The South Carolina legislature finalized two bills this week that will impact economic development, the broader business community, and nearly every taxpayer in the state.

The bill with the widest impact – H.5341 – was signed by Governor Henry McMaster shortly after it passed on Wednesday. It avoids two outcomes that neither businesses nor lawmakers wanted: a tax-filing nightmare for accountants and a large tax increase, both of which would have happened if the General Assembly failed to pass a conformity bill to adjust the state tax laws in response to the federal tax overhaul Congress passed late last year.

The other bill was largely focused on economic development – S.1043 – and was the “main priority” this session for the S.C. Economic Developers' Association. Governor McMaster vetoed it in July, but lawmakers overrode that veto on Wednesday.

How S.C. Is (and Isn’t) Conforming With the Federal Tax Overhaul

Since the mid-1980s, South Carolina has generally handled the process of conforming the state’s tax laws with the federal tax code on an annual basis by picking and choosing the specific provisions of the federal tax code the state will and won’t conform to for the current tax year, all with the underlying goal of keeping the net changes revenue neutral.

Conforming entirely to the recent federal tax overhaul would have resulted in a tax increase of approximately $253 million, according to the state’s Revenue and Fiscal Affairs Office.

On the other hand, if the legislature had failed to pass a conformity bill, taxpayers and their accountants would have been required to file 2018 tax returns reporting their income one way for federal purposes and then a completely different way for state purposes.

With H.5341 now enacted, neither of the above will happen. Lawmakers avoided the filing nightmare by conforming to substantial portions of the recent federal tax overhaul. Lawmakers avoided the projected tax increase by boosting inflation adjustments for the state’s income tax brackets and by providing exemptions for dependents ($8,220 for a dependent under age 6, $4,110 for a dependent age 6 or older) that were eliminated in the recent federal tax overhaul.

Notable instances of South Carolina not conforming to the recent federal tax overhaul include:

  • Section 199A deduction for qualified pass-through income.
  • Foreign tax provisions.

How Economic Development Tax Credits Are Expanding

Many businesses and local governments in the economic development arena are ecstatic about S.1043 becoming law. It expands the types of businesses that can apply for one of South Carolina’s most popular tax incentives – Job Development Credits (JDCs) – and reduces the job and wage thresholds for certain service-related facilities to qualify for JDCs. The bill also creates a new tax credit program for agribusinesses.

In addition, the bill extends the expiration date of the existing tax credit for abandoned building revitalization projects for another two years, ensuring developers of current projects won’t lose out on the benefits if their rehabilitation isn’t completed by the end of 2019.

The Takeaway

In sum, South Carolina has resolved the uncertainty surrounding several tax issues that had been lingering throughout the year. Taxpayers and their accountants will not have to worry about excessive complications when their 2018 returns are due. Also, economic developers will now have additional financing options they can seek for certain types of projects in the state.