Fifty Percent (50%) of the Taxpayer’s Remaining Tax Liability

What is the South Carolina R&D Tax Credit 50% Limitation?

The South Carolina Research Expenses Credit is statutorily limited to 50% of a taxpayer’s remaining tax liability after all other credits have been applied. Under S.C. Code § 12-6-3415, this rule requires taxpayers to calculate their R&D credit cap only after deducting other incentives (such as the Jobs Tax Credit) from their total liability. While this “remaining liability” provision often reduces the immediate cash benefit of the credit, the state allows unused amounts to be carried forward for up to 10 years. A specific exception exists for small businesses with fewer than 150 employees, which may qualify for a refundable credit capped at $5 million statewide annually.

The Fifty Percent (50%) of the Taxpayer’s Remaining Tax Liability represents the final statutory cap on the South Carolina Research Expenses Credit, limiting the usable credit to exactly half of the tax burden remaining after every other applicable credit has been subtracted. This provision ensures that even the most research-intensive businesses maintain a minimum contribution to the state’s General Fund while allowing for the carryforward of excess credits over a ten-year horizon.

The legal architecture of the South Carolina Research and Development (R&D) tax credit is established under S.C. Code § 12-6-3415, a provision designed to incentivize technological advancement and high-wage job creation within the state. While the credit is ostensibly calculated as a flat percentage of qualified expenditures, its actual utility in any given tax year is governed by a complex interplay of ordering rules, statutory caps, and administrative guidance from the South Carolina Department of Revenue (SCDOR). The 50% limitation on “remaining tax liability” is not merely a mathematical ceiling but a strategic fiscal policy that dictates how innovation-driven companies must plan their multi-year tax liabilities. This analysis explores the nuances of this limitation, the specific guidance issued by state revenue offices, and the practical application of the law through rigorous calculation and situational modeling.

Statutory Foundations of the Research Expenses Credit

The Research Expenses Credit is a central component of the South Carolina Income Tax Act, which was significantly expanded by 2000 Act No. 283 and subsequent legislative reforms intended to modernize the state’s economic incentives. The statute, codified at S.C. Code § 12-6-3415, provides that a taxpayer who claims a federal income tax credit under Internal Revenue Code (IRC) Section 41 for increasing research activities is entitled to a state-level credit.

The Federal Linkage Requirement

The eligibility for the South Carolina credit is inextricably linked to the federal R&D tax credit. Under S.C. Code § 12-6-3415(A), a taxpayer must “claim a federal income tax credit pursuant to Section 41 of the Internal Revenue Code” for the same taxable year to qualify for the state incentive. This linkage ensures that the state does not need to independently define or verify what constitutes “qualified research,” instead relying on the well-established “Four-Part Test” utilized by the Internal Revenue Service (IRS).

The Four-Part Test, as integrated into South Carolina law through the adoption of IRC § 41(b), requires that research activities meet the following criteria:

1. Permitted Purpose: The activity must relate to a new or improved business component’s function, performance, reliability, or quality.
2. Elimination of Uncertainty: The researcher must intend to discover information that would eliminate uncertainty regarding the capability, method, or design for developing or improving a product or process.
3. Process of Experimentation: Substantially all activities must constitute a process of experimentation, involving the evaluation of alternatives through modeling, simulation, or systematic trial and error.
4. Technological in Nature: The process of experimentation must fundamentally rely on principles of physical or biological science, engineering, or computer science.

By tethering state eligibility to the federal claim, the South Carolina General Assembly created a streamlined but rigorous compliance environment. If a taxpayer’s federal R&D credit is disallowed upon audit, the state credit is almost certainly subject to a parallel disallowance, as the underlying qualified research expenses (QREs) would no longer meet the statutory definition.

The Credit Rate and South Carolina Nexus

While the federal credit uses a complex “incremental” calculation based on a historical base amount, the South Carolina credit is a “first-dollar” credit. It is calculated simply as 5% of the qualified research expenses made in South Carolina during the tax year. This geographic nexus is critical; expenses incurred in other states, even if they qualify for the federal credit, are excluded from the South Carolina calculation.

Expenditure Category	Definition under IRC § 41(b) as Applied in SC	Treatment in Credit Calculation
Direct Wages	Salaries and wages paid to employees directly conducting, supervising, or supporting research.	Included at 100% of the in-state portion.
Supplies	Non-depreciable tangible property consumed during the research process, including prototypes.	Included at 100% of the in-state portion.
Contract Research	Payments to third parties for performing research on the taxpayer’s behalf.	Included at 65% of the in-state portion.
Consortium Research	Payments to qualified research consortia (e.g., universities).	Included at 75% of the in-state portion.
Computer Rental	Costs associated with leasing computers or equipment for research.	Included at 100% of the in-state portion.

Deconstructing the “Remaining Tax Liability” Limitation

The core of the user’s inquiry rests on the interpretation of S.C. Code § 12-6-3415(B)(1), which states: “The credit taken in any one taxable year pursuant to this section may not exceed fifty percent of the taxpayer’s remaining tax liability after all other credits have been applied”. This specific phrasing distinguishes the Research Expenses Credit from other South Carolina incentives that are limited to 50% of the total tax liability.

The Mechanism of “Remaining Liability”

In the context of South Carolina revenue law, “Remaining Tax Liability” is the net tax due after the application of all non-R&D credits. Most South Carolina credits can be applied in any order the taxpayer elects. However, the statutory language of the R&D credit effectively mandates that it be placed at the end of the calculation sequence.

When a credit is limited to “remaining liability,” the base for the 50% calculation shrinks with every other credit the taxpayer uses. This creates a mathematical “pincer effect” for companies with multiple incentives. For example, if a company has a New Jobs Credit and a Research Expenses Credit, and they use the New Jobs Credit first (which is limited to 50% of total liability), the “remaining liability” for the R&D credit is already cut in half before the 50% R&D limit is even applied.

Interaction with Ordering Rules

The South Carolina Department of Revenue’s Tax Incentives for Economic Development (SCTIED) guide provides crucial clarity on these ordering rules. Generally, taxpayers should use credits with the shortest carryforward periods first to avoid expiration. However, because the Research Expenses Credit is statutorily tied to the remaining liability, it cannot be moved “up” the stack to increase its utilization base.

The SCDOR guidance in the SCTIED 2025 Edition confirms that “any limitations on the total amount of liability for taxes… must be computed one credit at a time before another credit is used to reduce any remaining tax liability”. This “credit-by-credit” computation is the operational heart of the 50% limitation.

Mathematical Formulation of the Limitation

To represent the usable Research Expenses Credit ($C_{RD}$) for a given tax year, one must use the following progression:

1. Determine Initial Liability ($L_{Initial}$): Sum of income tax and corporate license fees.
2. Sum Other Credits ($C_{Other}$): Total of all other non-R&D credits taken in the year.
3. Define Remaining Liability ($L_{Rem}$): $L_{Rem} = \max(0, L_{Initial} – C_{Other})$
4. Calculate Utilization Cap ($Cap_{RD}$): $Cap_{RD} = L_{Rem} \times 0.50$
5. Final Usable Credit ($C_{RD}$): $C_{RD} = \min(Total\_Available\_RD\_Credit, Cap_{RD})$

Revenue Office Guidance and Administrative Procedures

The South Carolina Department of Revenue has issued several forms and instructions that serve as the primary source of administrative guidance for this credit.

Form TC-18: The Research Expenses Credit Schedule

Form TC-18 is the specific schedule used to calculate the credit and apply the 50% limitation. The form’s structure reinforces the “remaining liability” rule through its line-by-line progression.

Line Number	Description	Significance
Line 1	Qualified research expenses made in South Carolina	Establishes the QRE base.
Line 2	Multiply line 1 by 5%	Calculates the current year’s earned credit.
Line 3	Credit carried forward from previous years	Integrates unused credits from the 10-year window.
Line 4	Total research expenses credit before limitations	The maximum potential offset available.
Line 5	Tax liability before claiming credits	The starting gross tax liability.
Line 6	Total of all credits other than research expenses	The sum of all prior-order credits.
Line 7	Subtract line 6 from line 5	Defines “Remaining Tax Liability”.
Line 8	Multiply line 7 by 50%	Calculates the final utilization cap.
Line 9	Credit claimed this year	The lesser of Line 4 or Line 8.

Corporate License Fee Applicability

A frequent point of confusion in SCDOR guidance is the scope of taxes that the R&D credit can offset. Unlike the New Jobs Credit, which primarily targets income tax, the Research Expenses Credit is explicitly allowed against both “any tax due pursuant to this chapter” and “Section 12-20-50 [Corporate License Fees]”.

The corporate license fee in South Carolina is effectively a franchise tax, calculated at $1 for every $1,000 of paid-in capital and paid-in surplus, plus a $15 annual fee. For capital-intensive R&D firms—such as pharmaceutical manufacturers or aerospace engineers—the ability to offset this fee is a significant advantage. The 50% limitation applies to the combined remaining liability of both taxes if they are reported together.

Guidance on Pass-Through Entities

For S corporations, partnerships, and LLCs treated as partnerships, the credit is earned at the entity level but used at the partner or shareholder level. The entity must provide the owner with a South Carolina Schedule K-1 detailing their share of the credit.

The SCDOR guidance emphasizes that the 50% limitation is applied to the individual’s own tax liability. If an individual has income from multiple sources (e.g., a salary, a pass-through R&D business, and investment income), the 50% limit applies to their total South Carolina tax liability after other personal credits (like the child care credit or taxes paid to other states) are applied.

The Small Business Refundable Exception

A critical modification to the 50% limitation was introduced to support smaller, pre-revenue or low-margin technology companies. Under S.C. Code § 12-6-3415(B)(2), the 50% limitation “does not apply to a taxpayer that employs less than one hundred fifty full-time employees”.

Eligibility and Mechanics of Refundability

For taxpayers with fewer than 150 employees, the R&D credit transitions from a strictly nonrefundable credit to a partially refundable one. This is a rare feature in the South Carolina tax code, which generally favors nonrefundable carryforwards.

The rules for small business refundability are highly specific:

• Waiver of 50% Cap: These taxpayers can claim the entire earned credit in one year, potentially reducing their liability to zero without the 50% constraint.
• Refund Calculation: if the credit exceeds the taxpayer’s liability, the remaining portion is refundable.
• 75% Liability Floor: The total refunded amount “must not exceed seventy-five percent of the taxpayer’s liability”. This phrasing is somewhat contradictory in the bill text but is generally interpreted to mean the refund itself is capped relative to the size of the taxpayer’s tax footprint or that the state maintains a certain level of retained revenue.
• The $5 Million Statewide Cap: The state limits the total pool of R&D refunds to $5 million per calendar year. If the total qualifying refund requests from all small businesses exceed this amount, each taxpayer’s refund is reduced on a pro-rata basis.

Administrative Hurdles for Small Businesses

To claim the refund, small businesses must use schedules beginning with “I-” rather than “TC-” (which are for nonrefundable credits). Because of the $5 million annual cap and the pro-rata requirement, the actual cash refund may be lower than the taxpayer initially calculates. Any portion of the credit that is not refunded due to these caps is not lost; it is instead converted into a standard 10-year carryforward.

Carryforward and Multi-Year Compliance

Because the 50% limitation often prevents taxpayers from using the full amount of the credit in the year it is earned, the law provides a ten-year carryforward period.

The 10-Year Sunset

The carryforward period begins the year the qualified research expenses are made. S.C. Code § 12-6-3415(B)(1) stipulates that the credit “may not be used for a taxable year that begins on or after ten years from the date of the qualified research expenses”.

This creates a “vintage” system for tax credits. Taxpayers must track their R&D credits by the year earned to ensure they exhaust the oldest credits first. The SCDOR recommends attaching a schedule to the return that shows the year earned, the amount earned, the amount used in previous years, and the remaining balance for each vintage year.

Amending Returns and Statute of Limitations

The standard statute of limitations for a refund or credit claim in South Carolina is three years from the date the return was filed. However, the SCDOR provides an important exception for carryforward credits. A taxpayer may file an amended return for a year that is out of statute to claim a credit that can be carried forward into open years.

The calculation for these out-of-statute amendments is rigorous. The taxpayer must calculate the credit for the closed year and then reduce the carryforward amount by whatever portion could have been used in that year and all subsequent closed years. This “shadow” calculation prevents taxpayers from gaming the statute of limitations to shift credits into more favorable years without accounting for the 50% limits they would have faced in the past.

Illustrative Case Study: The “Remaining Liability” Trap

To demonstrate the profound impact of the 50% limitation on “remaining” liability, consider a comparison between two different ordering strategies for a hypothetical corporation, “Palmetto Innovation Group.”

Palmetto Innovation Group Financial Profile

• Total Tax Liability: $1,000,000
• New Jobs Credit Available: $600,000 (Subject to its own 50% of total liability limit)
• Research Expenses Credit Available: $500,000 (Subject to 50% of remaining liability limit)

Scenario A: Non-Strategic Ordering (R&D After Jobs Credit)

In this scenario, the taxpayer applies the New Jobs Credit first, as is common.

1. Initial Liability: $1,000,000.
2. Apply New Jobs Credit: The credit is limited to 50% of $1,000,000 ($500,000). The taxpayer uses $500,000 of their $600,000 Jobs credit.
3. Remaining Tax Liability: $1,000,000 – $500,000 = $500,000.
4. Calculate R&D Limit: The limit is 50% of the remaining $500,000, which is $250,000.
5. R&D Credit Used: $250,000.
6. Total Credits Used: $750,000.
7. Final Tax Bill: $250,000.
8. Carryforwards: $100,000 (Jobs) and $250,000 (R&D).

Scenario B: The Impact of “After All Other Credits”

The law for the R&D credit states it must be applied after all other credits. Thus, the result in Scenario A is not a choice, but a statutory requirement. If the taxpayer had a credit that was not limited by a percentage—such as the Conservation Credit—the outcome would be even more restrictive for the R&D credit.

Step	Component	Calculation	Balance
1	Initial Liability	–	$1,000,000
2	Conservation Credit	No limit, assume $400,000	$600,000
3	New Jobs Credit	50% of $1,000,000 cap = $500k; use $500k	$100,000
4	Remaining Liability	For R&D purposes	$100,000
5	R&D Utilization Cap	$100,000 x 50%	$50,000
6	Final Tax Due	$100,000 – $50,000	$50,000

In Scenario B, the taxpayer has a massive R&D credit ($500,000) but can only use $50,000 of it because other credits were applied first, shrinking the “remaining liability” base. This demonstrates why the phrasing of S.C. Code § 12-6-3415(B) is a significant hurdle for multi-incentive taxpayers.

Economic and Strategic Implications of the 50% Limit

The 50% limitation on remaining liability is more than a tax calculation; it is a driver of corporate behavior and state economic strategy.

Preventing Tax Erasure

The primary intent of the 50% limit is to prevent a company from utilizing multiple credits to completely eliminate their tax liability to zero, especially when those credits are for different types of activities (e.g., job creation and R&D). By forcing the R&D credit to calculate its cap based on what is left over, the state effectively ensures that a taxpayer who is aggressive with other credits will have their R&D benefit severely throttled in the current year.

Encouraging Long-Term Commitment

The 10-year carryforward period, when coupled with the 50% limit, serves as a “golden handcuff” for corporations. Since a company may generate more credits in a single high-investment year than it can use over the next three or four years due to the cap, the company is incentivized to remain in South Carolina to realize the value of those “banked” credits. If the company leaves the state, the carryforwards typically lose their value, as there is no longer a South Carolina tax liability to offset.

The Impact on Capital Intensity

Manufacturers and software developers are the primary beneficiaries of the R&D credit, but they are also the most likely to be affected by the 50% cap. These firms often have high upfront costs (which generate the credits) followed by years of fluctuating income. The 50% cap provides a “smoothing” effect on state revenues, ensuring that the state does not face a total loss of corporate tax revenue during the high-income years of a company’s product lifecycle.

Compliance and Audit Considerations

The SCDOR maintains a high level of scrutiny on Research Expenses Credits due to their complexity and the interaction with federal law.

Documentation Requirements

To sustain the credit and the 50% limitation calculation during an audit, taxpayers must maintain a “Nexus Folder” that includes:

1. Federal Form 6765: A copy of the federal R&D credit claim.
2. State-Specific QRE Breakdown: A list of every employee whose wages were included, their job titles, and the percentage of their time spent on qualifying activities in South Carolina.
3. Project Descriptions: Narrative descriptions of each research project, demonstrating how it meets the Four-Part Test.
4. Credit Ordering Worksheet: A detailed calculation showing how “Remaining Tax Liability” was derived, including a list of all other credits used and their statutory basis.

The Alltel Communications Doctrine

While not directly an R&D case, the South Carolina Supreme Court’s decision in Alltel Communications, Inc. v. South Carolina Department of Revenue (2012) underscored a crucial principle for tax credits: statutes providing for tax credits or exemptions must be strictly construed against the taxpayer. This means that the SCDOR interprets the “after all other credits” clause of § 12-6-3415(B) in the most restrictive way possible. If there is ambiguity in the order of credits, the department will typically require the order that results in the lowest R&D credit utilization.

Summary of SCDOR Form Instructions (TC-18)

For professional practitioners, the instructions for Form TC-18 provide the most immediate “how-to” guidance. The department specifies that if the credit is received from a pass-through entity, the name and Federal Employer Identification Number (FEIN) of the entity must be entered on the form. Furthermore, the instructions explicitly state: “The credit taken in any tax year may not exceed 50% of the taxpayer’s tax liability remaining after all other credits are applied”.

The department also warns that “failure to provide your Social Security Number if you are an individual taxpayer… may result in the disallowance of the credit”. These administrative details, while minor, are essential for successful credit utilization.

Final Thoughts

The “Fifty Percent (50%) of the Taxpayer’s Remaining Tax Liability” provision is the defining characteristic of the South Carolina Research Expenses Credit’s utilization phase. By requiring the R&D credit to be applied last and limiting its impact to half of the residual tax, South Carolina law creates a structured, multi-year incentive that balances corporate tax relief with state revenue stability. For large corporations, this necessitates sophisticated credit-stacking strategies and long-term carryforward management. For small businesses, the law provides a vital liquidity exception, albeit one constrained by a statewide funding cap and pro-rata distributions. In all cases, the 50% limit reinforces the state’s requirement that taxpayers maintain a physical and economic nexus to South Carolina to fully realize the benefits of their innovation. Compliance requires not only a deep understanding of IRC Section 41 but also a rigorous adherence to the SCDOR’s ordering rules and documentation standards. As the state continues to attract high-tech manufacturing and aerospace sectors, the mastery of the “remaining liability” calculation will remain a critical skill for tax directors and their advisors.

The interaction of these rules ensures that the Research Expenses Credit remains a sustainable and attractive incentive, fostering a continuous cycle of investment and development that underpins the state’s modern economy. Understanding the 50% limit is therefore not just a matter of calculation, but a fundamental requirement for navigating the South Carolina tax landscape.