Tax due pursuant to Chapter 6, Title 12 refers to the total South Carolina income tax liability imposed on individuals, estates, trusts, and corporations as calculated under the South Carolina Income Tax Act. In the context of the Research Expenses Credit, this figure establishes the primary tax base against which the 50% utilization limitation is applied only after all other non-refundable credits have first reduced the liability.
The Statutory Architecture of South Carolina Title 12, Chapter 6
The South Carolina Code of Laws provides the foundational legal authority for state taxation within Title 12. Chapter 6 of this title is officially designated as the South Carolina Income Tax Act, providing a comprehensive framework for the imposition, assessment, and collection of taxes on income derived from sources within the state. To understand the phrase Tax Due Pursuant to Chapter 6, it is necessary to examine the broad scope of this chapter, which governs the tax liabilities of a diverse array of legal entities and the administrative powers of the South Carolina Department of Revenue (SCDOR).
The South Carolina Department of Revenue is charged with the administration and enforcement of the taxes imposed under Chapter 6. The department is statutorily mandated to publish rules and regulations necessary for enforcement, provided they are not inconsistent with the chapter itself. These regulations carry the force of law and serve as the primary source of interpretive guidance for taxpayers seeking to understand their obligations and the availability of incentives such as the Research Expenses Credit.
Definitions and Taxpayer Classifications
Central to the application of Chapter 6 are the definitions provided in Section 12-6-30. The term taxpayer is defined expansively to include individuals, trusts, estates, partnerships, associations, companies, corporations, or any other entity subject to the tax imposed by the chapter or required to file a return. This broad definition is critical because the Research Expenses Credit, while often associated with large corporations, is also available to individuals and pass-through entities who incur qualifying expenses within the state.
The chapter further distinguishes between resident and nonresident individuals. A resident individual is one domiciled in South Carolina, whereas a nonresident individual is any individual who is neither a resident nor a part-year resident. Similarly, resident estates and resident trusts are defined based on the domicile of the decedent at the time of death or the location of trust administration, respectively. These classifications are vital in determining the tax due, as residents are generally taxed on their entire income, whereas nonresidents are taxed only on income derived from South Carolina sources.
| Statutory Term | Legal Definition per Section 12-6-30 | Application to Tax Due |
|---|---|---|
| Taxpayer | Individuals, trusts, estates, partnerships, corporations, or any entity subject to tax | Defines the scope of entities eligible for Chapter 6 credits |
| Resident Individual | An individual domiciled in the State of South Carolina | Subject to tax on total income under Chapter 6 |
| Nonresident Individual | An individual other than a resident or part-year resident | Subject to tax on SC-source income only |
| Tangible Property | Real property and corporeal personal property; excludes money and stocks | Relevant for property-based exemptions and nexus |
| Intangible Property | All property other than tangible property | Governs sourcing of income for nonresident beneficiaries |
Internal Revenue Code Conformity
South Carolina’s income tax laws are fundamentally tethered to the federal Internal Revenue Code (IRC). Section 12-6-40 stipulates that, except where otherwise provided, the Internal Revenue Code means the IRC of 1986 as amended through a specific date—most recently through December 31, 2024. This conformity simplifies the calculation of tax due by adopting federal taxable income as the starting point for state returns.
However, South Carolina does not adopt the IRC in its entirety. Section 12-6-50 lists specific federal provisions that the state has chosen not to adopt. For example, South Carolina traditionally does not follow federal bonus depreciation under IRC Section 168(k), the interest limitation rules of IRC Section 163(j), or the qualified business income deduction under IRC Section 199A. Consequently, the tax due pursuant to Chapter 6 is the result of starting with federal taxable income and applying state-specific additions and subtractions as required by Article 9 of Chapter 6.
The Research Expenses Credit: S.C. Code Section 12-6-3415
The Research Expenses Credit is a key economic development incentive codified within Article 25 of Chapter 6. This credit is designed to reward taxpayers for increasing research and development activities within South Carolina, thereby fostering a state economy based on innovation and high-value manufacturing.
Eligibility and Linkage to IRC Section 41
For a taxpayer to qualify for the South Carolina Research Expenses Credit, they must first claim a federal income tax credit for research activities under IRC Section 41 for the same taxable year. This federal linkage ensures that the state credit supports activities that meet the rigorous federal standards for qualified research. Under IRC Section 41, and by extension S.C. Code Section 12-6-3415, qualified research must satisfy a four-part test: it must be technological in nature, aim to develop or improve a product or process, involve a process of experimentation, and seek to eliminate technical uncertainty.
The credit is calculated as 5% of the qualified research expenses made by the taxpayer in South Carolina during the tax year. While the federal credit often involves a complex calculation relative to a historical base amount, the South Carolina credit is frequently described in administrative guidance as a flat 5% of current-year in-state expenditures.
Components of Qualified Research Expenses (QREs)
Qualified research expenses generally fall into three categories: wages, supplies, and contract research. To contribute to the tax due calculation under Chapter 6, these expenses must be incurred for activities conducted physically within the borders of South Carolina.
- Wages: This includes the portion of an employee’s salary dedicated to performing, supervising, or supporting qualified research.
- Supplies: Tangible property, other than land or improvements, used in the conduct of qualified research.
- Contract Research: Generally, 65% of the amount paid to any outside vendor or person who performs qualified research on behalf of the company.
The Mechanics of Tax Due in Credit Utilization
The phrase Tax Due Pursuant to Chapter 6 becomes critically important when determining the actual amount of credit a taxpayer can use in a given year. Unlike some credits that may be used to offset a taxpayer’s entire liability, the Research Expenses Credit is subject to a strict 50% limitation.
The 50% Limitation and Ordering Rules
S.C. Code Section 12-6-3415 states that the credit taken in any tax year may not exceed 50% of the taxpayer’s tax liability remaining after all other credits have been applied. This after all other credits clause is the defining characteristic of the Research Expenses Credit’s interaction with the broader South Carolina tax code.
The South Carolina Department of Revenue provides specific guidance on the ordering of tax credits. While credits can generally be applied in any order, the Research Expenses Credit is one of the few that is statutorily required to be computed after other credits have already reduced the tax liability. This positioning often results in a lower utilization of the R&D credit in years where a taxpayer also claims other significant incentives, such as the Jobs Tax Credit (Section 12-6-3360) or the Investment Tax Credit (Section 12-6-3410).
Interaction with Corporate License Fees (Chapter 20)
A unique feature of the Research Expenses Credit is its applicability against both Income Tax (Chapter 6) and Corporate License Fees (Chapter 20). The Corporate License Fee is an annual fee imposed on corporations for the privilege of doing business in South Carolina, calculated based on the corporation’s paid-in capital and paid-in surplus.
When a corporation calculates its Tax Due, it must aggregate the liabilities from both chapters. The 50% limitation is then applied to the total remaining combined liability. This cross-chapter application provides corporations with a broader base to utilize their R&D credits, which is particularly beneficial for capital-intensive industries that may have high license fees but fluctuating income tax liabilities.
| Liability Type | Statutory Source | Credit Application |
|---|---|---|
| Individual Income Tax | Section 12-6-510 | Direct offset up to 50% limit |
| Corporate Income Tax | Section 12-6-530 | Direct offset up to 50% limit |
| Corporate License Fee | Section 12-20-50 / 12-20-100 | Direct offset up to 50% limit |
| Bank Tax | Section 12-11-20 | Not explicitly listed for TC-18 but common in others |
| Savings and Loan Tax | Section 12-13-30 | Permitted for some Chapter 6 credits |
Local State Revenue Office Guidance and Application
The South Carolina Department of Revenue (SCDOR) issues several forms of guidance that clarify how Section 12-6-3415 should be applied to the tax due. These include formal Revenue Rulings, Information Letters, and the instructions for tax forms such as SC Schedule TC-18.
Guidance from Form SC Schedule TC-18
The instructions for Form TC-18, the specific form used to claim the Research Expenses Credit, provide the most direct guidance on the computation of the 50% limit. The form requires a step-by-step calculation to ensure the credit does not exceed the statutory threshold:
- Identify Total Qualified Expenses: Multiply the total South Carolina QREs by 5% to find the credit earned in the current year.
- Determine Available Credit: Add any carryforwards from previous years to the current year’s earned credit.
- Establish the Limitation Base: Calculate the Remaining Tax Liability by taking the initial tax liability (Income and License) and subtracting all other credits being claimed on the return.
- Calculate the 50% Cap: Multiply the Remaining Tax Liability from Step 3 by 0.50.
- Determine Allowable Credit: The credit used for the year is the lesser of the Available Credit or the 50% Cap.
Revenue Rulings and Information Letters
SCDOR has issued multiple revenue rulings that, while often focusing on the Jobs Tax Credit, establish the framework for how all credits within Chapter 6 are treated. Revenue Ruling 16-10 and 21-2 provide context on how income tax liability is determined, while Information Letters are published annually to provide the per capita income figures that determine wage thresholds for related credits.
The department also provides guidance on Nexus, or the level of activity required for a corporation to be subject to the taxes of Chapter 6. Revenue Ruling 16-11 addresses activities that create corporate income tax nexus, which is the prerequisite for having a tax due against which any credit can be applied. If a company does not have nexus under Chapter 6, it cannot claim the R&D credit, regardless of the research performed in the state.
Treatment of Pass-Through Entities
For partnerships, S corporations, and LLCs, the credit is earned at the entity level but the tax due is calculated at the shareholder, partner, or member level. SCDOR Revenue Procedure 98-1 and Section 12-6-3310 clarify that unless specifically prohibited, these entities may pass through the credit to their owners.
In these cases, the Tax Due Pursuant to Chapter 6 is the personal income tax of the individual owner. The owner must apply the 50% limit on their own SC1040, taking into account their share of the entity’s research expenses and their own personal tax liability after other individual credits (such as the Two-Wage Earner Credit).
Example of Research Expenses Credit Application
To demonstrate the application of the law and SCDOR guidance, consider Innovation Manufacturing Corp, a C corporation with operations in South Carolina.
Scenario Assumptions
- South Carolina Taxable Income: $5,000,000
- Initial Income Tax Liability (5% of Income): $250,000
- Corporate License Fee Liability: $10,000
- Total Initial Tax Liability: $260,000
- Jobs Tax Credit Earned: $100,000
- South Carolina Qualified Research Expenses (QREs): $2,000,000
- Prior Year R&D Credit Carryforward: $20,000
Step: Calculate Other Credits
Innovation Manufacturing Corp first applies its Jobs Tax Credit. The Jobs Tax Credit is generally limited to 50% of the total tax liability.
- Jobs Tax Credit Limit: $260,000 times 0.50 = $130,000
- Credit Used: The company uses its full $100,000 Jobs Tax Credit since it is below the $130,000 limit.
Step: Determine Remaining Tax Liability for R&D Credit
Following the instructions for Form TC-18, the corporation must determine its Remaining Tax Liability after the Jobs Tax Credit.
- Remaining Tax Liability: $260,000 – $100,000 = $160,000
Step: Calculate R&D Credit Earned and Available
The current year R&D credit is 5% of the $2,000,000 in SC QREs.
- Current Year R&D Credit: $2,000,000 times 0.05 = $100,000
- Total Available R&D Credit: $100,000 (Current) + $20,000 (Carryforward) = $120,000
Step: Apply the 50% Limitation to the R&D Credit
The allowable R&D credit is limited to 50% of the Remaining Tax Liability.
- Allowable R&D Credit Cap: $160,000 times 0.50 = $80,000
- Credit Utilized: $80,000 (The lesser of $120,000 available or the $80,000 cap).
Step: Final Tax Due and Carryforwards
- Final Tax Payable: $160,000 – $80,000 = $80,000
- R&D Credit Carryforward: $120,000 – $80,000 = $40,000
| Step | Component | Calculation | Amount |
|---|---|---|---|
| 1 | Total Tax Liability | Income Tax + License Fee | $260,000 |
| 2 | Apply Other Credits | Jobs Tax Credit | ($100,000) |
| 3 | Remaining Liability | Total Liability – Other Credits | $160,000 |
| 4 | 50% Limit Base | Remaining Liability x 0.50 | $80,000 |
| 5 | Total R&D Available | Current Year + Carryforward | $120,000 |
| 6 | R&D Credit Used | Lesser of Line 4 or Line 5 | $80,000 |
| 7 | Net Cash Tax Due | Remaining Liability – R&D Used | $80,000 |
Comprehensive Analysis of Regulatory Guidance and Compliance
The administration of the Research Expenses Credit involves navigating several distinct areas of the South Carolina Code, as well as the overarching administrative procedures established by the SCDOR.
The Role of Section 12-6-3310
Section 12-6-3310 provides the general rules for tax credits found in Article 25 of Chapter 6. It establishes that all credits in this article are non-refundable and, unless otherwise provided, must be used in the year they are generated. The Research Expenses Credit is one of the few credits that otherwise provides for a carryforward, specifically allowing unused credits to be carried over for up to 10 years.
This section also mandates that no credit may be used more than once and that credits must be used to offset the taxes for which they are specifically authorized. For the R&D credit, this means primarily Corporate Income Tax (Section 12-6-530), Individual Income Tax (Section 12-6-510), and Corporate License Fees (Section 12-20-50/100).
Audit and Documentation Standards
Given the complexity of defining qualified research, the SCDOR maintains rigorous audit standards. Guidance suggests that taxpayers maintain detailed records of their research activities and associated costs. Because the state credit is contingent upon a federal Section 41 claim, any federal audit that adjusts the federal R&D credit will likely trigger a corresponding state-level adjustment.
Taxpayers who fail to take the credit on an original return have the opportunity to amend their returns within the three-year statute of limitations. However, the SCDOR clarifies that when filing an amended return for a year out of statute solely to claim a carryforward for an open year, the carryforward must be reduced by the amount that could have been used in the closed years. This underscores the importance of the ordering rules—the 50% of remaining tax liability must be calculated for every intervening year to determine the valid carryforward amount.
Strategic Implications of the Remaining Liability Rule
The statutory construction of Section 12-6-3415—specifically the after all other credits clause—reflects a deliberate policy choice by the South Carolina General Assembly. By requiring the R&D credit to be applied last and limited to 50% of what is left, the state effectively prioritizes other policy goals (like job creation and headquarters relocation) while ensuring that R&D-heavy companies still maintain a residual tax payment to the state.
For a corporation, this means that even if they have enough R&D credits to theoretically zero out their tax, the 50% limit on the remaining balance ensures they will always owe some tax, unless other credits that are not subject to such a limitation (or whose limitations are based on total tax) happen to eliminate the first 50% of the liability.
Future Outlook and Legislative Trends
The South Carolina tax landscape is subject to annual adjustments through conformity acts and targeted economic development legislation. House Bill 4087, passed in 2024, highlights this trend by modernizing the Corporate Headquarters credit and emphasizing the legislature’s intent to support diverse business units beyond traditional corporate structures.
As the state continues to transition toward a high-tech, knowledge-based economy, the definition of tax due pursuant to Chapter 6 will likely continue to evolve. Changes in federal law, such as the ongoing debate over the amortization of research expenses under IRC Section 174, will have immediate ripple effects in South Carolina due to its conformity under Section 12-6-40. Taxpayers must remain vigilant, monitoring SCDOR Information Letters and Revenue Rulings to ensure their innovation-driven incentives remain fully compliant with the intricacies of Chapter 6.
Final Thoughts: Synthesizing the Tax Base and the Credit
In final analysis, the Tax Due Pursuant to Chapter 6, Title 12 is not a static number but a dynamic calculation that incorporates federal starting points, state-specific modifications, and a strictly ordered sequence of credits. Within this structure, the Research Expenses Credit acts as a targeted but constrained incentive. Its 5% rate on in-state expenditures and 10-year carryforward provide significant value to innovative firms, yet its application as a final, 50%-limited offset ensures a balanced fiscal outcome for the State of South Carolina. Understanding this hierarchy—and the administrative guidance that supports it—is essential for any entity seeking to maximize its innovation-based tax benefits while maintaining full compliance with the South Carolina Income Tax Act.
