Tax News Update    Email this document    Print this document  

June 9, 2021

South Carolina enacts electable entity-level tax on pass-throughs

Legislation (2021 S.C. Act No. 61, SB 627) signed into law on May 17, 2021, allows certain pass-through entities (PTEs) to elect an entity-level tax in South Carolina. This new tax is intended to enable South Carolina taxpayers who own PTEs to deduct, for federal income tax purposes, state and local taxes exceeding the $10,000 limitation imposed by IRC Section 164(b)(6) (the SALT deduction limitation), consistent with IRS Notice 2020-75 (see Tax Alert 2021-0092).

Starting in 2021, a "qualified entity" may elect annually to have its active trade or business income taxed at the entity level at a 3% flat income tax rate (i.e., the tax rate in S.C. Code Section 12-6-545(B)(2)). The election must be made by the due date for filing the applicable income tax return (including extensions).

A "qualified entity" includes partnerships, S corporations or limited liability companies (LLC) taxed as partnerships or S corporations. To be a "qualified entity," the partnership, S corporation or LLC must be owned by (1) a "qualified owner" (i.e., a partner or shareholder of a qualified entity that is an individual, estate, trust or any other entity except those taxed or exempted from South Carolina's corporate income tax) or (2) a partnership that is owned directly or through other partnerships by qualified owners.

Active trade or business income from an electing qualified entity is excluded from a qualified owner's South Carolina taxable income if the electing qualified entity properly filed an income tax return and paid the tax due. A qualified owner's active trade or business losses that are from other PTEs and reported directly may not reduce tax at a rate higher than the rate in S.C. Code Section 12-6-545(B)(2) (currently 3%).

The shareholders' or partners' basis in the stock of a qualified S corporation or a qualified partnership (including an LLC taxed as a partnership) is determined as if (1) the PTE-level tax election had not been made and (2 each shareholder's or partner's pro rata share of the qualified entity's items of income, loss and deduction was properly taken into account in the same manner required for non-electing S corporations/partnerships.

An electing PTE must apportion active trade or business income using the single sales factor formula under S.C. Code Section 12-6-2252 or a special apportionment authorized in S.C. Code Sections 12-6-2290 through 12-6-2290. None of the active trade or business income maybe treated as income from a personal service.

Withholding requirements for nonresident shareholder and partner distributions do not apply to electing qualified entities to the extent they pay tax on their active trade or business income.

Starting in 2022, electing qualified entities must pay estimated taxes.

If an electing qualified entity fails to pay tax due, the South Carolina Department of Revenue may collect tax from the entity or its direct and indirect owners based on their proportionate share of income of the qualified entity, or both.


In the bill's analysis, the South Carolina Department of Revenue stated that making the election available in 2021 "may present a challenge in providing guidance for taxpayers and implementing the necessary programming changes."

In Notice 2020-75 (issued November 2020), the IRS indicated its intention to issue proposed regulations clarifying that a partnership or S corporation computing non-separately stated taxable income or loss for federal income tax purposes could deduct state and local income taxes imposed on its net income for the tax year at issue without regard to the SALT deduction limitation (see Tax Alert 2020-2690). Those regulations have yet to be proposed. It was widely anticipated that most states would rush to enact an entity-level tax to provide the federal tax benefit to owners of PTEs in their states.1 South Carolina and other states have enacted or proposed such legislation since the IRS's announcement.2


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
   • Chris Barras (
   • Errett Roth (


1 States that had already enacted PTE taxes (or PTE tax elections) before the Notice include Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island and Wisconsin.

2 States that recently enacted electable PTE-level taxes include Alabama, Arkansas, Georgia, Idaho and New York. In addition, a bill was approved by the Illinois Legislature and bills are being considered in California, Colorado, Massachusetts, Michigan and North Carolina.