The South Carolina PTE Election Explained
Learn how South Carolina's PTE tax election allows eligible businesses to pay state tax at the entity level, altering federal tax outcomes for their owners.
The Pass-Through Entity (PTE) tax election in South Carolina was established in response to the $10,000 federal limitation on state and local tax (SALT) deductions for individuals, a cap introduced by the Tax Cuts and Jobs Act of 2017. This election allows the business itself to pay the state income tax on behalf of its owners. By doing so, the state tax payment becomes a deductible business expense for the entity, effectively bypassing the individual SALT deduction cap. The election is an annual choice a business must make each year.
Understanding the South Carolina PTE Tax Election
Eligibility for this election is specific. Qualifying entities include partnerships, S corporations, and limited liability companies (LLCs) that are taxed as either a partnership or an S corporation. The entity must be entirely owned by “qualified owners,” which includes individuals, estates, or trusts. Entities with corporate owners are not eligible to make the election.
Certain business structures are explicitly excluded from making the PTE election. Sole proprietorships and single-member LLCs that are treated as disregarded entities for tax purposes cannot elect this status. C corporations are also ineligible, as they are not pass-through entities.
Required Information and Tax Calculation
To prepare for the PTE tax election, a business must gather its legal name, Federal Employer Identification Number (FEIN), and detailed records for each owner. For every partner or shareholder, the business needs their name, address, and their specific ownership percentage in the company.
The tax base is limited to the entity’s “active trade or business income.” This means income from passive sources, like certain interest, dividends, and capital gains, is excluded from the PTE tax calculation and is still passed through to the owners. The calculation must determine the portion of active business income attributable to South Carolina by applying the state’s apportionment rules. This applies to the income shares of both resident and non-resident owners.
Once the active trade or business income is determined, a flat tax rate of 3% is applied. This rate is applied to the total active business income apportioned to the state to determine the total tax liability for the entity.
This information is used to complete Form SC I-435, the Pass-Through Entity Election Tax Return, which is the official document for making the election and remitting payment. Businesses should obtain the current version of this form from the South Carolina Department of Revenue’s website.
The Election and Filing Process
The formal election is made by submitting Form SC I-435 along with the entity’s annual South Carolina income tax return, either Form SC 1065 for partnerships or Form SC 1120S for S corporations. The election is considered made when these returns are filed together by the due date, including any approved extensions.
The deadline for filing the return and making the election is the same as the due date for the entity’s income tax return. For calendar-year entities filing for the 2024 tax year, the deadline is March 15, 2025. If a valid extension is filed, the due date is pushed to September 15, 2025.
Entities that elect to pay the PTE tax are also required to make estimated tax payments throughout the year, which are due quarterly. Failing to make these required estimated payments can result in penalties. If the entity fails to pay the tax, the South Carolina Department of Revenue can collect the amount from either the entity or its owners.
Tax Credit and Reporting for Owners
After the entity pays the PTE tax, each qualified owner is entitled to a tax credit for their proportionate share of the tax paid by the entity. This credit prevents double taxation by offsetting the owner’s personal tax liability on their share of the entity’s income.
The business is responsible for reporting this information to its owners. The entity details each owner’s share of the paid PTE tax on their South Carolina Schedule K-1. The Schedule K-1 breaks down an owner’s share of the entity’s income, deductions, and credits.
Owners then use the information from their Schedule K-1 to claim the credit on their personal South Carolina income tax return, Form SC 1040. The credit directly reduces the owner’s individual state income tax liability.