Remaining Tax Liability After All Other Credits Applied

Remaining Tax Liability After All Other Credits Applied refers to the net balance of South Carolina tax due after subtracting all other non-R&D nonrefundable credits, which serves as the specific statutory base for calculating the fifty percent utilization cap on the Research Expenses Credit. This computational requirement effectively places the R&D credit at the end of the state’s credit ordering hierarchy, ensuring that other incentives are exhausted first before the research credit is applied to eliminate up to half of the final remaining tax burden.

Statutory Framework and the Evolution of Research Incentives

The South Carolina Research and Development (R&D) tax credit, formally designated as the “Research Expenses Credit,” is codified under South Carolina Code of Laws Section 12-6-3415. This provision represents a pillar of the state’s economic development strategy, specifically targeting the promotion of high-technology investment and intellectual property creation within the state’s borders. The credit was significantly refined through the Research and Development Tax Credit Reform Act of 2007, which sought to clarify the interaction between state incentives and federal standards, while establishing the current 10-year carryforward period.

At its core, the statute allows a taxpayer that claims a federal income tax credit pursuant to Section 41 of the Internal Revenue Code (IRC) for increasing research activities to claim a corresponding credit against South Carolina taxes. The amount of this credit is strictly set at five percent of the taxpayer’s qualified research expenses (QREs) made specifically within South Carolina. This geographical restriction is a critical distinction; while the state adopts the federal definition of what constitutes a “qualified” expense, it limits the financial basis to those activities conducted physically within the state’s jurisdiction.

The legislative structure of Section 12-6-3415 is designed to operate in tandem with the federal tax code. Under IRC Section 41, QREs include wages paid to employees performing or supporting research, supplies used in the research process, and a percentage of contract research costs. By tethering the state credit to the federal claim, South Carolina leverages federal audit standards and definitions, providing a streamlined compliance environment for multi-state corporations.

Statutory Attribute	South Carolina Research Expenses Credit (Section 12-6-3415)
Credit Percentage	5% of qualified research expenditures
Federal Conformity	Requires claim under IRC Section 41
Geographic Scope	Restricted to expenses incurred in South Carolina
Taxes Offset	Corporate Income, Individual Income, Corporate License Fees
Utilization Cap	50% of remaining tax liability after other credits
Carryforward	10 succeeding taxable years

Understanding “Remaining Tax Liability After All Other Credits Applied”

The phrase “remaining tax liability after all other credits have been applied” is the operative legal constraint found in Section 12-6-3415(B). This specific phrasing creates a unique credit-ordering hierarchy that differentiates the R&D credit from other state incentives like the Jobs Tax Credit (JTC) or the Investment Tax Credit (ITC).

The Mechanics of the Ordering Hierarchy

In South Carolina tax law, credits are generally classified into two categories: refundable and nonrefundable. Nonrefundable credits, such as the Research Expenses Credit, cannot reduce a taxpayer’s liability below zero. However, South Carolina law typically allows most nonrefundable credits to be applied in any order the taxpayer chooses, unless a specific statutory limitation dictates otherwise.

The Research Expenses Credit is one of the few incentives with such a specific statutory override. Because the law limits the R&D credit to fifty percent of the liability that remains after other credits are applied, the taxpayer is effectively forced to apply all other eligible nonrefundable credits first. This “last-in-line” positioning has profound implications for taxpayers with a large portfolio of state incentives.

Defining the “Other Credits” Component

For the purposes of calculating the R&D credit limit, “all other credits” encompasses any nonrefundable credit that does not have a similar “remaining liability” restriction. Common credits that fall into this category include:

• New Jobs Tax Credit (Section 12-6-3360): Provides a per-job credit for business expansions. This credit is limited to fifty percent of the gross tax liability.
• Corporate Headquarters Credit (Section 12-6-3410): Offers a twenty percent credit for real and personal property costs associated with headquarters facilities.
• Qualified Conservation Contribution Credit: Often used by landowners or developers, this credit may not have a percentage-based liability cap in some applications.
• Capital Investment Credit (Section 12-14-60): A credit for manufacturing and productive equipment, which can sometimes offset up to one hundred percent of liability.

By requiring these to be applied first, the state ensures that the most restrictive credit—the R&D credit—is calculated against the smallest possible tax base. This protects state revenue by preventing a taxpayer from using the R&D credit to wipe out fifty percent of a large gross tax bill and then using other credits to wipe out the remaining fifty percent.

Comparative Limitation Structures

The following table compares how different South Carolina credits interact with the concept of tax liability to illustrate the specific nature of the R&D limitation.

Credit Type	Limitation Base	Maximum Annual Offset
Research Expenses	Remaining Tax Liability	50% of Remaining Balance
New Jobs	Gross Tax Liability	50% of Gross Liability
Headquarters	Gross Tax Liability	100% of Gross Liability
Solar Energy	Gross Tax Liability	50% of Gross (up to $3,500)
Textile Rehab	Gross Tax Liability	50% of Gross Liability

Detailed Revenue Office Guidance: Form TC-18

The South Carolina Department of Revenue (SCDOR) provides administrative clarity on this limitation through the instructions and structure of Form TC-18, the official schedule used to claim the Research Expenses Credit. The form’s computational steps precisely mirror the statutory “remaining liability” logic.

Walkthrough of the TC-18 Calculation Logic

The form follows a ten-line process to arrive at the allowable credit for the current year. Lines 5 through 9 are the specific location where the “Remaining Tax Liability After All Other Credits Applied” is calculated and enforced.

• Line 5: Tax liability before claiming credits. This is the starting point, representing the sum of the taxpayer’s South Carolina Income Tax and Corporate License Fees (if applicable).
• Line 6: Total of all credits other than the research expenses credit. Here, the taxpayer must aggregate every other nonrefundable credit being used in the current tax year.
• Line 7: Subtract line 6 from line 5. This result is the literal “Remaining Tax Liability” after other credits. If this number is zero or less, no R&D credit can be used in the current year, and the entire amount must be carried forward.
• Line 8: Multiply line 7 by 50% (0.5). This step applies the statutory utilization cap.
• Line 9: Enter the lesser of line 4 (Total Credit Available) or line 8. This identifies the final amount that can be entered on the tax return’s credit summary (SC1040TC or SC1120TC).

Second-Order Insight: Effective Tax Floors

A second-order insight derived from the TC-18 logic is the creation of an “effective tax floor” for R&D-heavy companies. If a company has enough other credits (like the Jobs Tax Credit) to reach its own fifty percent cap, and then applies the R&D credit to fifty percent of the remaining balance, the taxpayer is essentially guaranteed to pay at least twenty-five percent of their original tax bill ($100\% \text{ Gross} – 50\% \text{ JTC} = 50\% \text{ Remaining}$; $50\% \text{ of } 50\% \text{ Remaining} = 25\% \text{ Final Tax Due}$). This ensures that even the most incentivized companies contribute a minimum percentage to the state’s general fund.

Application to Corporate License Fees

One of the most significant aspects of the South Carolina R&D credit, often overlooked by taxpayers, is its applicability to Corporate License Fees (CLF). This is particularly relevant given that the “Remaining Tax Liability” calculation on Form TC-18 includes CLF in the base liability on Line 5.

Nature of the Corporate License Fee

The Corporate License Fee serves as South Carolina’s franchise tax, levied on a corporation’s paid-in capital and paid-in surplus. Unlike the income tax, which is based on profitability, the CLF is based on the company’s capital structure and investment in the state. The rate is typically one mill ($0.001$) per dollar of capital plus a fifteen-dollar annual fee.

For capital-intensive industries such as aerospace, automotive manufacturing, and pharmaceuticals—which are also the primary drivers of R&D—the CLF can represent a substantial recurring cost regardless of current-year net income. The ability of the Research Expenses Credit to offset fifty percent of the remaining CLF (after any other CLF credits are applied) provides a critical hedge for companies during years of heavy research spending where taxable income might be low or negative.

Apportionment and Liability Calculation

For corporations doing business in multiple states, both the Income Tax and the Corporate License Fee are subject to apportionment. South Carolina utilizes a “single-factor sales” apportionment formula for manufacturers and retailers.

$$ \text{Apportionment Fraction} = \frac{\text{Sales in South Carolina}}{\text{Total Sales Everywhere}} $$

This fraction is applied to the company’s total income and total capital to determine the South Carolina tax base. The “Remaining Tax Liability” for R&D credit purposes is calculated after this apportionment occurs. Therefore, a company’s ability to utilize R&D credits is directly tied to its market presence and sales volume within the state, as these factors determine the gross liability that serves as the starting point for the TC-18 calculation.

The Role of Pass-Through Entities and Individual Liability

While the R&D credit is often discussed in a corporate context, it is equally applicable to individual income tax liabilities through pass-through entities (PTEs) such as S-corporations, Partnerships, and Limited Liability Companies (LLCs).

Allocation via Schedule K-1

When a PTE conducts qualified research in South Carolina, the credit is not taken at the entity level. Instead, the credit is calculated based on the entity’s QREs and then allocated to the individual partners or shareholders in proportion to their ownership interest. This information is communicated to the owners via the South Carolina Schedule K-1 (Form SC1065 K-1 or SC1120S K-1).

Individual Limitation Constraints

For the individual taxpayer, the “Remaining Tax Liability” rule applies at the individual level on their Form SC1040. This can create complex interactions if the individual has multiple sources of credits.

Consider an individual who owns a share of an R&D-intensive LLC but also qualifies for personal credits such as:

• Two-Wage Earner Credit
• Child and Dependent Care Credit
• South Carolina Earned Income Tax Credit (EITC)

Under SCDOR guidance, the individual must apply these personal credits first. The “Remaining Tax Liability” that determines their R&D credit cap is the amount of tax left after these personal incentives have been deducted from their total individual income tax. If an individual’s personal credits already reduce their tax to zero, they cannot use any allocated R&D credits in the current year, and those credits must be carried forward on the individual’s own tax record for up to ten years.

Interaction with the Jobs Tax Credit (JTC)

The interaction between the Research Expenses Credit and the New Jobs Tax Credit (S.C. Code § 12-6-3360) is the most frequent and complex calculation performed by South Carolina taxpayers. Because many research-intensive facilities also create the requisite number of high-paying jobs, they often qualify for both.

Eligibility and Tiering

The JTC is a tiered incentive where the value per job depends on the economic status of the county. Counties are ranked annually by the SCDOR into four tiers based on unemployment rates and per capita income.

County Tier	Credit Amount Per Job	Minimum Jobs (Large Business)
Tier I (Developed)	$1,500	10
Tier II (Moderately Developed)	$2,500	10
Tier III (Under Developed)	$3,500	10
Tier IV (Least Developed)	$4,500	10

The Cumulative Cap Problem

The JTC itself is limited to fifty percent of the tax liability. When a taxpayer has both JTC and R&D credits, the “Remaining Tax Liability” rule for R&D ensures that the two credits are not simply additive up to one hundred percent.

As established in SCDOR guidance, the JTC is typically applied against the gross liability first (subject to its 50% cap). Only the tax remaining after this 50% reduction is available to be offset by the R&D credit. This creates a mathematical “diminishing returns” effect for the taxpayer’s credit portfolio, where each successive credit is capped by a smaller and smaller remaining balance.

Comprehensive Tax Calculation Example

To synthesize these concepts, this example follows a South Carolina manufacturing corporation through a single tax year, illustrating the step-by-step application of the “Remaining Tax Liability” rule.

Taxpayer Profile: Palmetto Aerospace Systems, Inc.

• Entity Type: C-Corporation
• Location: Charleston County (Tier I)
• South Carolina Apportioned Income Tax: $500,000
• South Carolina Apportioned License Fee: $100,000
• South Carolina QREs: $4,000,000
• Jobs Tax Credit (JTC) Available (from previous years and current hires): $400,000
• Other Credits (e.g., Energy Efficient Home Credit): $20,000

Step 1: Establish Gross Tax Liability (TC-18, Line 5)

The total liability includes both income tax and license fees.

$$ \text{Gross Liability} = \$500,000 + \$100,000 = \$600,000 $$

Step 2: Determine R&D Credit Generated

The credit is 5% of in-state qualified research expenses.

$$ \text{Earned R&D Credit} = \$4,000,000 \times 0.05 = \$200,000 $$

Step 3: Apply Other Credits First (TC-18, Line 6)

First, calculate the utilization of the Jobs Tax Credit. The JTC is limited to 50% of the gross liability.

$$ \text{JTC Limit} = \$600,000 \times 0.50 = \$300,000 $$

Palmetto Aerospace has $400,000 in JTCs, but can only use $300,000 this year. The remaining $100,000 will carry forward.

Next, apply the $20,000 in other credits.

$$ \text{Total All Other Credits} = \$300,000 (\text{JTC}) + \$20,000 (\text{Other}) = \$320,000 $$

Step 4: Calculate Remaining Tax Liability (TC-18, Line 7)

Subtract the other credits from the gross liability to find the base for the R&D cap.

$$ \text{Remaining Tax Liability} = \$600,000 – \$320,000 = \$280,000 $$

Step 5: Apply the R&D Utilization Cap (TC-18, Line 8)

The R&D credit is limited to 50% of the remaining balance.

$$ \text{Allowable R&D Credit} = \$280,000 \times 0.50 = \$140,000 $$

Step 6: Final Determination (TC-18, Line 9)

The corporation earned $200,000 (Step 2) but is limited to $140,000 (Step 5).

• R&D Credit Used: $140,000
• R&D Credit Carryforward: $60,000 ($200,000 – 140,000)
• Final Tax Due: $600,000 – 320,000 – 140,000 = \$140,000$

Analysis of Results

Despite having $620,000 in total potential credits ($400k JTC + $200k R&D + $20k Other) to cover a $600,000 liability, the corporation must still pay $140,000 in cash. This illustrates how the “Remaining Tax Liability” rule acts as a governor on credit usage, preserving state liquidity while ensuring the company maintains a substantial 10-year carryforward for its unused R&D incentives.

Administrative Compliance and Filing Requirements

The South Carolina Department of Revenue mandates specific procedural steps for taxpayers to secure the Research Expenses Credit and validate their “Remaining Tax Liability” calculations.

Filing Forms and Codes

To claim the credit, taxpayers must file the appropriate summary schedule with their annual tax return. For individuals, this is the SC1040TC; for corporations, it is the SC1120TC.

Form	Taxpayer Type	Purpose
TC-18	All Claimants	Detailed credit calculation and 50% limit worksheet
SC1120TC	Corporations	Summarizes all nonrefundable credits; uses Code 018
SC1040TC	Individuals	Summarizes all nonrefundable credits; uses Code 018
SC K-1	Pass-Throughs	Reports allocated credit share to individual owners

Statute of Limitations and Amendments

South Carolina generally follows a three-year statute of limitations for the filing of amended returns to claim missed credits or seek refunds. Taxpayers who identify qualified research expenses from prior years may amend their returns to establish the credit. However, if the prior year is “out of statute” (older than three years), the credit can only be carried forward to open years, and it must be reduced by the amount that could have been used in those closed years had it been claimed timely.

Electronic Management via MyDORWAY

The SCDOR increasingly requires the management of tax incentives through MyDORWAY, the state’s online tax portal. Taxpayers with a combined liability of $15,000 or more across all tax types are generally required to pay electronically, often via ACH credit. While the R&D credit reduces the tax due, the remaining balance identified after the “Remaining Tax Liability” calculation must be settled according to these electronic filing rules to avoid penalties.

Economic Policy Implications: The Innovation vs. Revenue Balance

The “Remaining Tax Liability” limitation is a deliberate policy choice by the South Carolina General Assembly that balances two competing interests: the desire to attract R&D-intensive firms and the need for predictable tax revenues.

Encouraging In-State R&D

By offering a credit that mirrors the federal IRC 41, South Carolina signals its commitment to being a “conformity state,” which reduces the administrative burden for corporate tax departments. The five percent rate is competitive with other states in the Southeast, and the inclusion of Corporate License Fees in the offset pool makes the credit particularly attractive for high-capital manufacturing sectors.

Protecting the General Fund

If South Carolina allowed the R&D credit to offset one hundred percent of a taxpayer’s liability, a few large manufacturers could potentially zero out their state tax obligations for years at a time. The “Remaining Tax Liability” rule ensures that the credit only ever takes “half of what’s left,” preserving a minimum revenue stream for the state even during peak innovation cycles.

Long-Term Value and Carryforwards

The ten-year carryforward period is a critical component of this balance. It acknowledges that R&D projects are often long-term investments that may not yield taxable income immediately. By allowing the unused portion of the credit (the part blocked by the 50% remaining liability limit) to roll forward, the state ensures that the taxpayer eventually receives the full economic benefit of the incentive as their South Carolina operations mature and generate more tax liability.

Comparison with Regional and National Counterparts

To appreciate the nuance of South Carolina’s “Remaining Tax Liability” rule, it is helpful to compare it to the limitation structures of other states mentioned in peer research materials.

• Arizona: Offers a credit for increased research activities that is generally twenty-four percent of QREs up to $2.5$ million. Unlike South Carolina, Arizona provides a refundable portion for small businesses (fewer than 150 employees) who receive pre-approval from the Arizona Commerce Authority.
• Alaska: Provides a credit equal to eighteen percent of the calculated federal IRC Section 38 credits. Utilization is capped at twenty-five percent of the total credit per year, which is a different mechanism than South Carolina’s fifty percent of remaining liability cap.
• Texas: Historically utilized a “temporary credit” mechanism for R&D that required the credit to be used only after all other deductions and credits, similar to South Carolina’s hierarchy, but without the specific 50% remaining liability multiplier.

South Carolina’s approach is unique because it combines a relatively high utilization cap (50%) with a very restrictive base (Remaining Liability). This makes the credit powerful for companies with high tax bills but ensures it never eliminates the tax bill entirely.

Third-Order Insight: Strategic Interaction with Per Capita Income Requirements

A deep strategic insight involves the interaction between the R&D credit and the per capita income requirements of other facilities. Many facilities that conduct R&D also qualify as “Qualified Service-Related Facilities” or “Technology Intensive Facilities”. These designations often require that the jobs created pay a certain multiple of the state or county per capita income.

Job Type Requirement	Multiple of Per Capita Income	Related Credit
HQ/R&D Facility Jobs	1.5x State Per Capita	Headquarters Credit
Service-Related Facility	1.5x to 2.5x (tiered)	Jobs Tax Credit
Life Sciences Facility	1.5x State Per Capita	Various Incentives

If a company fails to meet these per capita wage thresholds, it might lose its Jobs Tax Credit. Paradoxically, losing the Jobs Tax Credit increases the company’s “Remaining Tax Liability,” which actually increases the amount of R&D credit they can use in the current year. While no company would intentionally lose a credit, this highlights the “inverse relationship” between the R&D credit and all other state incentives. The R&D credit serves as a secondary buffer; if other incentives fail or expire, the R&D credit expands to fill the void, up to its own 50% cap.

Summary and Key Takeaways for Practitioners

The South Carolina Research Expenses Credit is a sophisticated fiscal tool that requires precise mathematical execution. The “Remaining Tax Liability After All Other Credits Applied” rule is the cornerstone of this complexity.

Final Procedural Checklist

1. Validate Federal Claim: Ensure an IRC Section 41 credit is claimed for the same tax year.
2. Isolate SC QREs: Filter expenses to include only those physically incurred in South Carolina.
3. Aggregate License Fees: Ensure the “Tax Liability” base on TC-18 includes Corporate License Fees, not just Income Tax.
4. Sequence Other Credits: Identify every other nonrefundable credit and apply them according to their own limits first.
5. Calculate the 50% Cap: Apply the R&D credit only against half of the balance that survives Step 4.
6. Track Carryforwards: Maintain a schedule for the 10-year expiration of unused R&D credits, keeping them separate from the 15-year carryforwards of the Jobs Tax Credit.

By strictly adhering to these SCDOR guidelines and understanding the statutory intent behind the “remaining liability” logic, taxpayers can effectively manage their South Carolina tax position while maximizing their return on investment for research and innovation. The Research Expenses Credit remains one of the most durable and valuable incentives in the state’s portfolio, provided the taxpayer navigates the ordering rules with the requisite technical precision.

Final Thoughts

Proper planning around the credit ordering rules is essential. While the 50% limitation on remaining liability is restrictive, it provides a consistent and predictable benefit for companies committed to long-term research within South Carolina.