brings its own payroll and filing costs. Our S corp or LLC guide for North Carolina walks through that choice.

The deadline is the return due date, extensions included

This is where businesses lose the election. NCDOR says the election must be made by the due date of the entity's return, including extensions, and that an election on a late-filed return is not valid.

For a calendar-year S corporation or partnership, the North Carolina return is due April 15 (the 15th day of the fourth month after year end). For tax year 2026, that means April 15, 2027, or October 15, 2027 on extension. A business that received an automatic federal extension gets the matching North Carolina extension if it certifies the federal extension on its return. Without a federal extension, the business can still file the North Carolina extension form by the original due date.

NCDOR's own examples make the point: an S corporation on extension that files by October 15 and checks the box has a valid election. A partnership that never got an extension and files on October 15 does not, because its return was late.

The election can also be revoked, but only before that same due date (with extensions). After the deadline passes, the choice is locked for the year.

What the tax costs, and how it's calculated

A Taxed PTE multiplies its North Carolina taxable income by the individual income tax rate for that year. Under the rate schedule in S.L. 2023-134, that's 4.25% for 2025 and 3.99% for 2026. NCDOR has posted the 2026 NC withholding tables at 3.99%; confirm the rate on the 2026 CD-401S or D-403 instructions when NCDOR releases them.

The taxable income is the sum of:

  • Every owner's share of the business income that is attributable to North Carolina, and
  • Each North Carolina resident owner's share of the income that is not attributable to North Carolina.

In plain terms, nonresident owners are taxed only on the North Carolina piece, and resident owners are taxed on all of it. Separately stated deductions (charitable gifts passed through to owners, for example) are left out of the calculation.

On the owner's side, each owner deducts their share of the Taxed PTE's income on their own North Carolina return, so the same income isn't taxed twice. This is a deduction, not a credit, which is different from states like Connecticut or Massachusetts. One catch: if the entity doesn't pay the full tax within 60 days after NCDOR notifies it of a balance due, the owners lose that deduction.

Estimated payments and the forms that go with them

A Taxed PTE that expects at least $500 of North Carolina tax has to make estimated payments, the same way a C corporation does. Payments are due on the 15th day of the fourth, sixth, ninth and twelfth months of the tax year. For a calendar year, that's April 15, June 15, September 15 and December 15.

The vouchers are:

  • CD-429 PTE for a Taxed S corporation
  • NC-40 PTE for a Taxed partnership

If you're deciding now, in the fourth quarter, the December 15, 2026 installment is the one in front of you. A business that plans to elect for 2026 and hasn't been paying estimates should talk through the underpayment exposure before year end.

Owners who used to cover this income with their own North Carolina estimated payments need to coordinate, so nobody pays twice. If the entity pays, the owner's personal estimates can usually come down.

A worked example: does the election still pay in 2026?

Take a Raleigh S corporation with two shareholders, both North Carolina residents. The business expects $300,000 of North Carolina income for 2026, split evenly.

  • Taxed PTE cost to the entity: $300,000 x 3.99% = $11,970.
  • Federal effect: the entity deducts the $11,970 as a business expense, so each shareholder's federal K-1 income drops by $5,985.
  • North Carolina effect: each shareholder deducts their $150,000 share on their own return, so the North Carolina tax is roughly the same either way. The state collects the money from the entity instead of from the owners.

Whether that federal deduction is worth anything depends on what each shareholder could deduct anyway. Under the higher federal SALT cap of about $40,400 for 2026, a shareholder whose own property tax and state income tax already fit under the cap would get the same deduction without the election, as long as they itemize. For them, the election mostly moves paperwork around.

The election tends to help when:

  • Owners don't itemize. Someone taking the standard deduction gets nothing from state tax paid personally, but still gets the benefit of the entity-level deduction.
  • Owners' income is high enough to hit the federal phase-down. The higher cap shrinks for incomes above roughly $500,000 and can drop back to $10,000. The entity-level deduction doesn't depend on the owner's income.
  • Owners already have large property taxes. If property tax alone fills the cap, state income tax paid personally adds nothing.

It tends to help less, or hurt, when:

  • Owners live in other states. A nonresident shareholder may face their home state's rules on credits for tax paid by an entity. NCDOR's FAQ notes that North Carolina itself doesn't allow resident owners a credit for another state's tax paid by a Taxed PTE; that credit sits at the entity level. Multistate ownership needs its own review.
  • Owners need cash flow flexibility. The entity has to fund estimates. That can strain a business with uneven income.
  • The S corporation has a problem with disproportionate distributions. Entity-level tax payments have to be handled so they don't look like unequal distributions to shareholders.

Federal rules can change, and the SALT cap is scheduled to return to $10,000 in 2030. Re-check the decision every year.

Nonresident owners: a filing benefit

There's one advantage that holds up regardless of the SALT math. Under North Carolina's administrative code, a nonresident shareholder or partner generally doesn't have to file a North Carolina individual return if their only North Carolina income is from the entity and the entity pays the tax for them. For a business with out-of-state owners, an election can mean fewer state returns to file. NCDOR can still require a return if it believes an individual owes tax, so keep records.

What to do before the 2026 returns

  1. List every owner and check that the entity is eligible. One corporate or LLC partner makes the partnership ineligible.
  2. Get year-to-date numbers from books that are current through September or October.
  3. Ask each owner whether they itemize and roughly what their income and property taxes look like.
  4. Run both versions: with the election and without, at the 3.99% rate.
  5. Decide on the December 15 estimate using CD-429 PTE or NC-40 PTE.
  6. Put April 15, 2027 (or October 15, 2027 on extension) on the calendar, with a note that the box on the NC CD-401S or D-403 is the election.
  7. Tell every owner in writing what was decided. The entity has to report the election, each owner's share of included income, and the tax paid on it.

Common questions about the North Carolina Taxed PTE

Is the election permanent? No. It's made each year on that year's return, and it can be revoked only before that return's due date, including extensions.

Can a sole proprietor or single-member LLC elect? No. Only S corporations and partnerships that file North Carolina returns are eligible.

Do owners get a credit for the tax the entity pays? Not in North Carolina. Owners deduct their share of the entity's income on their own North Carolina return instead.

What's the rate for 2026? 3.99% under current law, the same as the individual rate. Confirm it in the 2026 return instructions when they're posted.

We missed the deadline. Can we file late and still elect? No. An election on a late-filed return isn't valid.

This guide is general information about North Carolina law as of October 2026, not tax advice for your situation. Rates and federal rules change, so check the current NC forms before you file.

Make the call with current books

RKube Services handles bookkeeping, payroll and tax prep for small businesses across the US and Canada, including S corporations and partnerships in Raleigh, Charlotte, Durham and the rest of North Carolina. We keep the books current so the Taxed PTE decision is made on real numbers before the December estimate, not in a rush at the April deadline. Start with a free scoping call and a 30-day trial: call (984) 234-7030 or reach us through rkubeservices.com.

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