Tax Law Insights

South Carolina offers many tax credits that can be used to reduce or even eliminate state income taxes and license fees.  Examples of these tax credits include the new jobs credit, infrastructure credit, corporate headquarters credit, abandoned buildings credit, biomass resource credit, research credit, community development credit, venture capital credit, historic rehabilitation credit, and conservation easement credit (and many others).

A taxpayer will sometimes seek to claim more than one state tax credit at the same time, which raises the question of how the tax credits should be applied.  For example, do you apply a credit that can offset up to 50% of income before applying another, and different, credit that is not subject to a cap?  Do you apply a credit that can be used to offset only income taxes or license fees,  or can you split the credit between income taxes and license fees?

Fortunately for taxpayers, South Carolina allows you to choose how our state tax credits may be applied.  South Carolina Code Ann. § 12-6-3480(3) states that:

The taxpayer may apply any credits arising under this chapter [Chapter 6] or Chapter 14 of this title in any order the taxpayer elects, and may apply a credit that is allowed for use against both taxes and license fees in any order, unless otherwise specifically provided, and against either one or both taxes and license fees in any given year, subject to specific limitations in the applicable credit statute and this item.

Absent a specific provision in a tax credit statute, a taxpayer can generally utilize SC tax credits in the manner most beneficial to it.  For example, a taxpayer can apply a credit that is capped at 50% of income, and then claim a credit that is not subject to a percentage cap to zero out the taxpayer's liability.  The South Carolina Tax Incentives for Economic Development guide (2014 Edition), published by the South Carolina Department of Revenue, provides the following helpful examples of the tax credit ordering rules:

Example 1 - Income Limitation Credit by Credit Computation. Assume a taxpayer has a $10,000 income tax liability and has generated two tax credits in Chapter 6 that are limited to 50% of its tax liability - a $6,000 jobs tax credit and a $6,000 child care credit. The amount of credits that can be claimed could be computed as follows:

Step 1

Tax Liability                $10,000

1st Limitation %         50%                            

Limited Liability         $ 5,000

Step 2

Limited Liability         $5,000

2nd Limitation %        50%    

Limited Liability         $2,500

Only $7,500 ($5,000 + 2,500) of the liability may be offset by the credits. The first limitation amount of $5,000 applies to either credit the taxpayer chooses. The second limitation amount of $2,500 applies to the remaining credit.

Example 2 - Choice of Credit Ordering. Assume the same facts as Example 1 and further assume that the taxpayer has a conservation credit (a credit with no specific income limitation) equal to $8,000. Based on Example 1, the taxpayer has the option to:

1. Use the $8,000 conservation credit first since it does not have a tax liability limitation percentage and then apply the limitation percentages of the job tax credit and the child care credit to the $2,000 remaining tax liability (resulting in the ability to use $1,500 of the combined jobs tax and child care credits) or
2. Apply the limitation percentages to the jobs tax credit and the child care credit first (using $7,500 combined jobs tax and child care credits) and then reduce the $2,500 remaining tax liability to $0 with the conservation credit.