Corporate income and franchise taxes

Taxable income

How is taxable income determined in your state? To what extent is the state income tax base aligned with the federal income tax base?

In South Carolina, a corporation’s taxable income is determined on the basis of whether the corporation transacts, conducts, or does business within the state of South Carolina, or whether a corporation has income from within the state of South Carolina. There is no fixed dollar minimum corporate income tax on corporations in South Carolina or a state alternative minimum tax rate.

In general, South Carolina income tax laws conform substantially to the federal income tax laws. Subject to specified modifications, allocation, and apportionment, South Carolina gross income and taxable income of a business is the business’s gross income and taxable income as determined under the Internal Revenue Code.

How is in-state income apportioned for multi-state businesses? Does your state regulate transfer pricing?

South Carolina typically requires multi-state businesses to use one of three standard income apportionment methods: the single sales method, the gross receipts method, or the special apportionment method. The special apportionment method, however, is limited in its applicability to a select number of industries (railroad companies, motor carriers, telephone service companies, pipeline companies, airline companies and shipping lines). South Carolina also allows multi-state businesses to use an alternative method of apportionment under two circumstances:

  • if the statutory apportionment methods “do not fairly represent the extent of the taxpayer’s business activity”; or
  • if the business is establishing or expanding a facility in South Carolina that will have a “significant beneficial economic effect” on the area.

The taxpayer must enter into an agreement with the South Carolina Department of Revenue in order to use an alternative method of apportionment. 

South Carolina regulates transfer pricing. ‘Transfer pricing’ is the practice of setting prices for services and goods sold between commonly controlled or related entities. South Carolina adopts I.R.C § 482.

Nexus

How is nexus determined for corporate income tax purposes?

In South Carolina, the nexus of a corporation is determined by the economic presence standard—physical presence in the state is not required. According to the South Carolina Income Tax Act, an income tax is imposed on any corporation “transacting, conducting, or doing business within this State, or having income within this State regardless of whether these activities are carried on through intrastate, interstate, or foreign commerce.”

Is affiliate nexus recognized in your state? If so, to what extent? Has there been any notable case law in this area?

South Carolina introduced affiliate (or ‘click through’) legislation in 2017, but it was not enacted. The state’s Department of Revenue, however, currently takes the position that affiliate nexus can be established under existing South Carolina law.

Rates

What are the applicable corporate income tax rates?

South Carolina’s corporate income tax rate is 5%.

Exemptions, deductions and credits

What exemptions, deductions, and credits are available?

Credits

Energy and environmental credits:

  • Alternative Motor Vehicle Credit;
  • Biomass Resources Credit;
  • Brownfields Voluntary Clean-up Credit;
  • Conservation Credit;
  • Credit for Alternative Fuel Distribution and Storage;
  • Credit for Energy Conservation and Renewable Energy;
  • Credit for Renewable Fuels—Credit for Distribution or Dispensing Facility;
  • Credit for Renewable Fuels—Credit for Production Facility;
  • Credit for Water Impoundments and Water Controls;
  • Ethanol Biodiesel Production Credits—Credit for Qualified New Production Beginning January 1 2017;
  • Habitat Management Credit;
  • Recycling Facility Tax Credit;
  •  Renewable Energy Tax Incentive Program;
  •  Solar Energy Heating or Cooling System Installation Credit;
  •  Solar Energy Property Income Tax Credit; and
  • Whole Effluent Toxicity Testing Credit.

Entertainment industry credits:

  •  Commercial Production Credit;
  •  Motion Picture Production Company Rebates—Expenditures/Supplier Rebate;
  •  Motion Picture Production Company Rebates—Wage/Payroll Rebate;
  • Motion Picture Production Facility Credit; and
  •  Motion Picture Project Credit.

Historic rehabilitation and housing credits:

  • Abandoned Buildings Revitalization Credit;
  • Historic Structure Rehabilitation Credit; and
  • Textile Communities Revitalization Credits.

Investment credits:

  • Capital Investment Credit;
  •  Corporate Headquarters Credit;
  •  County Business Development Corporation Shareholder Credit;
  •  Credit for Infrastructure Construction;
  •  Income Tax Moratorium—Substantial Investment and New Job Creation;
  • Industry Partnership Fund Credit;
  • Palmetto Seed Capital Credit;
  • Rubber and Plastics Manufacturer Investment Credit;
  • South Carolina Business Development Corporation Shareholder Credit; and
  • Venture Capital Investment Incentive.

Job creation and other employer credits:

  •  Accelerated Small Business Credit;
  • Annual Job Credit;
  • Apprenticeship Income Tax Credit;
  • Credit for Hiring Family Independence Recipient;
  • Employee Child Care Programs Credit;
  • Job Development Credit; and
  • Job Retraining Credit.

Other credits:

  • Agricultural Use of Anhydrous Ammonia Credit; 
  • Credit Against License Tax for Infrastructure;
  • Deferral of Tax on Income Attributable to Foreign Trade Receipts;
  • Donated Deer Credit;
  • Milk Producer Credit;
  • Minority Business Credit;
  • Port Cargo Volume Increase Credit;
  •  Motor Fuel Tax Credit; and
  • Quality Improvement Program Credit.

Deductions and exemptions

South Carolina follows the federal rules subject to the following modification:

  • South Carolina does not recognize deductions for bonus depreciation, domestic production activities or qualifying shipping activities; 
  • 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, and any taxes measured by or with respect to net income, are added back;
  • Federal net operating loss must be added back; and
  • Corporations claiming a reduction in salaries and wages due to the federal jobs credit must subtract that amount for South Carolina purposes.

Filing requirements

What filing requirements and procedures apply? Are there special filing requirements for groups of company?

South Carolina requires C corporations to file Form SC 1120: C Corporation Income Tax Return on or before the 15th day of the fourth month after the end of the tax year (April 15 for calendar year taxpayers).

South Carolina is a ‘separate entity’ state and, as such, typically treats related corporations as unrelated instead of a part of a ‘unitary’ business group. South Carolina does, however, permit (and may require) combined unitary reporting under certain circumstances.

A South Carolina ‘consolidated’ return (also called a ‘combined return’) is permitted for entities doing business in South Carolina that share at least 80% ownership of the total combined voting power of all classes of stock. A corporation doing business entirely within South Carolina may consolidate with a corporation doing a multi-state business and two or more corporations doing a multi-state business may file a consolidated return. A South Carolina consolidated return is not prepared in the same manner as a federal consolidated return. South Carolina has not adopted the federal consolidation rules (or the regulations thereunder). South Carolina taxable income or loss is computed separately for each corporation. Income is allocated separately for each corporation, and income is apportioned separately for each corporation. There are no elimination adjustments for intercompany transactions such as those required for federal consolidated returns. The separately computed South Carolina income or loss for each participating member of the group is added together to arrive at the South Carolina income or loss for the consolidated group and reported on a single return for the consolidated group.

South Carolina does not permit corporate taxpayers that are not a part of a controlled group to file combined returns. The one exception to this rule is for corporations that want to file combined returns as an alternative apportionment method when the standard statutory apportionment method that is otherwise applicable does not fairly represent a taxpayer’s business activity in South Carolina.

Corporate franchise tax

Does your state impose a corporate franchise tax? If so, is it imposed in lieu of or in addition to corporate income tax?

Unless subject to a specific exemption in the South Carolina Income Tax Act, every corporation incorporated, qualified to do business, or required to file a tax return in South Carolina is subject to the South Carolina corporate license fee (franchise tax). This corporate license fee is based on capital stock and paid in surplus. Additionally, entities that elect to be taxed as corporations for South Carolina income tax purposes are also subject to imposition of the license fee. The fee is due in addition to the South Carolina corporate income tax.

If your state imposes a corporate franchise tax, please stipulate:

(a) The applicable tax base.

The applicable tax base is based on the capital stock and paid-in capital surplus of the corporation. Most corporations pay the fee based on capital.

(b) Tax rates.

The annual license fee is imposed at the rate of $15 plus $1 for each $1,000 (or fraction thereof) of capital stock and paid-in capital surplus of the corporation as shown by the corporation’s records on the first day of the taxable year in which the report is filed. For 2018, the minimum corporate franchise tax/license fee is $25.

(c) Any exemptions or deductions.

Certain types of entity are generally not subject to the license fee:

  • banks, and savings and loan companies;
  • insurance, fraternal, beneficial or mutual protection insurance companies; and
  • non-profit corporations.

Public utilities and holding companies are subject to the fee, but the basis of calculation is different for these types of company. It is based on gross receipts from the regulated business and property.    

(d) Filing formalities.

In South Carolina, the license fee and required reports must be filed with the Department of Revenue on or before the 15th day of the fourth month following the close of the corporation’s tax year. The license fee is reported on South Carolina Form SC 1120, South Carolina C Corporation Income Tax Return.

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