Corporate License Fees (Chapter 20, Title 12)

The South Carolina Corporate License Fee is a tax imposed on a corporation's capital stock and surplus, while the Research and Development tax credit provides a five percent incentive for in-state research expenses. Under Section 12-6-3415, eligible taxpayers may apply this credit to reduce up to fifty percent of their combined income tax and corporate license fee liability.

Statutory Framework of the Corporate License Fee (Chapter 20, Title 12)

The South Carolina Corporate License Fee, codified under Title 12, Chapter 20 of the South Carolina Code of Laws, functions as an annual franchise tax imposed for the privilege of doing business or existing as a legal entity within the state. Unlike the corporate income tax, which is calculated based on net earnings, the license fee is assessed against the capital structure of the corporation, ensuring that every entity maintaining a nexus with South Carolina contributes to the state’s fiscal requirements regardless of immediate profitability. This tax is mandatory for every corporation required to file an annual report, covering both domestic entities incorporated under South Carolina law and foreign corporations authorized to conduct business within the state.

Definitions and Taxable Base

The administration of the license fee begins with the definitions provided in Section 12-20-10. A domestic corporation is defined as any entity incorporated under the laws of South Carolina, while a foreign corporation encompasses any entity not so incorporated. The taxable year for license fee purposes is the same calendar or fiscal year used for computing taxable income under Chapter 6 of Title 12.

The primary imposition of the fee occurs under Section 12-20-50, which establishes the tax base as the capital stock and paid-in or capital surplus of the corporation as shown by the records of the corporation on the first day of the taxable year. For the purposes of this calculation, capital stock refers to the par value of issued shares, and paid-in surplus generally includes the amount of consideration received by the corporation for its shares in excess of par value. Notably, the statute excludes earned surplus—the accumulated net profits and gains of the corporation—from the base, provided that such surplus has not been utilized to eliminate a capital deficit.

Component of License Fee Base	Statutory Treatment	Reference
Capital Stock	Included at par value	Section 12-20-50(A)
Paid-in Surplus	Included as consideration exceeding par	Section 12-20-50(A)
Capital Surplus	Included in the total base calculation	Section 12-20-50(A)
Earned Surplus	Excluded from the base fee calculation	Section 12-20-50(B)
Minimum Fee	Fixed at twenty-five dollars	Section 12-20-50(A)

Rate of Taxation and Minimum Requirements

The standard license fee rate is fifteen dollars plus one dollar for each thousand dollars, or fraction thereof, of the corporation’s capital stock and paid-in surplus. The statutory formula for the annual license fee can be expressed as:

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

The law specifies that in no case may the license fee be less than twenty-five dollars. This minimum applies to each corporation in a combined group, as the license fee is measured by the total capital and surplus of each corporation considered separately, without offset for the investment of one corporation in the capital or surplus of another group member.

Apportionment and Multi-State Entities

When a corporation conducts business both within and outside South Carolina, or uses its capital in multiple jurisdictions, the license fee must be apportioned. Section 12-20-60 mandates that the fee be apportioned in accordance with the ratio prescribed for income tax purposes in the taxable year preceding the year for which the report is filed. This alignment between income tax and license fee apportionment ensures administrative consistency for multi-state taxpayers. However, the law explicitly states that the minimum license fee of twenty-five dollars is not subject to apportionment.

The Utility License Fee (Section 12-20-100)

Chapter 20 also differentiates between general corporations and specific entities subject to the Utility License Fee under Section 12-20-100. This second type of fee applies to express companies, street railway companies, navigation companies, waterworks companies, power companies, electric cooperatives, light and gas companies, and telegraph or telephone companies.

Base and Rate for Utilities

The calculation for the Utility License Fee deviates significantly from the general capital-based fee. It is determined by two components:

1. One dollar for each thousand dollars of the fair market value of property owned and used by the taxpayer in South Carolina in the conduct of its business.
2. Three dollars for each thousand dollars for services rendered in South Carolina from a regulated business.

The inclusion of a property-value component reflects the high capital investment typically required by utilities. Revenue Ruling #96-11 clarifies that the gross receipts component only includes revenue from regulated business activities, meaning this portion of the fee is zero if the corporation conducts no regulated operations within the state.

Fee Type	Tax Base Basis	Rate
General License Fee	Capital Stock & Paid-in Surplus	$15 + $1 per $1,000
Utility - Property	FMV of Property in SC	$1 per $1,000
Utility - Receipts	Regulated Business Services in SC	$3 per $1,000

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

The South Carolina Research and Development (R&D) tax credit is designed to foster innovation and technological advancement by providing a direct financial incentive for companies conducting qualified research within the state. The credit is governed by Section 12-6-3415 of the South Carolina Income Tax Act and is administered by the South Carolina Department of Revenue (SCDOR).

Eligibility and Federal Conformity

To qualify for the South Carolina R&D credit, a taxpayer must satisfy two primary conditions. First, the taxpayer must claim a federal income tax credit for increasing research activities under Section 41 of the Internal Revenue Code (IRC) for the same taxable year. Second, the research must be conducted within the borders of South Carolina.

The state law relies on the federal definition of qualified research expenses (QREs) as provided in IRC Section 41(b). These expenses generally include:

• In-house Research Expenses: Wages paid to employees directly performing, supervising, or supporting research, and the cost of supplies used in the research process.
• Contract Research Expenses: Typically sixty-five percent of the amount paid to any person other than an employee for qualified research, or seventy-five percent for payments to qualified research consortia.

Credit Amount and Calculation

The South Carolina credit is equal to five percent of the taxpayer's qualified research expenses made in South Carolina during the tax year. Unlike the federal credit, which is often incremental and based on exceeding a base period amount, the South Carolina credit is a straightforward percentage of the total in-state QREs for the year.

SC R&D Credit = 0.05 * (SC Qualified Research Expenses)

Carryforward and Non-refundability

The R&D credit is non-refundable, meaning it cannot reduce the taxpayer's liability below zero to generate a cash refund from the state. However, any unused portion of the credit may be carried forward for up to ten years from the date the qualified research expenses were incurred. This ten-year window allows businesses to utilize the credit as they grow and achieve higher tax liabilities in subsequent years.

Applying the R&D Credit against Corporate License Fees

A critical feature of Section 12-6-3415 is that it allows the research expenses credit to be applied against both the South Carolina corporate income tax (under Chapter 6) and the South Carolina corporate license fee (under Section 12-20-50).

Statutory Authority for the Offset

The intersection of these two tax types is explicitly authorized by Section 12-6-3415(A), which states the credit is allowed against any tax due pursuant to this chapter or Section 12-20-50. Furthermore, Section 12-20-175 confirms that license fees may be reduced by specific credits, including the R&D credit and the corporate headquarters credit.

This dual-applicability is a significant benefit for manufacturers and technology firms that may have high capital investment (leading to high license fees) but fluctuating net income. The credit essentially allows the corporation to recover a portion of its innovation costs by reducing the mandatory fee for its existence in the state.

The Fifty Percent Liability Limitation

The use of the R&D credit is subject to a strict limitation: 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 applies to the aggregate of the income tax and the license fee if the taxpayer is using the credit to offset both.

The remaining tax liability refers to the liability after other non-limited credits, such as the New Jobs Credit (Section 12-6-3360), have been deducted. This ordering rule means the R&D credit is typically applied last in the calculation sequence.

Step in Application	Action	Statutory Basis
1	Calculate Total Income Tax and License Fee	Chapters 6 & 20
2	Apply Credits without 50% Limits	Chapter 6
3	Calculate Remaining Tax Liability	SCDOR Policy
4	Apply 50% Limit to Remaining Liability	Section 12-6-3415(B)
5	Determine Allowable R&D Credit	Lesser of (Limit) or (Total Credit)
6	Determine Carryforward	Unused Balance (10 Years)

Local State Revenue Office Guidance and Administrative Rules

The SCDOR provides detailed guidance through revenue rulings, procedures, and form instructions to ensure taxpayers correctly apply the law.

Schedule TC-18 Instructions

The primary administrative tool for claiming the credit is Schedule TC-18 (Research Expenses Credit). According to the form's instructions, taxpayers must:

1. Enter qualified research expenses made in South Carolina on Line 1.
2. Multiply by five percent to determine the credit earned for the current year.
3. Add any research expenses credit carried forward from previous years on Line 4.
4. Enter the tax liability before credits on Line 5 and the total of all other credits on Line 6.
5. Calculate the fifty percent limitation on Line 8 by multiplying the remaining liability by 0.50.
6. Take the lesser of the total credit or the limitation to arrive at the allowable credit for the year.

Revenue Ruling #05-11 and QSubs

Guidance regarding Qualified Subchapter S Subsidiaries (QSubs) is essential for corporate groups. Revenue Ruling #05-11 specifies that for license fee purposes, the parent and each QSub are treated as one entity. This means the capital stock and surplus of the entire group are aggregated for the Chapter 20 fee calculation, and the R&D credit earned by any part of the entity can be applied against the consolidated license fee liability, subject to the fifty percent limit.

Pass-Through Entity Treatment

For partnerships, S-Corporations, and LLCs treated as partnerships, the R&D credit is earned at the entity level but passed through to the owners. These entities themselves are not subject to the corporate license fee unless they have elected to be treated as a corporation for federal tax purposes. When a corporate partner or shareholder receives its portion of the R&D credit via a South Carolina K-1, it may then use that credit to offset its own corporate license fee and income tax liabilities.

Interaction with the Headquarters Credit (Section 12-6-3410)

There is significant overlap between the R&D credit and the Corporate Headquarters Credit. Section 12-6-3410 allows a credit of twenty percent of real and personal property costs for establishing a headquarters, which can also offset license fees. Administrative guidance in Revenue Ruling #99-11 and Private Revenue Opinion #01-1 confirms that these credits can be used in tandem to reduce a corporation's license fee burden, though each remains subject to its specific statutory limits and job creation requirements.

Comprehensive Example: The Manufacturing Innovation Offset

Consider a manufacturer, Carolina Aerospace Dynamics (CAD), a C-Corporation operating in a Tier III county in South Carolina. For the tax year 2024, the corporation has the following financial profile:

• SC Qualified Research Expenses: $1,500,000 (Research wages for engineers in SC).
• Capital Stock and Paid-in Surplus: $8,000,000.
• SC Corporate Income Tax Liability: $100,000.
• Other Credits: CAD is also claiming a New Jobs Credit of $20,000.

Step 1: Calculate the Corporate License Fee (Chapter 20)

Under Section 12-20-50, the fee is $15 plus $1 per $1,000 of capital and surplus.

• Base Fee: $15
• Capital Fee: ($8,000,000 / 1,000) * $1 = $8,000
• Total License Fee: $8,015

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

The credit is 5% of SC QREs.

• Total R&D Credit Earned: $1,500,000 * 0.05 = $75,000

Step 3: Determine the Total Tax Liability and Remaining Liability

The R&D credit can offset both the income tax and the license fee.

• Total Initial Liability: $100,000 (Income Tax) + $8,015 (License Fee) = $108,015
• Subtract Other Credits (New Jobs Credit): $108,015 - $20,000 = $88,015
• Remaining Tax Liability: $88,015

Step 4: Apply the Fifty Percent Limitation

The R&D credit usage is capped at 50% of the remaining liability.

• Maximum Allowable R&D Credit for 2024: $88,015 * 0.50 = $44,007.50

Step 5: Final Result and Carryforward

• Credit Used in 2024: $44,007.50 (since the earned credit of $75,000 is greater than the limit).
• Final Total Tax and Fee Due: $88,015 - $44,007.50 = $44,007.50
• Carryforward Amount: $75,000 - $44,007.50 = $30,992.50 (Available for the next 10 years).

Category	Amount	Calculation Note
Capital Stock/Surplus	$8,000,000	Tax base for Chapter 20
Initial License Fee	$8,015	$15 + ($1 per $1,000)
Income Tax Liability	$100,000	Chapter 6 Liability
Total Liability	$108,015	Combined IT and LF
Other Credits Used	($20,000)	New Jobs Credit applied first
Remaining Liability	$88,015	Base for 50% limitation
50% Limit	$44,007.50	Max credit usage per year
R&D Credit Earned	$75,000	5% of $1.5M QREs
R&D Credit Allowed	$44,007.50	Limited by 50% rule
Carryforward	$30,992.50	Unused portion

Administrative Nuances and Practical Considerations

Nexus and the License Fee

Revenue Ruling #05-11 and SCTIED manuals clarify that any activity that creates income tax nexus also subjects a corporation to the license fee. A foreign corporation having only a contract for commercial printing in South Carolina may be exempt from nexus under Section 12-6-555, but generally, any entity conducting research (and thus claiming the R&D credit) will have a clear physical presence and nexus, triggering the Chapter 20 filing requirement.

Filing Deadlines and Extensions

The license fee must be paid on or before the original due date for filing the annual report. While an extension of time to file the income tax return (Form SC1120) also extends the time to file the annual report, it does not extend the time for payment of the license fee. Corporations must estimate and pay the fee by the original due date to avoid penalties and interest, even if the final R&D credit calculation is completed during the extension period.

Statute of Limitations for Amended Returns

Taxpayers who failed to claim the R&D credit on an originally filed return may file an amended return to claim the credit and request a refund or establish a carryforward. South Carolina generally follows a three-year statute of limitations for refund claims. However, if a taxpayer is out of statute for a refund for a particular year, they may still file an amended return to establish a carryforward that can be used in an open year, provided they reduce the carryforward by the amount that could have been used in the closed years.

Audit and Documentation Standards

The SCDOR advises businesses claiming the R&D credit to maintain contemporaneous documentation for audit compliance. This documentation should include:

• Project descriptions identifying the technological uncertainty and process of experimentation.
• Detailed payroll records for employees included in the QRE calculation.
• Invoices and supply records linking materials directly to South Carolina research sites.
• Contracts with third parties confirming the research was conducted in South Carolina.

Policy Rationale and Economic Impact

The integration of the Chapter 20 license fee with the Section 12-6-3415 credit represents a deliberate policy decision by the South Carolina legislature to mitigate the tax burden on capital-intensive, high-tech industries. By allowing the R&D credit to offset the license fee, the state ensures that companies investing heavily in the tools of innovation—which inherently increases their capital surplus and thus their license fee—are not penalized for their growth.

The 50% limitation ensures a floor of tax revenue for the state while still providing a robust 10-year window for businesses to realize the full value of their innovation credits. This framework, combined with the lack of an overall credit cap and a straightforward flat 5% rate, positions South Carolina as a competitive environment for both domestic and foreign corporations engaged in advanced manufacturing, life sciences, and software development.

Through the combination of statutory law in Chapter 20 and Chapter 6, reinforced by the rigorous administrative guidance of the SCDOR, South Carolina maintains a transparent and incentivized landscape for corporate innovation. The ability to reduce the cost of corporate existence via the R&D credit remains a cornerstone of the state's economic development strategy.