AN ACT TO reduce the impact of the federal salt cap by allowing certain pass‑through entities to elect to pay tax at the entity level.

The General Assembly of North Carolina enacts:

SECTION 1.(a)  G.S. 105‑131(b) reads as rewritten:

(b)      For the purpose of this Part, unless otherwise required by the context:

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(11)      Taxed S Corporation means an S Corporation for which a valid election under G.S. 105‑131.1A(a) is in effect.

SECTION 1.(b)  G.S. 105‑131.1 reads as rewritten:

§ 105‑131.1.  Taxation of an S Corporation and its shareholders.

(a)        An S Corporation shall not be subject to the tax levied under G.S. 105‑130.3. A taxed S Corporation shall be subject to tax under G.S. 105‑131.1A.

(b)        Each Except with respect to a taxed S Corporation, each shareholder's pro rata share of an S Corporation's income attributable to the State and each resident shareholder's pro rata share of income not attributable to the State, shall be taken into account by the shareholder in the manner and subject to the adjustments provided in Parts 2 and 3 of this Article and section 1366 of the Code and shall be subject to the tax levied under Parts 2 and 3 of this Article.

SECTION 1.(c)  Part 1A of Article 4 of Chapter 105 of the General Statutes is amended by adding a new section to read:

§ 105‑131.1A.  Taxation of S Corporation as a taxed pass‑through entity.

(a)        Taxed S Corporation Election. – An S Corporation may elect, on its timely filed annual return required under G.S. 105‑131.7, to have the tax under this Article imposed on the S Corporation for any taxable period covered by the return. An S Corporation may not revoke the election after the due date of the return, including extensions.

(b)        Taxable Income of Taxed S Corporation. – A tax is imposed for the taxable period on the North Carolina taxable income of a taxed S Corporation. The tax shall be levied, collected, and paid annually. The tax is imposed on the North Carolina taxable income at the rate levied in G.S. 105‑153.7. The North Carolina taxable income of a taxed S Corporation is determined as follows:

(1)        The North Carolina taxable income of a taxed S Corporation with respect to such taxable period shall be equal to the sum of the following:

a.         Each shareholder's pro rata share of the taxed S Corporation's income or loss, subject to the adjustments provided in G.S. 105‑153.5 and G.S. 105‑153.6, attributable to the State.

b.         Each resident shareholder's pro rata share of the taxed S Corporation's income or loss, subject to the adjustments provided in G.S. 105‑153.5 and G.S. 105‑153.6, not attributable to the State with respect to such taxable period.

(2)        Separately stated items of deduction are not included when calculating each shareholder's pro rata share of the taxed S Corporation's taxable income. For purposes of this subdivision, separately stated items are those items described in section 1366 of the Code and the regulations under it.

(3)        The adjustments required by G.S. 105‑153.5(c3) are not included in the calculation of the taxed S Corporation's taxable income.

(c)        Tax Credit. – A taxed S Corporation that qualifies for a credit may apply each shareholder's pro rata share of the taxed S Corporation's credits against the shareholder's pro rata share of the taxed S Corporation's income tax imposed by subsection (b) of this section. An S Corporation must pass through to its shareholders any credit required to be taken in installments by this Chapter if the first installment was taken in a taxable period that the election under subsection (a) of this section was not in effect. An S Corporation shall not pass through to its shareholders any of the following:

(1)        Any credit allowed under this Chapter for any taxable period the S Corporation makes the election under subsection (a) of this section and the carryforward of the unused portion of such credit.

(2)        Any subsequent installment of such credit required to be taken in installments by this Chapter after the S Corporation makes an election under subsection (a) of this section and the carryforward of any unused portion of such installment.

(d)       Tax Credit for Income Taxes Paid to Other States. – With respect to resident shareholders, a taxed S Corporation is allowed a credit against the taxes imposed by this section for income taxes imposed by and paid to another state or country on income taxed under this section. The credit allowed by this subsection is administered in accordance with the provisions of G.S. 105‑153.9.

(e)        Deduction Allowed for Shareholders of a Taxed S Corporation. – The shareholders of a taxed S Corporation are allowed a deduction as specified in G.S. 105‑153.5(c3)(1). This adjustment is only allowed if the taxed S Corporation complies with the provisions of subsection (g) of this section.

(f)        Addition Required for Shareholders of a Taxed S Corporation. – The shareholders of a taxed S Corporation must make an addition as provided in G.S. 105‑153.5(c3)(2).

(g)        Payment of Tax. – Except as provided in Article 4C of this Chapter, the full amount of the tax payable as shown on the return of the taxed S Corporation must be paid to the Secretary within the time allowed for filing the return. In the case of any overpayment by a taxed S Corporation of the tax imposed under this section, only the taxed S Corporation may request a refund of the overpayment. If the taxed S Corporation files a return showing an amount due with the return and does not pay the amount shown due, the Department may collect the tax from the taxed S Corporation pursuant to G.S. 105‑241.22(1). The Secretary must issue a notice of collection for the amount of tax debt to the taxed S Corporation. If the tax debt is not paid to the Secretary within 60 days of the date the notice of collection is mailed to the taxed S Corporation, the shareholders of the S Corporation are not allowed the deduction provided in G.S. 105‑153.5(c3)(1). The Secretary must send the shareholders a notice of proposed assessment in accordance with G.S. 105‑241.9. For purposes of this subsection, the term tax debt has the same meaning as defined in G.S. 105‑243.1(a).

(h)        Basis. – The basis of both resident and nonresident shareholders of a taxed S Corporation in their stock and indebtedness of the taxed S Corporation shall be determined as if the election under subsection (a) of this section had not been made and each of the shareholders of the taxed S Corporation had properly taken into account each shareholder's pro rata share of the taxed S Corporation's items of income, loss, and deduction in the manner required with respect to an S Corporation for which no such election is in effect.

SECTION 1.(d)  G.S. 105‑131.7 is amended by adding a new subsection to read:

(g)      Taxed S Corporation. – Subsections (b) through (f) of this section do not apply to an S Corporation with respect to any taxable period for which it is a taxed S Corporation under G.S. 105‑131.1A.

SECTION 1.(e)  G.S. 105‑131.8(a) reads as rewritten:

(a)      For Except as otherwise provided in G.S. 105‑153.9(a)(4) with respect to a taxed S Corporation, for purposes of G.S. 105‑153.9 and G.S. 105‑160.4, each resident shareholder is considered to have paid a tax imposed on the shareholder in an amount equal to the shareholder's pro rata share of any net income tax paid by the S Corporation to a state that does not measure the income of S Corporation shareholders by the income of the S Corporation. For purposes of the preceding sentence, the term net income tax means any tax imposed on or measured by a corporation's net income.

SECTION 2.(a)  G.S. 105‑153.3 reads as rewritten:

§ 105‑153.3.  Definitions.

The following definitions apply in this Part:

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(18a)    Taxed partnership. – A partnership for which a valid election under G.S. 105‑154.1 is in effect.

(18b)    Taxed pass‑through entity. – A taxed S Corporation or a taxed partnership.

(18c)    Taxed S Corporation. – Defined in G.S. 105‑131(b).

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SECTION 2.(b)  G.S. 105‑154(d) reads as rewritten:

(d)      Payment of Tax on Behalf of Nonresident Owner or Partner. – If a business conducted in this State is owned by a nonresident individual or by a partnership having one or more nonresident members, the manager of the business shall report information concerning the earnings of the business in this State, the distributive share of the income of each nonresident owner or partner, and any other information required by the Secretary. The distributive share of the income of each nonresident partner includes any guaranteed payments made to the partner. The manager of the business shall pay with the return the tax on each nonresident owner or partner's share of the income computed at the rate levied on individuals under G.S. 105‑153.7. The business may deduct the payment for each nonresident owner or partner from the owner or partner's distributive share of the income of the business in this State. If the nonresident partner is not an individual and the partner has executed an affirmation that the partner will pay the tax with its corporate, partnership, trust, or estate income tax return, the manager of the business is not required to pay the tax on the partner's share. In this case, the manager shall include a copy of the affirmation with the report required by this subsection. The affirmation must be annually filed by the nonresident partner and submitted by the manager by the due date of the report required in this subsection. Otherwise, the manager of the business is required to pay the tax on the nonresident partner's share. Notwithstanding the provisions of G.S. 105‑241.7(b), the manager of the business may not request a refund of an overpayment made on behalf of a nonresident owner or partner if the manager of the business has previously filed the return and paid the tax due. The nonresident owner or partner may, on its own income tax return, request a refund of an overpayment made on its behalf by the manager of the business within the provisions of G.S. 105‑241.6. This subsection does not apply to a partnership with respect to any taxable period for which it is a taxed partnership.

SECTION 2.(c)  Part 2 of Article 4 of Chapter 105 of the General Statutes is amended by adding a new section to read:

§ 105‑154.1.  Taxation of partnership as a taxed pass‑through entity.

(a)        Taxed Partnership Election. – A partnership may elect, on its timely filed annual return required under G.S. 105‑154(c), to have the tax under this Article imposed on the partnership for any taxable period covered by the return. A partnership may not revoke the election after the due date of the return, including extensions. This election cannot be made by a publicly traded partnership that is described in section 7704(c) of the Code or by a partnership that has at any time during the taxable year a partner who is not one of the following:

(1)        An individual.

(2)        An estate.

(3)        A trust described in section 1361(c)(2) of the Code.

(4)        An organization described in section 1361(c)(6) of the Code.

(b)        Taxable Income of Taxed Partnership. – A tax is imposed for the taxable period on the North Carolina taxable income of a taxed partnership. The tax shall be levied, collected, and paid annually. The tax is imposed on the North Carolina taxable income at the rate levied in G.S. 105‑153.7. The North Carolina taxable income of a taxed partnership is determined as follows:

(1)        The North Carolina taxable income of a taxed partnership with respect to such taxable period shall be equal to the sum of the following:

a.         Each partner's distributive share of the taxed partnership's income or loss, subject to the adjustments provided in G.S. 105‑153.5 and G.S. 105‑153.6, attributable to the State.

b.         Each resident partner's distributive share of the taxed partnership's income or loss, subject to the adjustments provided in G.S. 105‑153.5 and G.S. 105‑153.6, not attributable to the State with respect to such taxable period.

(2)        Separately stated items of deduction are not included when calculating each partner's distributive share of the taxed partnership's taxable income. For purposes of this subdivision, separately stated items are those items described in section 702 of the Code and the regulations adopted under it.

(3)        The adjustments required by G.S. 105‑153.5(c3) are not included in the calculation of the taxed partnership's taxable income.

(c)        Tax Credit. – A taxed partnership that qualifies for a credit may apply each partner's distributive share of the taxed partnership's credits against the partner's distributive share of the taxed partnership's income tax imposed by subsection (b) of this section. A partnership must pass through to its partners any credit required to be taken in installments by this Chapter if the first installment was taken in a taxable period that the election under subsection (a) of this section was not in effect. A partnership shall not pass through to its partners any of the following:

(1)        Any credit allowed under this Chapter for any taxable period the partnership makes the election under subsection (a) of this section and the carryforward of the unused portion of such credit.

(2)        Any subsequent installment of such credit required to be taken in installments by this Chapter after the partnership makes an election under subsection (a) of this section and the carryforward of any unused portion of such installment.

(d)       Deduction Allowed for Partners of a Taxed Partnership. – The partners of a taxed partnership are allowed a deduction as specified in G.S. 105‑153.5(c3)(3). This adjustment is only allowed if the taxed partnership complies with the provisions of subsection (f) of this section.

(e)        Addition Required for Partners of a Taxed Partnership. – The partners of a taxed partnership must make an addition as provided in G.S. 105‑153.5(c3)(4).

(f)        Payment of Tax. – Except as provided in Article 4C of this Chapter, the full amount of the tax payable as shown on the return of the taxed partnership must be paid to the Secretary within the time allowed for filing the return. In the case of any overpayment by a taxed partnership of the tax imposed under this section, only the taxed partnership may request a refund of the overpayment. If the taxed partnership files a return showing an amount due with the return and does not pay the amount shown due, the Department may collect the tax from the taxed partnership pursuant to G.S. 105‑241.22(1). The Secretary must issue a notice of collection for the amount of the tax debt to the taxed partnership. If the tax debt is not paid to the Secretary within 60 days of the date the notice of collection is mailed to the taxed partnership, the partners of the partnership are not allowed the deduction provided in G.S. 105‑153.5(c3)(3). The Secretary must send the partners a notice of proposed assessment in accordance with G.S. 105‑241.9. For purposes of this subsection, the term tax debt has the same meaning as defined in G.S. 105‑243.1(a).

(g)        Basis. – The basis of both resident and nonresident partners of a taxed partnership shall be determined as if the election under subsection (a) of this section had not been made and each of the partners of the taxed partnership had properly taken into account each partner's distributive share of the taxed partnership's items of income, loss, and deduction in the manner required with respect to a partnership for which no such election is in effect.

SECTION 3.  G.S. 105‑153.5 is amended by adding a new subsection to read:

(c3)    Taxed Pass‑Through Entities. – In calculating North Carolina taxable income, a taxpayer must make the following adjustments to the taxpayer's adjusted gross income:

(1)        A taxpayer that is a shareholder of a taxed S Corporation may deduct the amount of the taxpayer's pro rata share of income from the taxed S Corporation to the extent it was included in the taxed S Corporation's North Carolina taxable income and the taxpayer's adjusted gross income.

(2)        A taxpayer that is a shareholder of a taxed S Corporation must add the amount of the taxpayer's pro rata share of loss from the taxed S Corporation to the extent it was included in the taxed S Corporation's North Carolina taxable income and the taxpayer's adjusted gross income.

(3)        A taxpayer that is a partner of a taxed partnership may deduct the amount of the taxpayer's distributive share of income from the taxed partnership to the extent it was included in the taxed partnership's North Carolina taxable income and the taxpayer's adjusted gross income.

(4)        A taxpayer that is a partner of a taxed partnership must add the amount of the taxpayer's distributive share of loss from the taxed partnership to the extent it was included in the taxed partnership's North Carolina taxable income and the taxpayer's adjusted gross income.

SECTION 4.(a)  G.S. 105‑153.9(a) reads as rewritten:

(a)      An individual who is a resident of this State is allowed a credit against the taxes imposed by this Part for income taxes imposed by and paid to another state or country on income taxed under this Part, subject to the following conditions:

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(4)        Shareholders of a taxed S Corporation shall not be allowed a credit under this section for taxes paid by the taxed S Corporation to another state or country on income that is taxed to the taxed S Corporation. For purposes of allowing the credit under this section for taxes paid to another state or country by a taxed S Corporation's shareholders, a shareholder's pro rata share of the income of the taxed S Corporation shall be treated as income taxed to the shareholder under this Part and a shareholder's pro rata share of the tax imposed on the taxed S Corporation under G.S. 105‑131.1A shall be treated as tax imposed on the shareholder under this Part.

(5)        Partners of a taxed partnership shall not be allowed a credit under this section for taxes paid by the taxed partnership to another state or country on income that is taxed to the taxed partnership. The taxed partnership as defined in G.S. 105‑153.3(18a) is entitled to a credit under this section for all such taxes paid. For purposes of allowing the credit under this section for taxes paid to another state or country by a taxed partnership's partners, a partner's pro rata share of the income of the taxed partnership shall be treated as income taxed to the partner under this Part and a partner's pro rata share of the tax imposed on the taxed partnership under G.S. 105‑154.1 shall be treated as tax imposed on the partner under this Part.

SECTION 4.(b)  G.S. 105‑160.4 reads as rewritten:

§ 105‑160.4.  Tax credits for income taxes paid to other states by estates and trusts.

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(f)        Fiduciaries and beneficiaries of estates and trusts who are shareholders of a taxed S Corporation are not allowed a credit under this section for taxes paid by the estates and trusts or by the taxed S Corporation to another state or country on income that is taxed to the taxed S Corporation. The taxed S Corporation is entitled to a credit under G.S. 105‑153.9(a)(4) for all such taxes paid. For purposes of this subsection, the term taxed S Corporation is the same as defined in G.S. 105‑131(b).

(g)        Fiduciaries and beneficiaries of estates and trusts who are partners of a taxed partnership are not allowed a credit under this section for taxes paid by the estates and trusts or by the taxed partnership to another state or country on income that is taxed to the taxed partnership. The taxed partnership is entitled to a credit under G.S. 105‑153.9(a)(5) for all such taxes paid. For purposes of this subsection, the term taxed partnership is the same as defined in G.S. 105‑153.3.

SECTION 5.(a)  G.S. 105‑163.38 is amended by adding a new subdivision to read:

(6)      Taxed pass‑through entity. – Defined in G.S. 105‑153.3.

SECTION 5.(b)  G.S. 105‑163.39 is amended by adding a new subsection to read:

(d)      Taxed Pass‑Through Entity. – This Article applies to every taxed pass‑through entity in the same manner as a corporation subject to tax under Article 4 of this Chapter, except that G.S. 105‑163.41(d)(5) shall not apply with respect to a taxable year of a taxed pass‑through entity if it was not a taxed pass‑through entity during its preceding taxable year.

SECTION 6.  This act is effective for taxable years beginning on or after January 1, 2021.