Tax Due Pursuant to Section 12-20-50 (Corporate License Fees)

Tax Due Pursuant to Section 12-20-50 refers to the South Carolina corporate license fee, an annual tax on a corporation's capital stock and paid-in surplus. In the context of the South Carolina Research Expenses Credit, this specific liability can be reduced by up to fifty percent of the remaining fee after other credits have been applied.

The Statutory Construct of Section 12-20-50

The South Carolina corporate license fee, codified under Section 12-20-50, represents a franchise tax imposed upon corporations for the privilege of exercising their corporate franchise or doing business within the state. Unlike the corporate income tax, which is a retrospective levy on net profits generated during a concluded taxable period, the corporate license fee is a prospective tax on the capital structure of the entity itself. It serves as a regulatory and revenue-generating mechanism that ensures every corporate entity maintaining a presence in South Carolina contributes to the state’s administrative and infrastructure costs, regardless of their immediate profitability.

The imposition of this tax is broad, encompassing every domestic corporation and every foreign corporation qualified to do business in the state, as well as any other corporation required to file an income tax return pursuant to Section 12-6-4910. The law specifies that this fee is payable to the Department of Revenue (SCDOR) and is typically filed in conjunction with the corporation's annual report. For general corporations, the fee is fundamentally tethered to the invested capital, creating a direct correlation between the scale of the company’s capitalization and its annual license obligation.

Defining the Tax Base: Capital Stock and Paid-In Surplus

The calculation of the tax due pursuant to Section 12-20-50 relies on three primary accounting components: capital stock, paid-in surplus, and the exclusion of earned surplus. The statute defines "paid-in or capital surplus" as the entire surplus of a corporation other than its earned surplus. This is a comprehensive definition that captures a wide array of capital inflows beyond the initial issuance of shares.

Capital Component	Statutory Treatment under Section 12-20-50	Implications for Tax Liability
Capital Stock	Fully Includable.	Represents the par value or stated value of issued shares.
Donated Capital	Fully Includable.	Contributions of assets from non-shareholders or shareholders without issuance of stock.
Revaluation Surplus	Fully Includable.	Increases in the valuation of assets made upon a formal revaluation.
Earned Surplus	Expressly Excludable.	Retained earnings, net profits, and gains accumulated since incorporation.
Mergers/Acquisitions	Includable Adjustments.	Amounts credited to surplus accounts as a result of corporate reorganizations.

The distinction between "paid-in surplus" and "earned surplus" is the most critical factor in determining the tax due. "Earned surplus" is defined as that portion of the surplus equal to the balance of net profits, income, gains, and losses from the date of incorporation, or from the latest date when a deficit was eliminated by the application of capital surplus, after deducting subsequent distributions to shareholders and transfers to stated capital. By excluding earned surplus, the South Carolina General Assembly intended for the license fee to act as a tax on the investment in the company rather than the success of the company.

The Role of Applicable Financial Statements

The values for capital stock and surplus must be derived from the corporation's records as shown on the first day of the taxable year in which the report is filed. For a calendar-year taxpayer, this effectively means the balances as of January 1, which generally align with the closing balances of the preceding December 31. To ensure consistency and prevent arbitrary valuation, Section 12-20-50(B) mandates the use of an "applicable financial statement."

A hierarchy exists for determining which financial statement is "applicable." The primary source is any statement required to be filed with the Securities and Exchange Commission (SEC). In the absence of an SEC filing, a corporation must use a certified audited balance sheet used for credit purposes, reporting to shareholders, or any other substantial nontax purpose. If neither is available, the corporation may use a balance sheet provided to a federal or state government agency. This reliance on external, standardized financial reporting ensures that the tax due pursuant to Section 12-20-50 is based on verifiable and transparent accounting data.

Mathematical Formula and Minimum Requirements

The basic calculation for the license fee is expressed by the following formula:

License Fee = 15 + ((Capital Stock + Paid-in Surplus) / 1000) * 1

In this equation, any fraction of one thousand dollars is treated as a full thousand. For example, a corporation with a combined capital and paid-in surplus of $1,000,001 would be taxed as if it had $1,002,000 in qualifying capital. The fifteen-dollar base fee is a constant addition to this proportional amount.

Furthermore, the statute establishes a floor for the tax due. In no case may the license fee provided by Section 12-20-50 be less than twenty-five dollars. This minimum fee is a non-apportionable obligation, meaning that even corporations with very little capital or those doing only a small fraction of their business in South Carolina must pay at least this amount to maintain their corporate standing in the state.

Apportionment and Multi-State Corporate Operations

When a corporation conducts business or utilizes its capital both within and without South Carolina, the license fee cannot constitutionally or statutorily be applied to its entire global capital base. Instead, Section 12-20-60 provides that the amount of the license fee determined under Section 12-20-50 must be apportioned. The apportionment ratio used for the license fee is identical to the ratio prescribed for corporate income tax purposes in the taxable year preceding the year the report is filed.

South Carolina’s transition to a single sales factor apportionment method for tax years beginning after 2010 has significant implications for the license fee. For corporations primarily dealing in tangible personal property, the apportionment fraction is determined by dividing the total sales in South Carolina by the total sales everywhere.

Apportionment Variable	Definition in South Carolina Context	Impact on Section 12-20-50 Fee
Numerator	Total sales made or gross receipts from within South Carolina.	Directly increases the apportioned capital base.
Denominator	Total value of sales or gross receipts of the taxpayer everywhere.	Dilutes the capital base if global sales are significantly higher than SC sales.
Final Ratio	The resulting percentage applied to total capital.	Determines the "South Carolina portion" of the capital stock and surplus.

The logic behind using the preceding year's income tax ratio for the current year's license fee is rooted in the advance-payment nature of the fee. Because the license fee is paid for the privilege of the upcoming year, the state uses the most recently completed operational data (the prior year's sales) as a proxy for the level of business activity the corporation is likely to conduct in South Carolina during the license year.

The South Carolina Research Expenses Credit (Section 12-6-3415)

The South Carolina Research Expenses Credit is a strategic incentive designed to foster technological innovation and keep high-value research jobs within the state. Governed by Section 12-6-3415, the credit is explicitly available to taxpayers who claim the federal credit for increasing research activities under Internal Revenue Code Section 41. This direct linkage to federal law ensures that South Carolina’s definitions of "qualified research" and "qualified research expenses" (QREs) remain consistent with national standards, reducing the administrative burden on taxpayers.

Credit Rate and Geographic Limitations

The state credit is equal to 5% of the taxpayer’s qualified research expenses made in South Carolina during the taxable year. Unlike the federal credit, which often utilizes a complex "base amount" calculation to reward only the increase in research spending, the South Carolina credit is a "flat" credit based on the total qualifying spend within the state's borders.

Qualified research expenses generally fall into three categories:

1. In-house Wages: Payments to employees directly engaged in research or directly supervising or supporting research activities.
2. Supplies: Costs of tangible property (other than land or improvements to real property) used in the conduct of qualified research.
3. Contract Research: 65% of any amount paid to a person other than an employee for qualified research.

For an expense to qualify for the 5% South Carolina credit, the research activity must be performed within the State of South Carolina. If a company conducts research across multiple states, it must meticulously track and isolate the QREs attributable to its South Carolina facilities.

Nonrefundability and the 10-Year Carryforward

The Research Expenses Credit is classified as a nonrefundable credit. This means that the credit can reduce a taxpayer's liability to zero but cannot result in a refund check from the state for any excess credit. To preserve the value of the credit for companies that may not have sufficient current-year liability—such as early-stage biotech or aerospace firms with high R&D costs but low initial revenue—the law allows for a ten-year carryforward.

Any unused portion of the credit may be carried over to the immediately succeeding taxable years. However, a strict expiration exists: the credit carry-over may not be used for a taxable year that begins on or after ten years from the date of the qualified research expenses. This "use-it-or-lose-it" window encourages corporations to maintain a consistent level of tax-generating activity in South Carolina to ensure they can fully monetize their research incentives.

Contextual Application: Offsetting the License Fee

The specific phrase "Tax Due Pursuant to Section 12-20-50" is central to the R&D credit because Section 12-6-3415(A) explicitly names this section as one of the two primary liabilities the credit can offset. While many South Carolina tax credits are limited to offsetting corporate income tax (Section 12-6-530), the Research Expenses Credit is more versatile. It can be applied against:

• Individual Income Tax (Chapter 6).
• Corporate Income Tax (Section 12-6-530).
• Corporate License Fees (Section 12-20-50).

The 50% Limitation Mechanics

The most significant administrative and legal hurdle in applying the R&D credit to the license fee is the 50% liability limitation. Section 12-6-3415(B) states that the credit taken in any one taxable year may not exceed fifty percent of the taxpayer's remaining tax liability after all other credits have been applied.

This limitation necessitates a specific ordering of credits. According to SCDOR guidance, if a taxpayer qualifies for multiple credits, they must generally apply credits that do not have a percentage-of-liability limit first. This reduces the total tax liability to a "remaining" amount. The R&D credit is then applied to that remaining amount, but it can only satisfy up to half of it.

Stage of Calculation	Action Required	Statutory Reference
Initial Liability	Calculate Gross Section 12-20-50 Fee.	Section 12-20-50(A)
Priority Credits	Apply non-limited credits (e.g., Headquarters Credit).	Section 12-20-175
Remaining Liability	Identify the tax balance after Stage 2.	Form TC-18, Line 7
R&D Limitation	Multiply Remaining Liability by 50%.	Section 12-6-3415(B)
Final Credit Use	Apply the lesser of Available R&D Credit or Limitation.	Form TC-18, Line 9

The "Remaining Tax Liability" Definition

The term "remaining tax liability" as used in the context of the R&D credit is strictly defined by the SCDOR through its forms and revenue rulings. It is not the total tax due at the start of the calculation, but rather the net tax due after all other credits—except the Research Expenses Credit—have been deducted. This creates a scenario where the use of other credits can inadvertently restrict the amount of R&D credit a company can use in the current year, potentially pushing more of the R&D credit into the carryforward period.

State Revenue Office Guidance and Policy Manuals

The South Carolina Department of Revenue provides extensive guidance on the administration of these laws through Revenue Rulings, form instructions, and policy manuals. These documents bridge the gap between the abstract statutory language and the practical realities of tax filing.

Revenue Ruling 05-11: Short Periods and Proration

Revenue Ruling 05-11 is the primary guidance for corporations experiencing a change in their taxable year or those entering/exiting the state mid-year. The ruling clarifies that for a short period return, the annual license fee must be prorated.

The formula for proration is:

Short Period Fee = (Annual License Fee / 12) * Months in Short Period

However, the ruling emphasizes that the measure of the license fee base—the capital stock and paid-in surplus—is still taken from the applicable financial statement balances on the first day of the short period. When a corporation uses an R&D credit against a short-period fee, the 50% limitation applies to the prorated fee amount.

Form TC-18 Instructions and Electronic Mandates

The SCDOR requires the use of Form TC-18, "Research and Development Credit," to claim and calculate the R&D offset. The instructions for this form clarify several key points:

1. Pass-Through Entities: If the credit is earned by a partnership, S-corporation, or LLC, the credit flows through to the partners or shareholders via Schedule K-1. However, the credit may still be used against the entity's own license fee if it is required to file an SC1120S.
2. Federal Claim Requirement: A taxpayer must claim the federal credit for the same year to be eligible for the state credit. This means the taxpayer must have filed federal Form 6765.
3. Electronic Mandate: Taxpayers with a combined tax liability (including income and license fees) of $15,000 or more are mandated to file and pay electronically. Failure to do so can result in penalties, even if the underlying tax is fully offset by credits.

Guidance on the Utility License Fee Distinction

A common area of audit risk involves the misapplication of the R&D credit to the "Utility License Fee" under Section 12-20-100. Revenue Ruling 18-8 (and its successors) provides that the Research Expenses Credit, as well as the Utility License Fee Credit under Section 12-20-105, have very specific application scopes.

The Research Expenses Credit is only permitted against Section 12-20-50. Conversely, the Utility License Fee Credit is only available to those paying the fee under Section 12-20-100. The SCDOR has been consistent in its position that these two groups are mutually exclusive; a taxpayer paying the general license fee cannot claim the utility credit, and a taxpayer paying the utility license fee cannot use the R&D credit to offset that specific fee.

Comprehensive Example: Multi-Year Credit Strategy

To understand how the "Tax Due Pursuant to Section 12-20-50" interacts with the R&D credit in a real-world business cycle, consider a manufacturing firm, "Palmetto Aerospace," which relocates its headquarters to South Carolina and invests heavily in R&D.

Year 1: Heavy Capital Investment and Headquarters Relocation

Palmetto Aerospace moves to Greenville, SC. It issues $100 million in new stock to build a facility.

• Capital Stock + Paid-in Surplus: $100,000,000.
• SC QREs (Equipment testing and prototyping): $10,000,000.
• Headquarters Credit Earned (20% of facility cost): $20,000,000.

Step 1: Calculate License Fee (12-20-50)

Fee = 15 + (100,000,000 / 1,000 * 1) = $100,015

Step 2: Calculate R&D Credit (12-6-3415)

Credit = 10,000,000 * 5% = $500,000

Step 3: Apply Credits

Palmetto Aerospace uses its Headquarters Credit first. The Headquarters Credit can offset 100% of the license fee.

• Remaining Tax Liability: $100,015 - $100,015 = $0.
• R&D Credit Used: $0 (because 50% of $0 is $0).
• R&D Carryforward: $500,000.

Year 2: Operational Phase with Decreased Surplus

The company begins operations. Its paid-in surplus remains high, but it now has a Job Tax Credit and is utilizing its R&D carryforward.

• Section 12-20-50 Gross Liability: $100,015.
• Job Tax Credit (priority credit): $20,000.
• Remaining Tax Liability (for R&D calc): $100,015 - $20,000 = $80,015.

Step 4: Determine Allowable R&D Credit

• 50% Limitation: $80,015 * 0.50 = $40,007.50.
• R&D Credit Applied: Palmetto Aerospace applies $40,007.50 of its $500,000 carryforward.
• Final Tax Due: $80,015 - $40,007.50 = $40,007.50.
• Remaining R&D Carryforward: $459,992.50.

Strategic Implications of the Example

This multi-year scenario highlights the "crowding out" effect of other credits. Because Palmetto Aerospace had a massive Headquarters Credit in Year 1, its "Tax Due Pursuant to Section 12-20-50" was reduced to zero before the R&D credit could be applied. While this eliminated their tax bill, it forced the R&D credit into a carryforward. Companies must carefully plan the timing of their capital expansions and research projects to ensure they can utilize credits before they expire at the 10-year mark.

Technical Insight: Consolidation and the "Separate Entity" Rule

Under South Carolina law, while a group of corporations may file a consolidated income tax return (Section 12-6-5020), the treatment for the license fee under Section 12-20-50 is markedly different. For license fee purposes, each corporation in a consolidated group is considered a separate entity.

The license fee is measured by the capital stock and paid-in surplus of each corporation considered separately, without any offset for the investment of one corporation in the capital or surplus of another corporation within the same group. This "no-offset" rule can lead to significant pyramiding of the license fee if multiple layers of holding companies exist.

However, the R&D credit provides a potential relief mechanism in this structure. Since each corporation in the group has its own "Tax Due Pursuant to Section 12-20-50," each corporation can also individually qualify for and apply its own R&D credit. If a subsidiary is the primary research engine of a conglomerate, it can use its R&D credits to offset up to 50% of its own specific license fee liability, even if the parent company does not engage in research.

Entity Type	Income Tax Treatment (Consolidated)	License Fee Treatment (Section 12-20-50)	R&D Credit Application
Parent Co	Aggregated with subsidiaries.	Based on Parent's separate capital.	Offsets Parent's share of tax.
Subsidiary A	Aggregated with parent.	Based on Sub A's separate capital.	Offsets Sub A's share of tax.
Holding Co	Often eliminated in consolidation.	Based on Holding Co's capital.	Offsets Holding Co's share of tax.

Second-Order Insights: Economic Impacts and Corporate Behavior

The interaction between capital-based license fees and research credits creates a unique set of incentives for South Carolina corporations.

Capital Intensity vs. Innovation Efficiency

The Section 12-20-50 fee is, at its core, a tax on capital intensity. A company that requires $500 million in equity to build a manufacturing plant will pay $500,015 in license fees annually. If that same company is highly innovative and spends $10 million on research in the state, its R&D credit of $500,000 will perfectly "zero out" half of its license fee.

This creates a "neutralizing effect" for high-tech manufacturing. The state essentially uses the R&D credit to mitigate the burden of the license fee for companies that it deems to be strategically important. For a "low-tech" company with the same capital base but no R&D, the $500,015 fee remains a significant overhead cost.

Impact on Entity Selection and Funding

The presence of the Section 12-20-50 fee and the R&D offset influences how companies choose to fund their South Carolina operations. Because the fee is based on equity (capital stock and surplus) and not debt, there is a natural incentive to favor debt financing to keep the license fee low. However, for research-heavy firms, this incentive is weakened. If a company can generate enough R&D credits to offset 50% of its license fee, the "effective rate" of the license fee is halved, making equity financing more attractive than it would be in a state with a franchise tax but no R&D offset.

Future Outlook: Legislative and Regulatory Trends

Recent legislative efforts, such as House Bills 3592 and 3593, suggest a move toward making the R&D credit even more robust. Proposals have included allowing small businesses (fewer than 150 employees) to claim the entire credit in one year or even making a portion of the credit refundable if it exceeds the taxpayer's liability.

If such changes were enacted, the relationship with Section 12-20-50 would become even more dynamic. A refundable R&D credit would mean that the "Tax Due Pursuant to Section 12-20-50" would no longer act as a "ceiling" for the incentive's value. Instead, the license fee would merely be one of the first liabilities "soaked up" by the credit before the taxpayer receives a cash refund for the remainder.

Administrative Compliance and Audit Defense

For professional practitioners, defending the R&D credit offset against the Section 12-20-50 fee requires rigorous documentation. The SCDOR has increased its scrutiny of both the capital base and the QREs.

Substantiating the Capital Base

Auditors frequently verify the "paid-in surplus" by reconciling the SC1120 Schedule D with the "applicable financial statement." Discrepancies often arise from:

• Merger Accounting: Failure to properly credit the surplus account following an acquisition.
• Intercompany Accounts: Misclassifying intercompany debt as "donated capital" or "capital surplus."
• Treasury Stock: Incorrectly deducting the cost of treasury stock from the capital stock base (which is generally not allowed unless it reduces the stated capital).

Substantiating the R&D Offset

To defend the 5% credit, companies must provide "nexus documentation" showing that the research was performed in South Carolina. This involves:

• Time Tracking: Payroll records demonstrating that employees were physically located in South Carolina facilities when performing qualified services.
• Supply Invoices: Documentation showing that supplies were delivered to and used at South Carolina research sites.
• Contractor Agreements: Contracts specifying that research work was performed at the contractor's South Carolina location.

Final Thoughts: A Synergistic Policy Mechanism

The South Carolina corporate tax system, through the interplay of Section 12-20-50 and Section 12-6-3415, achieves a delicate balance between fiscal stability and economic incentive. The "Tax Due Pursuant to Section 12-20-50" ensures that corporations pay a predictable fee for their legal status and presence in the state, while the Research Expenses Credit provides a powerful lever for innovative firms to reduce that burden.

By tethering the credit to 50% of the remaining liability, the state guarantees that it will always collect a portion of the franchise tax from even the most research-intensive companies, while offering those same companies a 10-year window to fully realize the value of their investments. For businesses operating in South Carolina, a deep understanding of these statutes and the accompanying SCDOR guidance is not merely a matter of compliance, but a fundamental component of effective long-term capital and tax planning.