On Oct. 3, Gov. Henry McMaster (R) signed tax bill H. 5341, updating South Carolina’s tax conformity in response to federal tax reform. The bill changes the state’s conformity date with the Internal Revenue Code to Feb. 9, 2018, providing South Carolina taxpayers with a static conformity date that incorporates most of the tax changes made by the 2017 federal tax act.
However, the bill decouples from both the qualified business income deduction (I.R.C. § 199A), and the FDIC premium deduction disallowance provision (I.R.C. § 162(r)), affecting pass-through entities and financial institutions, respectively. The bill also modifies the requirements for claiming a dependent for resident individuals in the state.
The bill made significant changes for corporate income tax purposes, highlighted below:
Business Interest and Business Interest Expenses
South Carolina decoupled from the federal deduction limitation on business interest under I.R.C. §163(j) and now requires a subtraction modification for corporations with interest expenses disallowed by § 163(j). Similarly, the state decouples from the business interest carryforward provisions under I.R.C. § 381(c)(20) and I.R.C. § 382(d)(3) that are applicable to disallowed interest described in I.R.C. 163(j)(2).
Related Party Amounts Excluded
South Carolina also decoupled from the related party interest and expense deduction disallowed under I.R.C § 267A, which denies deductions for disqualified related party amounts paid or accrued pursuant to a hybrid transaction.
Foreign Source Intangible Income Deductions
Instead of conforming to the foreign derived intangible income (FDII) and global intangible low-taxed income (GILTI) deductions under I.R.C. § 250, the state now requires an add-back modification for amounts deducted by corporate taxpayers in taxable years after Dec. 31, 2017. At the federal level, corporate taxpayers take an income tax deduction of 37.5 percent against FDII income and a 50 percent deduction against GILTI income.
Contributions to Corporate Capital
By decoupling from I.R.C. § 118(b)(2), which was amended to exclude capital contributions made by a governmental entity or civic group from the term “contribution to the capital of the taxpayer,” South Carolina is increasing the federal taxable base of corporations with I.R.C. § 118(b)(2) contributions. There are no exceptions for governmental or civic entity contributions from the general rule.
Capital Gains Invested in Opportunity Zones
Lastly, South Carolina now conforms to I.R.C. § 1400Z which incentivizes investment in IRS-designated Qualified Opportunity Zones in various census tracts in the United States and U.S. territories, including 135 zones in South Carolina.
Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: What other issues affecting corporate taxpayers, if any, did the Legislature not address in its response to federal tax reform?
Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)