Date of the Qualified Research Expenses

The date of the qualified research expenses refers to the specific point in time when an expenditure is incurred or paid under the taxpayer's accounting method for research activities conducted in South Carolina. This temporal marker serves as the statutory anchor for the ten-year carryforward limitation, after which the credit expires and can no longer be used to offset tax liabilities.

The Statutory Foundation of the South Carolina Research Expenses Credit

The South Carolina Research and Development (R&D) tax credit, formally identified as the Research Expenses Credit, is established under S.C. Code Ann. § 12-6-3415. This provision represents a significant component of the state's economic development strategy, designed to incentivize technological innovation and scientific advancement within the borders of the Palmetto State. The credit is fundamentally structured as a nonrefundable incentive available to both corporate and individual taxpayers who engage in qualifying research activities as defined by federal standards but localized to South Carolina.

The primary mechanism of the credit is a flat rate of five percent applied to "qualified research expenses" made by the taxpayer in South Carolina. This simplicity is deceptive, as the application of the credit is governed by complex rules regarding federal conformity, geographic allocation, and, most crucially, the temporal tracking of expenses for carryforward purposes. The statute explicitly links the state credit to Internal Revenue Code (IRC) Section 41, creating a system of "moving conformity" where the definitions of what constitutes a qualified expense evolve in tandem with federal tax law, while the state maintains its own rules for credit utilization and expiration.

The legislative history of § 12-6-3415 reflects a steady commitment to the R&D incentive while refining its administrative boundaries. Originally added by 2000 Act No. 283, the credit became effective for taxable years beginning after June 30, 2001. Subsequent amendments in 2003 (Act No. 69) and 2007 (Act Nos. 110 and 116) further clarified the scope of the credit and aligned its terminology with evolving federal standards.

One of the most significant refinements in the 2003 amendment was the transition from the phrase "qualified expenditures for research and development" to "qualified research expenses," ensuring a more precise mirror of the federal terminology used in IRC § 41(b). This linguistic shift was not merely cosmetic; it reinforced the requirement that taxpayers must strictly adhere to federal definitions to sustain a claim at the state level. The 2007 amendments expanded the credit's applicability to various tax types, ensuring that the incentive reached a broader range of business structures, including pass-through entities where the credit is claimed at the individual level.

Detailed Analysis of the "Date of the Qualified Research Expenses"

The specific phrase "date of the qualified research expenses" is the most critical technical element in the South Carolina R&D credit statute regarding the longevity of the tax benefit. Under § 12-6-3415(B), any unused credit may be carried forward, but it is explicitly stated that "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".

In the absence of a specific regulatory definition of "date" within the South Carolina Income Tax Act for R&D purposes, the term must be interpreted through the lens of general tax accounting principles and South Carolina Department of Revenue (SCDOR) guidance. The "date" is generally understood to be the date on which the expense is incurred for an accrual-basis taxpayer or the date it is paid for a cash-basis taxpayer, consistent with how these expenses are reported for federal income tax purposes under IRC § 41.

Because research activities are typically continuous, the "date" effectively represents the specific tax year in which the expenses were generated. However, the statutory use of "date" rather than "taxable year in which the credit was earned" (a common phrase in other South Carolina credit statutes) suggests a higher degree of granularity is required in tracking. For a calendar-year taxpayer, all expenses incurred between January 1 and December 31 of a given year are considered to have a "date" within that year for purposes of the ten-year clock.

The expiration of the carryforward is governed by the start date of the future taxable year. The statute creates a "cliff" based on whether a new taxable year begins on or after the ten-year anniversary of the expense. This requires a rigorous "vintage-year" tracking system where each year's credit is isolated and monitored for its respective expiration date.

Mathematically, if D is the date of the research expense, and T is the beginning date of the taxable year in which the taxpayer wishes to use the carryforward, the credit is only available if:

T < D + 10 years

If T ≥ D + 10 years, the credit has expired. For a calendar year taxpayer who incurs expenses in 2024, the ten-year anniversary is in 2034. The credit remains usable for any taxable year that begins before January 1, 2035. Therefore, the 2034 tax year is the final year of eligibility, effectively providing an eleven-year window if the generation year is included in the count.

The temporal application of the R&D credit is distinct from other major South Carolina incentives, which often use different triggers for their carryforward periods. For instance, the Jobs Tax Credit (§ 12-6-3360) provides a 15-year carryforward from the "year earned," a significantly longer period that is simpler to track because it is tied to the tax year rather than a specific date. Similarly, the Corporate Headquarters Credit (§ 12-6-3410) generally allows a 10-year carryforward but includes provisions where the carryforward period is not extended for any year in which the taxpayer fails to meet certain employment requirements.

The R&D credit's use of "date" is most similar to the Investment Tax Credit (§ 12-14-60), which also utilizes a 10-year carryforward. However, as clarified in recent litigation, these credits are often applied as annual caps rather than lifetime caps, further emphasizing the need for precise year-by-year documentation.

South Carolina Department of Revenue Guidance and Administrative Application

The SCDOR provides guidance through forms, instructions, policy manuals, and revenue rulings. This administrative framework dictates how the broad language of the law is applied to the specific facts of a taxpayer's return.

The primary administrative tool for the R&D credit is Schedule TC-18, "Research Expenses Credit." The instructions for this form clarify that a taxpayer must first be claiming the federal R&D credit under IRC § 41 to qualify for the state credit. The form requires the taxpayer to report "qualified research expenses made in South Carolina" and provides a step-by-step calculation to determine the usable portion of the credit for the current year.

Line-by-Line Logics for Temporal Tracking:

• Line 1: Captures the current year's SC QREs. This establishes a new "vintage" of credit with its own ten-year expiration clock.
• Line 3: Requires the taxpayer to enter credit carried forward from previous years and attach a schedule. This attached schedule is where the taxpayer must substantiate the "date of the qualified research expenses" for each prior year to prove they have not expired.
• Line 10: Calculates the unused credit to be carried forward to the following year. This amount must be added to the internal tracking schedule, noting its origin date.

SCDOR Revenue Ruling #08-3 provides an advisory opinion on "Research and Development Machines". While primarily a sales and use tax ruling, it establishes the Department's perspective on what constitutes research "in the experimental or laboratory sense" and highlights the requirement that such activities must be for the development of "new products, new uses for existing products, or improvement of existing products". This reinforces the idea that the "date" of an expense must be associated with active, qualified experimentation as opposed to routine testing or administrative support.

SCDOR Regulation 117-201 stipulates that any person liable for tax must keep books and records sufficient to establish their right to any credit claimed. In the context of the R&D credit, this means maintaining:

1. Payroll Records: Documentation showing that wages were paid to employees for time spent on qualified research within South Carolina.
2. Invoices and Receipts: Records for supplies that include the "invoice date" and evidence that the materials were used in South Carolina.
3. Contract Agreements: Evidence of research performed by third parties, with payments tracked to verify the 65% qualification rule.

The "invoice date" is often the primary piece of evidence used by auditors to verify the "date of the qualified research expenses" and ensure the credit has not expired.

Federal Conformity and Geographic Allocation

South Carolina is a "conformity state," meaning it adopts large portions of the Internal Revenue Code to ensure consistency and ease of administration. For the R&D credit, § 12-6-3415(A) explicitly states that "qualified research expenses has the same meaning as provided for in Section 41 of the Internal Revenue Code".

While South Carolina adopts the federal definitions of expenses, it imposes a strict geographic limitation. Only expenses "made in South Carolina" qualify for the 5% credit. This creates a two-step verification process for every expense:

1. Federal Test: Does the expense qualify under the IRC § 41 four-part test?
2. State Test: Was the activity conducted, and the expense incurred, within South Carolina?

For multi-state corporations, this requires a detailed allocation of R&D wages. If a lead engineer spends 40% of their time at a facility in Rock Hill, SC, and 60% at a facility in Charlotte, NC, only 40% of their qualifying wages can be included in the South Carolina credit calculation, regardless of the company's total federal R&D claim.

Because South Carolina conforms to IRC § 41, changes at the federal level can automatically affect the state credit unless the South Carolina General Assembly chooses to "decouple" from specific provisions. A significant recent example is the requirement under the Tax Cuts and Jobs Act (TCJA) to amortize R&D expenses under IRC § 174 rather than deducting them immediately. While this primarily affects the deduction of expenses, it also influences the calculation of the credit because the definition of QREs remains tied to these federal standards.

Utilization Constraints and the 50% Liability Limitation

The South Carolina R&D credit is not just limited by its generation but also by its utilization. Under § 12-6-3415(B), the credit taken in any one taxable year cannot exceed fifty percent of the taxpayer's remaining tax liability after all other credits have been applied.

The R&D credit is positioned as one of the last credits to be used in the South Carolina tax hierarchy. This is because it is limited to 50% of the remaining liability. This ordering is crucial for tax planning, as it often forces a portion of the R&D credit into carryforward years even when a taxpayer has significant tax liability.

Hierarchy of Credit Application (Simplified):

1. Non-limited Credits: Credits that can offset 100% of liability (e.g., certain Conservation Credits).
2. Primary Limited Credits: Credits limited by a percentage of total liability (e.g., Jobs Tax Credit limited to 50%).
3. The R&D Credit: Limited to 50% of whatever liability is left after steps 1 and 2.

To determine the allowable R&D credit for a given year, the taxpayer must perform the following calculation:

Allowed Credit = min(Total Available Credit, 0.50 * (Total Tax Liability - Other Credits))

This formula ensures that the taxpayer always pays at least 50% of their "post-other-credit" liability, preventing the R&D credit from ever completely eliminating a tax bill in a single year.

Comprehensive Example: Multi-Year Credit Lifecycle

To illustrate the meaning of the "date of the qualified research expenses" and its application to the 10-year carryforward and 50% limit, consider the following scenario for a South Carolina-based aerospace components manufacturer.

The company incurs $1,000,000 in SC QREs.

• Current Credit Earned: $1,000,000 * 0.05 = $50,000.
• Tax Liability: $60,000.
• Other Credits: $20,000 (e.g., Jobs Tax Credit).
• Remaining Liability for R&D: $60,000 - $20,000 = $40,000.
• 50% Limitation: $40,000 * 0.50 = $20,000.
• Credit Used: $20,000.
• Carryforward: $50,000 - $20,000 = $30,000.

Note: This $30,000 has an origin "date" in 2024 and will expire for any tax year beginning on or after January 1, 2035.

The company has zero QREs in these years but maintains its $30,000 carryforward from 2024. Each year, it files Schedule TC-18 showing the $30,000 carryover.

The company has $100,000 in tax liability and $0 in other credits.

• Available Credit: $30,000 (from 2024).
• 50% Limitation: $100,000 * 0.50 = $50,000.
• Credit Used: $30,000 (since $30,000 < $50,000).
• Remaining Credit: $0.

The credit was successfully used before its expiration at the start of the 2035 tax year.

If the company had not used the $30,000 in 2033, this would be its final year of eligibility. Under the statute, a taxable year beginning January 1, 2035, would be "on or after ten years from the date" of the 2024 expenses (December 31, 2024 + 10 years = December 31, 2034). Therefore, the credit would become void on January 1, 2035.

Judicial Interpretation and Philosophical Underpinnings

The South Carolina courts have shown a willingness to strictly interpret tax statutes based on their "plain language," even when that interpretation conflicts with long-standing SCDOR policy.

In Duke Energy Corp. v. S.C. Dep't of Rev. (2025), the South Carolina Court of Appeals addressed a dispute over the Investment Tax Credit's $5 million limitation. The Department had interpreted this as a lifetime cap, but the court ruled it was an annual cap because the statute allowed the credit for "any taxable year".

This ruling has profound implications for the R&D credit. Because § 12-6-3415(B) uses the specific phrase "date of the qualified research expenses" to define the expiration, courts are likely to interpret this literally. If an expense occurred on a specific date, the ten-year clock is absolute. There is no provision in the law for the "tolling" or "extension" of this period, even in years where the taxpayer cannot use the credit due to the 50% liability limit.

South Carolina tax law generally holds that failure to meet a requirement in a specific year does not necessarily permanently disqualify a taxpayer from future benefits, but the clock continues to run. For example, in the Headquarters Credit, if a taxpayer fails to maintain jobs, they cannot claim the credit that year, but the carryforward period continues to run. This principle applies equally to the R&D credit: the 10-year period from the "date of the qualified research expenses" is an unrelenting timeline that is not paused by a taxpayer's lack of profitability or high use of other credits.

Record-Keeping and Audit Defense Strategies

Given the SCDOR's mandate to verify the "date" and "location" of expenses, taxpayers must adopt a defensive posture in their record-keeping.

An auditor's primary goal in an R&D credit review is to break the "nexus" between the expense and the state of South Carolina. To defend against this, businesses should maintain:

• Project Lists: Detailed descriptions of research projects conducted at South Carolina sites.
• Employee Location Data: Evidence that employees receiving qualified wages were physically present in South Carolina (e.g., office swipe-card data or localized IP addresses for remote workers).
• Supply Tracking: Shipping manifests showing that supplies were delivered to a South Carolina laboratory or manufacturing plant.

Taxpayers should maintain a "Credit Continuity Schedule" that functions as a sub-ledger to their tax return. This schedule should track each year's credit generation, the amount used in each subsequent year, and the calculated expiration date.

Example Credit Continuity Schedule:

Legislative Proposals and the Future of the R&D Credit

The South Carolina legislature continues to evaluate the effectiveness of the R&D credit as a tool for economic growth. Several bills have been proposed to alter the credit's mechanics.

Recognizing that many R&D-heavy startups have zero tax liability in their early years, Bill H 3592 proposed making the credit refundable for businesses with fewer than 150 employees. If enacted, this would radically change the importance of the "date of the qualified research expenses." Instead of being a carryforward anchor, the date would become a trigger for a cash refund, drastically increasing the incentive's immediate value for early-stage companies.

There are also efforts to create "super-credits" for specific technologies. For example, Bill H 3593 sought to create a 40% credit for solar liquid fuel research, a massive increase from the standard 5% rate. This proposal retained the 10-year carryforward from the "date of the qualified research expenses," further cementing this temporal rule as the state's standard for innovation incentives.

Summary of Regulatory Compliance and Best Practices

To ensure full compliance with the South Carolina R&D tax credit law and SCDOR guidance, taxpayers should adhere to a rigorous process of documentation and calculation.

1. Confirm Federal Status: Verify that an IRC § 41 credit is being claimed for the same taxable year.
2. Isolate SC QREs: Filter all federal expenses to exclude those not incurred in South Carolina.
3. Apply the 5% Rate: Calculate the gross credit based on the current year's SC QREs.
4. Perform Ordering Rule Check: Determine the remaining tax liability after all other credits have been applied.
5. Calculate the 50% Cap: Apply the 50% limit to the remaining liability.
6. Document the "Date": Create a permanent record of the expense date to track the 10-year carryforward.
7. File TC-18: Accurately complete the state form and attach required schedules.

The "date of the qualified research expenses" is more than a administrative footnote; it is a statutory boundary that defines the lifecycle of the state's most powerful innovation incentive. By understanding its meaning in the context of S.C. Code § 12-6-3415 and the surrounding SCDOR guidance, taxpayers can effectively manage their innovation investments and maximize their long-term tax savings in South Carolina.