CORPORATE INCOME TAX
Every corporation must register with the South Carolina Department of Revenue by completing and submitting Form SCTC-111, Business Tax Registration Application. Domestic corporations must submit the Articles of Incorporation and related documents to the Secretary of State. Foreign corporations must submit an Application for Authority to Transact Business in the State of South Carolina and related documents to the Secretary of State. Form CL-1, Initial Annual Report of Corporations, must be submitted by both domestic and foreign corporations to the Secretary of State, along with the corporate license fee for the first year.
Every corporation organized under the laws of this state and every foreign corporation authorized to do business in this state are required to file a tax return even if no business was transacted during the income period. Also, every unauthorized foreign corporation doing business in this state, every political organization (IRC section 527(e) or (527g) and every homeowners' association (528c) which have South Carolina taxable income must file a return. Tax-exempt organizations are not required to file annual returns with the Department of Revenue unless the organization has non-related business income.
Charters and authority which are approved by the Secretary of State are valid until formally cancelled by the Secretary of State. Returns must be filed and license fee paid at least annually as long as the charter or authority is valid.
Taxable income (loss) of an S corporation flows through and is taxable to the shareholders in the same manner as for federal income tax purposes. Federal taxable income items apportioned or allocated to South Carolina and taxable to nonresident shareholders are subject to withholding by the S corporation at a five percent rate. Nonresident shareholders providing affidavits of their intention to file returns and S corporations filing a composite return on behalf of all of their nonresident shareholders are exempt from the withholding requirement. Payment of the withholding tax is due by the fifteenth day of the third month following year end.
Corporations and other entities taxed for income tax purposes as a corporation are subject to an annual license tax of .001 times their capital stock and paid-in-surplus plus $15. Multistate corporations multiply their capital stock and paid-in-capital by the income tax apportionment ratio to arrive at the license tax base subject to the tax. The license tax is payable by the original due date for filing the income tax return and is paid along with the return or the request for an extension for filing the income tax return. The initial license tax is $25.00 and is paid at the time of incorporation or at the time of qualification by an out-of-state corporation with the South Carolina Secretary of State.
South Carolina taxable income of a partnership is the same as for federal partnership income tax purposes with certain South Carolina modifications. Taxable income (loss) of a partnership flows through and is taxable to the partners in the same manner as for federal partnership income purposes. Multi-state partnerships determine South Carolina taxable income by applying an apportionment ratio to the various income (loss) amounts of the partnership. Partnerships manufacturing or dealing with tangible personal property use a four factor apportionment ratio of property, payroll and sales counted twice. Others use a single factor apportionment ratio. Real estate gains (losses) and dividends, however, are allocated to the state of situs or state of partner domicile, respectively. Federal taxable income items apportioned or allocated to South Carolina and taxable to nonresident partners are subject to withholding by the partnership at a five percent rate. Nonresident partners providing affidavits of their intention to file and partnerships filing a composite return on behalf of all of their nonresident partners are exempt from the withholding requirement. Payment of withholding tax is due along with the filing of the return by the fifteenth day of the forth month after year end.
The tax rate on South Carolina net income is 5%. The starting point in determining South Carolina taxable income is the corporation's federal taxable income.
The license fee rate is .001% of the corporation's capitalization plus $15. The corporation's capital stock and paid in capital accounts are subject to this tax. The minimum license fee is $25 and is paid in advance.
Interest on state or local obligations other than South Carolina are additions to income. State and local income taxes or state and local franchise taxes measured by net income, any income taxes, or any taxes measured by or with respect to net income must be added back to federal taxable income. South Carolina law allows the same depletion as Internal Revenue Code Sections 611 through 613. A corporation that allocates or apportions income has the option of adding back depletion before apportionment and of deducting depletion after apportionment on mines, oil and gas wells and other natural deposits located in the state, except that the allowances may not exceed 50% of the net income apportioned to South Carolina. Any taxpayer who is reporting income or deducting expenses over a time period as a result of a change of accounting method or accounting year, shall continue to report income or deduct expenses in the manner provided in the Internal Revenue Code and approved by the IRS. At the expiration of the authorized adjustment period, the balance of the income or expenses must be reported or deducted in the same manner and amount for South Carolina income tax purposes until all of the income or expenses have been fully reported or deducted.
Transitional adjustment on items of prepaid income or deferred expenses are additions to income.
If prior to January 1, 1985, a corporation has maintained a vacation pay accrual account as permitted by IRC Section 463, the taxpayer may establish a vacation pay accrual account for South Carolina income tax purposes and is allowed as an addition to the reserve, the amounts provided in IRC section 463.
If a taxpayer has claimed a capital loss carryover on the federal tax return from a tax year prior to 1985, an addition must be made to the extent of any benefit received from such carryover.
Federal net operating losses are additions to income. If a taxpayer has a charitable contribution deduction carryover as permitted by IRC section 170 from a tax year prior to 1985, the taxpayer must add this amount to federal net taxable income.
If prior to 1985, a taxpayer has elected installment sale reporting for SC purposes and not federal purposes, the taxpayer shall continue to report the gain in the SC tax return in addition to income otherwise taxable. Nonresident sellers of South Carolina real property and associated tangible personal property that elect out of installment sales treatment for state income tax purposes pursuant to section 12-9-510 will have an addition to federal taxable income in the year of sale so as to include the entire gain in South Carolina taxable income.
Corporate taxpayers that claim a child care program credit for donations to a non profit South Carolina corporation providing child care services to its employees (Schedule TC-9)are not allowed a deduction for these donations. These disallowed deductions are an addition to federal taxable income.
The deduction for wages paid must be reduced by the amount of a credit claimed for wages paid to employees terminated due to base closure (Schedule TC-10). The amount of this credit is an addition to federal taxable income.
The "gross-up" of dividends received from a foreign corporation located outside the U.S. required by a domestic U.S. corporation electing the foreign tax credit as provided for in IRC section 78 is subtracted from federal net taxable income. Reduction in depreciable property due to investment credit election will result in an ordinary expense for South Carolina purposes.
If, as of January 1, 1985, a corporation is amortizing for federal income tax purposes a capital expense paid or incurred prior to 1985 as provided in IRC sections 169, 171, 174, 177, 184, 185,188, 189, 194, 195, 248 and 709, the corporation is allowed to deduct for South Carolina income tax purposes the amount amortized and deducted for federal income tax purposes.
Effective for tax years beginning after 1983, South Carolina has adopted federal depreciation and IRC section 179 expensing for South Carolina income tax purposes. The deduction for depreciation cannot exceed your depreciable basis. As of 1985, the depreciation due to prior federal and state differences will occur at the end of the federal depreciation period. The balance of personal property basis will be depreciated at the rate of 50% per year and real property basis at the rate of 20% per year. If a corporation disposes of an asset that has a different South Carolina basis and federal basis, the corporation shall adjust South Carolina gain or loss to reflect the difference in the basis of the assets.
Transitional adjustment for items of prepaid income or deferred expenses are deductions from income.
If a taxpayer is reporting income from the liquidation of a corporation under IRC section 337 using the installment method of reporting or from an installment sale under IRC section 453, and the corporation has previously reported all the gain for South Carolina tax purposes, then South Carolina income must be reduced by the amount of the installment gain.
Depreciable assets with a higher state basis due to:
- Taxable corporate liquidation prior to 1985,
- Exchange of property prior to 1985 or after 1988 as a result of not having a situs in this state; or
- IRC section 179 expensing prior to 1985 may continue the state depreciation in the same manner. If you elect to continue this option, subtract the depreciation from your income.
If a taxpayer is subject to the provisions of IRC sections 483 or 1271-1278 as result of a contract entered into prior to 1985, then no recomputation of principal and income is required.
If a corporation is claiming a reduction in salaries and wages due to the federal jobs credit, subtract this amount for South Carolina purposes.
Dividends received from foreign corporations located outside the U.S. that are included in federal taxable income may be reduced in the same manner that dividend received from domestic corporation are deducted under IRC section 243.
Drip/Trickle Credit: A credit of 25% of expenditures up to $2,500 is allowed for the purchase and installation of drip/trickle irrigation systems and dual purpose combination truck and crane equipment. The unused credit may be carried over for five years.
Minority Business Credit: A contractor having a contract with the State of South Carolina who awards a sub-contract to a certified South Carolina-based minority business is eligible for a credit of 4% of payments made to the minority subcontractor up to $25,000 or the amount of the tax liability, whichever is less. No carryover is permitted.
Water Resources Credit: A tax credit is allowed for 25% of allowable expenditures up to $2,500 for the construction and installation or restoration of ponds, lakes and other water impoundments and water control structures designed for the purposes of water storage for irrigation, water supply, sediment control, erosion control or aquaculture and wildlife management. A five-year carryover is allowed.
New Jobs Credit: An income tax credit is allowed for each new job created in the state's 46 counties so long as 10 (ten) jobs are created and maintained. In the least developed counties, the credit is $4,500.00 for each job created. In undeveloped counties, the credit is $3,500.00 for each job created. In moderately developed counties, the credit is $2,500.00 per job created. Lastly, in developed counties, the credit is $1,500.00 for each job created. The credit is for five years as long as the minimum number of jobs is maintained. The five year period begins with year 2 after job creation and continues for years 2 through 6. The new jobs credit applies only to manufacturing, tourism, processing, warehousing, distributing, and research and development facilities. Retail and service related facilities qualify if they are located in a least developed county. Health service related facilities not located in a least developed county qualify if 250 jobs are created. The credit is increased by $1,000.00 per job in the new jobs are located in a multi-county industrial park. The maximum credit for one employee for the aggregate total of this credit and the AFDC credit is $5,500.00 in a tax year. The jobs credit may not exceed 50% of income tax liability. However, any unused portion may be carried over fr 15 years
Palmetto Seed Capital Credit: An income tax credit is allowed for qualified investments in the Palmetto Seed Capital Corporation used to encourage business growth. The credit may not exceed tax liability but may be carried over for 10 years.
Corporate Headquarters Credit: A credit of 20% of costs incurred in establishing a corporate headquarters is allowed if the total costs are at least $50,000 and at least 75 new jobs are created.
Child Care Credit: Taxpayers who establish child care programs for their employees may claim a credit of 50% of costs not to exceed $100,000. If the taxpayer pays another child care facility to provide child care on behalf of employees, the credit is 50% of payments made, not to exceed $3,000 per employee. The credit may not exceed 50% of tax liability but may be carried forward for 10 years.
Credit for wages paid to Employees terminated due to Base Closure: Taxpayers that hire employees terminated from employment due to the closing or realignment of a federal military installation are allowed a credit 10% of the first $7,000 of wages paid during the first year of employment.
Economic Impact Zone Property Investment Credit: This credit allows taxpayers to claim a 5% investment credit for the cost of qualifing property placed in service in an economic impact zone. Economic impact zone means any part of a county or municipality located within 50 miles of a federal military installation that is closed or realigned.
Credit for Employers Hiring AFDC Recipients: Employers are allowed a credit for qualified wages paid to recipients of Family Independence Payments (AFDC). The credit is 20% of the wages paid for the first year of employment, 15% of the wages paid for the second year of employment, and 10% of the wages paid for the third year of employment.
Corporations are required to file one of the following returns, whichever is applicable: Form SC1120 for corporations, Form SC1120S for `S' corporations, Form SC1120U for utilities or Form SC990T for certain tax-exempt organizations. These forms incorporate three filing requirements:
- Computations of income tax liability,
- Computation of license fee (none for tax exempts), and
- Annual Report of Corporations. All three sections of the form, plus supporting schedules, must be completed by every corporation.
Corporate income tax returns are due no later than the 15th day of the third month following the close of the taxable year. Tax-exempt organizations with non-related business income must file returns no later than the 15th day of the fifth month following the close of the taxable year.
Corporations with a multi-state business are taxed only on the income earned or derived within South Carolina. If the taxpayer is dealing in or manufacturing tangible personal property, the tax is based on the arithmetic average of four ratios: property, payroll, and sales counted twice. If the business does not involve manufacturing or selling tangible personal property, the tax is based generally on a "gross receipts" ratio. Federal taxable income is the starting point in determining state corporate income tax liability.
Request for extension must be made in writing on Form SC1120T, Request for Extension to File Corporation Income Tax Return, on or before the due date of the return. Anticipated tax for the period must be paid and must equal 90% of the final tax due to avoid penalty. In addition, the license fee must be paid in full at the time of the extension request. A federal extension or an extension from another state is not acceptable.
Consolidated returns are permitted for parent companies and substantially controlled subsidiaries or two or more corporations under substantially the control of the same interest, provided all parties are taxable in South Carolina and have the same accounting year. "Substantially controlled" means the ownership of at least 80% of the voting power of all classes of stock must be the same for all corporations filing as part of the consolidated return.
Declaration of estimated tax payments are required by the 15th day of the 3rd, 6th, 9th and 12th months following the beginning of the taxable year. The total of the estimated payments must equal 100% of the final tax liability, based on requirements for federal estimated income in IRC section 6655. No estimated tax payment is required if the estimated tax is less than $100 annually.
A limited liability company (LLC) is an unincorporated business association that provides its owners (members) limited liability and flexible management and financial alternatives. An LLC provides the favorable pass-through tax treatment of partnerships and the limited personal liability of corporations. An LLC is formed when two or more initial members sign Articles of Organization and deliver that to the Secretary of State along with the filing fee.
The Secretary of State may dissolve an LLC which does not maintain its governmental filing requirements or does not file a tax return or pay tax. If an LLC is a corporation for federal income tax purposes, it is a corporation for South Carolina income tax purposes. Likewise, if an LLC is a partnership for federal income tax purposes, it is a partnership for South Carolina income tax purposes. South Carolina has adopted all of the partnership provisions (subchapter K) of the Internal Revenue Code and IRC Section 7701 which defines partnership and corporation.
Internal Revenue Code regulations govern how an organization is classified for federal tax purposes.
Single member limited liability companies which are not taxed for South Carolina income tax purposes as a corporation will be ignored for all South Carolina tax purposes.
The following definitions will be used:
Partnership includes an LLC taxed for SC income tax purposes as a partnership. Partner includes any member of an LLC taxed for SC income tax purposes as a partnership. Corporation includes an LLC or professional or other association taxed for SC income tax purposes as a corporation. Shareholder includes any member of an LLC taxed for SC income tax purposes as a corporation.
A limited liability partnership (LLP) is formed when an application is filed by a majority of the partners or any one or more partners authorized to execute it, and delivered to the Secretary of State with a $100 filing fee.
An LLP's registration is effective for one year only. Each year the LLP must file a renewal application within the 60-day period preceding the expiration date. The Secretary of State is not required to notify an LLP that its registration is up for renewal.
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