The South Carolina Pass-Through Entity Tax Election: Info for Medical Practice Owners as of 2026
If you own your medical practice through an S corporation or a partnership, you probably pay South Carolina income tax on profit that stopped being federally deductible back in 2018. Congress revisited that deduction cap last year, South Carolina rewrote its own income tax this spring, and the state offers an election that can put the deduction back on the table. This post covers how the election works, the catch that applies specifically to medical practices, and how to decide with your CPA whether it belongs on your agenda this year.
The SALT cap still bites practice owners
First some backstory. The 2017 tax law capped the itemized deduction for state and local taxes at $10,000. The One Big Beautiful Bill Act raised that cap to $40,000 for 2025 and $40,400 for 2026, with small annual increases through 2029. In 2030, the cap is scheduled to fall back to $10,000.
Here’s the part that matters for practice owners. The higher cap phases down once modified adjusted gross income passes $505,000 (the 2026 threshold), shrinking by 30 cents for every dollar above the line until it hits a $10,000 floor. At a little over $600,000 of MAGI, you are right back where you started. A dual-physician household or an established practice owner clears that threshold without trying. For them, the headline increase changed almost nothing.
One more piece of recent history worth knowing: early drafts of the 2025 bill would have blocked the workaround described below for service businesses, including medicine. That language did not make it into the final law. The strategy remains available under current rules.
The workaround: pay the tax through the practice
The cap applies to state taxes you pay personally. It has never applied to taxes a business pays as a business expense. In 2020, the IRS confirmed in Notice 2020-75 that when a partnership or S corporation pays state income tax at the entity level, that payment is deductible in computing the entity's income. It comes off the top before profit ever reaches your personal return, so the cap never touches it.
Most states responded by creating elective entity-level taxes, usually called pass-through entity taxes, or PTETs, and South Carolina joined them in 2021.
How it works in South Carolina
South Carolina's election lives in Code Section 12-6-545(G). The election is annual. The entity makes it on its South Carolina return, Form SC1120S for S corporations or SC1065 for partnerships, and the deadline is the return's due date including extensions. The tax is a flat 3 percent, applied to the entity's active trade or business income, and electing entities pay quarterly estimates during the year. On your personal South Carolina return, you then exclude the income the entity already paid tax on rather than claiming a credit.
Here is the part that makes it all work. South Carolina already lets individuals pay a flat 3 percent on active trade or business income through Form I-335, and many practice owners already do. So the election usually does not change what you send to the SC DoR. What changes is who writes the check. When the practice pays it, the 3 percent becomes a federal business deduction instead of a capped personal itemized deduction. This transformation is what we’re after.
The catch for medical practices
Most articles about PTET elections stop there. For physicians, the next part matters more.
South Carolina defines active trade or business income more narrowly than the name suggests. It excludes passive investment income, capital gains, and, critically, amounts reasonably related to the personal services of an owner. Your W-2 salary from your own S corporation is out. And the state's position is that a portion of your K-1 profit can be attributable to your own labor as well, which would also fall outside the 3 percent base.
South Carolina does provide a safe harbor, but it is narrow. It applies at the individual level only when your total South Carolina taxable income from pass-through entities for which you perform personal services is $100,000 or less, and it lets you treat half of that income as active trade or business income without a detailed calculation. Most physicians who are candidates for this election will be well above that ceiling, and the SCDOR has answered the entity question directly in Revenue Ruling 21-15: an entity making the election cannot use the safe harbor at all. Either way, someone will need to determine the actual personal services portion, a calculation your CPA will perform.
The practical effect is that a solo physician whose K-1 is largely a reflection of their own production will have a smaller qualifying base than a physician whose practice earns from associates, mid-level providers, or ancillary revenue lines, where a larger share of profit can be attributed to something other than the owner's own labor. The ruling's first worked example makes the point plainly: a two-partner law practice whose entire $300,000 of profit came from the partners' own services had no active trade or business income at all, so its election had no effect. Same election, very different math depending on how your practice earns.
What the numbers might look like
A hypothetical, for illustration only. Suppose a physician owns her practice as an S corporation, pays herself $250,000 in W-2 compensation, and after the personal services analysis has $200,000 of K-1 income that qualifies as active trade or business income.
If the entity elects, it pays 3 percent of $200,000, or $6,000, to South Carolina. That $6,000 is a business deduction, so her K-1 drops to $194,000. At a 35 percent federal marginal rate, the deduction is worth about $2,100 per year, on tax she would have paid to South Carolina either way. Her state bill is essentially unchanged.
Two notes on that number. First, you might expect the smaller K-1 to cost her part of the qualified business income deduction, but most high-income physicians already lose that deduction because medicine is a specified service business, so there is usually nothing left to give up. Owners at lower income levels should run that interaction before electing. Second, $2,100 is not a windfall. It is, however, recurring, and once the election is part of your annual routine it takes very little ongoing effort.
Who should take a closer look
The election tends to be worth a conversation if all three of these describe you:
Your practice is taxed as an S corporation or partnership. Sole proprietors filing on Schedule C cannot make the election, which is one more input in the entity-structure decision.
Your household MAGI sits above roughly $600,000, where the personal SALT cap has fully phased back to $10,000.
You have meaningful K-1 profit beyond your own compensation.
It is usually a pass, or at least a deferral, if your MAGI is under $505,000 and the full personal cap already covers your state taxes, if the practice is running a loss, or if ownership crosses state lines, which adds complexity that deserves its own analysis.
Three quieter benefits are worth mentioning. The entity-level deduction lowers your own adjusted gross income, which can help if you sit inside the phase-down band, where each extra dollar of income costs you both tax and deduction. Unlike an itemized SALT deduction, it also reduces income for alternative minimum tax purposes.
And with state income tax handled at the entity level, your personal cap is free for property taxes, or you may simply take the standard deduction.
What South Carolina's new tax law changes, and what it doesn't
On March 30, 2026, the Governor signed H.4216, which restructures South Carolina's income tax beginning with the 2026 tax year. The state now applies 1.99 percent to the first $30,000 of taxable income and 5.21 percent above that, starts the calculation from federal adjusted gross income, drops the federal standard and itemized deductions from the state return, and adds a new state-level deduction aimed at lower incomes.
Two implications for this topic. First, the mechanics survive. The 3 percent election under Section 12-6-545 remains in place for 2026: H.4216 does not amend that section, and the new rate structure in Section 12-6-510 preserves the longstanding exception for income taxed under Sections 12-6-530 through 12-6-550, which covers the election. Second, the math narrowed. The spread between the 3 percent rate and the new 5.21 percent top rate is roughly 2.2 percentage points, down from 3 points under 2025's 6 percent top rate, so the state-side appeal of the reduced rate is smaller than in years past. The federal logic is untouched either way: South Carolina tax is still nondeductible on your federal return once you are past the cap, unless the entity pays it. The SCDOR has said it will issue additional guidance on H.4216 as needed, so confirm with your CPA that nothing has changed before the election is made.
One more date to keep in view. The federal cap is scheduled to snap back to $10,000 in 2030. If that happens, elections like this one become more valuable, not less. Building the decision into your annual rhythm now means you will not be scrambling then.
A recurring task
This is an annual decision, not a set-and-forget one. The election deadline is generous, but estimated payments run during the year, and cash-basis practices generally need to pay before December 31 to claim the federal deduction in the same year. Timing is most of the execution here.
If you practice in other states
If you practice outside South Carolina, this strategy is likely available to you in some form, since most states with an income tax now offer their own pass-through entity election. The details are state specific, though, from rates to eligibility to deadlines, so work with your CPA or advisor on how your state's version applies before you take action.
Sources: IRS Notice 2020-75; S.C. Code Section 12-6-545; SCDOR Revenue Rulings 08-2, 21-15, and 22-5; SC Form I-335 instructions; SC H.4216 (signed March 30, 2026) and the SCDOR H.4216 information page (dor.sc.gov/news/information-about-h-4216).
