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?
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