Refunded Amount (Maximum 75% of Taxpayer’s Liability)

The South Carolina Research and Development tax credit provides a non-refundable 5% offset against income tax or license fees for qualified in-state research expenses, generally capped at 50% of the taxpayer’s remaining liability. While the core credit is non-refundable, the “Refunded Amount” nomenclature typically refers to Job Development Credits utilized by research facilities to recoup employee withholding, or specific 75% limitation thresholds found in concurrent state incentive programs.

The Statutory Foundation and Legislative Intent of Section 12-6-3415

The South Carolina Research and Development (R&D) tax credit is established under South Carolina Code Section 12-6-3415, a provision designed to stimulate high-technology investment and intellectual property development within the state. This statute aligns South Carolina’s tax policy with federal incentives by leveraging the definitions and frameworks provided in Section 41 of the Internal Revenue Code (IRC). The legislative history suggests that the state sought to create a competitive environment for manufacturers and technology firms by offering a “flat” credit based on the total volume of research activity conducted within South Carolina borders, rather than the incremental “base-period” model used at the federal level.

Under Section 12-6-3415(A), a taxpayer who claims a federal income tax credit for increasing research activities is permitted a credit against any tax due under the South Carolina Income Tax Act or the corporate license fee requirements of Section 12-20-50. The credit amount is precisely 5% of the taxpayer’s qualified research expenses (QREs) made in South Carolina. The dependency on the federal credit is a mandatory prerequisite; a taxpayer must successfully elect and claim the IRC Section 41 credit for the same taxable year to qualify for the state-level incentive. This structural link ensures that only activities meeting the rigorous federal definition of “qualified research” are eligible for state benefits.

The Definition of Qualified Research Expenses (QREs)

The state’s reliance on IRC Section 41(b) means that the types of expenditures qualifying for the 5% credit are standardized across federal and state jurisdictions, though South Carolina applies a geographic nexus requirement. To calculate the South Carolina credit, a business must isolate the costs incurred for research performed specifically within the state. These costs generally fall into four categories: qualified wages, research supplies, contract research, and computer rental or leasing costs.

The “includable percentage” for research consortia—75%—is a statutory figure defined in the federal code and adopted by South Carolina. This specific percentage represents the portion of a payment to a non-profit research group that can be counted as a QRE. This should be distinguished from the “Maximum 75% of Taxpayer’s Liability” phrasing, which pertains to how much of an earned credit can be applied against a tax bill in certain alternative programs.

Decoding the Liability Limitations: 50% vs. 75%

A primary point of interest for corporate tax planners is the limitation on the use of the R&D credit. Section 12-6-3415(B) explicitly states that the credit taken in any one taxable year may not exceed 50% of the taxpayer’s remaining tax liability after all other credits have been applied. This “50% cap” acts as a ceiling, preventing the credit from entirely wiping out a company’s tax obligation to the state.

The interaction of this 50% limit with other credits is governed by the South Carolina Department of Revenue (SCDOR) ordering rules. Because the R&D credit is specifically limited to the “remaining liability” after all other credits, it is effectively the last credit applied in the tax calculation sequence. This positioning can be disadvantageous for companies with multiple competing credits, as the 50% limitation is applied to a smaller and smaller tax base as other credits are deducted first.

The Origin of the 75% Limitation Phrasing

While the standard R&D tax credit is capped at 50% of liability, the reference to a “Maximum 75% of Taxpayer’s Liability” suggests a potential intersection with other South Carolina incentives or a cross-state conflation. Detailed examination of SCDOR guidance and current legislative enactments reveals three primary contexts where a 75% threshold is applicable.

First, the Exceptional SC credit (Educational Credit for Exceptional Needs Children) was modified starting in the tax year 2021. For this program, the total credit taken can now reach up to 75% of the taxpayer’s liability, an increase from the previous 60% limit. While this is an income tax credit like the R&D incentive, its purpose is social rather than economic development.

Second, the South Carolina Abandoned Retail Facility Revitalization Act provides a property tax credit. Under this Act, a taxpayer who redevelops an eligible site may receive a credit that can be taken against up to 75% of the real property taxes due on that site each year. This 75% limit is specifically tied to property tax, not income tax, but it represents a high-water mark for state tax relief mechanisms.

Third, there is a prominent 75% refundability feature in the Arizona R&D tax credit system (A.R.S. § 41-1507). In Arizona, small businesses with fewer than 150 employees may apply for a partial refund of 75% of the “excess” (unused) credit amount, provided they receive certification from the state’s commerce authority. Given that the South Carolina R&D credit is fundamentally non-refundable, it is possible that multi-state taxpayers associate the 75% refundability of the Arizona model with the R&D context in South Carolina.

Refundability and the Job Development Credit (JDC) Program

The phrase “Refunded Amount” carries a very specific weight in South Carolina economic development. For most taxpayers, the R&D credit is a non-refundable “book entry” that offsets liability or creates a carryforward. However, businesses that operate research and development facilities as “qualifying facilities” can participate in the Enterprise Zone Act programs, specifically the Job Development Credit (JDC).

Unlike a standard tax credit, the JDC is a discretionary incentive provided through the Coordinating Council for Economic Development. It allows a company to receive a cash refund of a portion of the state employee withholding taxes it collects and remits to the SCDOR. These refunds are used to reimburse the company for eligible capital expenditures, such as infrastructure, land, and building costs. Because R&D facilities are explicitly defined as qualifying facilities under this program, a company conducting research in South Carolina may effectively receive “refunded amounts” through this parallel mechanism.

The JDC refund is subject to its own set of limitations and performance requirements. If a company’s job creation falls below 80% of its target, or if the average wage falls below established thresholds, the “refunded amount” may be eliminated, and the company may be terminated from the program. This highlights that while the R&D tax credit (the 5% incentive) is an “as-of-right” benefit with a 50% liability limit, the actual “refunded cash” for R&D facilities comes through negotiated agreements under the JDC framework.

Department of Revenue Guidance and Administrative Compliance

The South Carolina Department of Revenue provides the primary guidance for claiming the R&D credit through its form instructions and advisory opinions. The central administrative document is Form SC Schedule TC-18, “Research Expenses Credit.”

Procedural Requirements for Form TC-18

Form TC-18 acts as the computational worksheet and historical record for the credit. Taxpayers must provide the name and Federal Employer Identification Number (FEIN) of the entity conducting the research, which is especially important for pass-through entities like partnerships or S-corporations where the credit is generated at the entity level but claimed by individual owners. The SCDOR instructions emphasize that the credit taken in any year may not exceed 50% of the tax liability remaining after all other credits are applied.

If the amount on Line 4 exceeds the amount on Line 8, the taxpayer has a “credit carry-over.” Section 12-6-3415(B) provides that any unused credit may be carried forward to the immediately succeeding taxable years for a period of up to ten years from the date the original expenses were incurred. After ten years, any unused portion of the credit is permanently lost.

Revenue Ruling 08-3: The Sales and Use Tax Interaction

One of the most significant pieces of SCDOR guidance for R&D companies is Revenue Ruling 08-3, which addresses the “Research and Development Machines” exemption from sales and use tax. While distinct from the income tax credit, it is a vital component of the overall “R&D context” in South Carolina.

Section 12-36-2120(56) exempts the sale of machines used directly and primarily in research and development from sales and use tax. Revenue Ruling 08-3 clarifies that “primarily” means that more than 50% of the machine’s total use must be for research. If a machine is used for both qualifying research and non-qualifying activities (such as administrative tasks, teaching, or general manufacturing), the taxpayer must maintain records proving the 50% research threshold is met. This “more than 50% usage” rule in the sales tax realm is frequently discussed alongside the “50% liability limit” in the income tax realm, occasionally leading to confusion regarding the specific percentage limits applicable to each tax type.

Qualified Research Activities: The Four-Part Test

Because South Carolina incorporates IRC Section 41 by reference, the determination of what constitutes “research” is governed by federal regulations. The SCDOR and state-level tax consultants rely on the “Four-Part Test” to validate research activities during audits.

The Permitted Purpose Test

The activity must be intended to develop a new or improved business component. A business component is defined as any product, process, software, technique, formula, or invention that the taxpayer intends to hold for sale, lease, or use in its trade or business. The improvement must relate to functionality, performance, reliability, or quality. Activities intended purely for aesthetic or cosmetic improvements do not qualify.

The Elimination of Uncertainty Test

The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing the component, or the appropriate design of the component.

The Technological in Nature Test

The process of eliminating the uncertainty must fundamentally rely on the principles of physical science, biological science, engineering, or computer science. Research in the social sciences, arts, or humanities is expressly excluded from the credit.

The Process of Experimentation Test

The taxpayer must engage in a process of experimentation to resolve the uncertainty. This involves the evaluation of alternatives through testing, modeling, simulating, or a systematic trial-and-error methodology. If a solution is known from the outset, the activity does not qualify as research.

Example of Credit Calculation and Limitation Application

To illustrate the interplay between qualified expenses, the 5% credit rate, and the 50% liability limitation, consider a hypothetical scenario involving “Palmetto Tech Solutions,” a C-Corporation operating in Charleston, South Carolina.

Identifying and Categorizing QREs

In the current tax year, Palmetto Tech Solutions incurs the following costs related to the development of a new industrial drone propulsion system. All activities occur at their Charleston lab.

• In-house Research Wages: $800,000 paid to aerospace engineers.
• Research Supplies: $200,000 for specialized composite materials and prototype parts.
• Contract Research: $100,000 paid to a third-party testing facility.
• University Research Consortium: $50,000 paid to a South Carolina university for foundational fluid dynamics research.

First, we must calculate the total South Carolina QREs based on the statutory inclusion rates:

SC QREs = $800,000 (Wages) + $200,000 (Supplies) + ($100,000 x 0.65) (Contract) + ($50,000 x 0.75) (Consortium)

SC QREs = $800,000 + $200,000 + $65,000 + $37,500 = $1,102,500

Calculating the Gross Credit Amount

The South Carolina R&D credit is 5% of the QREs:

Gross R&D Credit = $1,102,500 x 0.05 = $55,125

Additionally, Palmetto Tech Solutions has an unused R&D credit carryforward from the previous year of $15,000.

Total Available Credit = $55,125 + $15,000 = $70,125

Applying the Liability Limitations

For the current year, Palmetto Tech Solutions has a South Carolina corporate income tax liability of $120,000. However, they are also claiming a New Jobs Credit of $40,000. Following the SCDOR ordering rules, we must determine the “remaining liability” before applying the R&D credit.

Remaining Liability = $120,000 (Gross Liability) – $40,000 (New Jobs Credit) = $80,000

The R&D credit is capped at 50% of this remaining liability:

Maximum Allowable R&D Credit = $80,000 x 0.50 = $40,000

Final Tax Impact and Carryforward

Palmetto Tech Solutions uses $40,000 of their $70,125 available credit to reduce their tax bill.

• Final Tax Due: $80,000 – $40,000 = $40,000
• Unused Credit (Carryforward): $70,125 – $40,000 = $30,125

The $30,125 carryforward can be used in the subsequent year, subject to the same 50% limit in that year. There is no “refunded amount” for the unused $30,125; Palmetto Tech Solutions simply maintains it as a deferred tax asset for future use.

Strategic Implications of the South Carolina R&D Credit

The South Carolina R&D tax credit is a cornerstone of the state’s economic strategy, particularly for the manufacturing, aerospace, and life sciences sectors. Unlike many other states that use an “incremental” model (where you only get credit for spending more than a historical average), South Carolina rewards the total volume of research spending. This is particularly beneficial for established companies with high, consistent research budgets that might not qualify for incremental credits at the federal level.

Comparison with Federal Incremental Methods

At the federal level, companies typically choose between the Regular Research Credit (RRC) and the Alternative Simplified Credit (ASC). Both methods require comparing current year QREs to a base period. South Carolina’s 5% flat rate ignores these complexities. If a company spends $1 million on research every year, they may get zero federal credit (because they aren’t “increasing” their spending), but they will reliably get a $50,000 South Carolina credit every year, subject to the 50% liability cap.

Interaction with the Corporate License Fee

One of the unique features of the South Carolina R&D credit is its applicability to the corporate license fee. Most state R&D credits only offset income tax. In South Carolina, if a company has zero income tax liability (due to net operating losses or other deductions), they can still use the R&D credit to offset up to 50% of their corporate license fee. The license fee is essentially a tax on the company’s capital and surplus, and for large capital-intensive manufacturers, this can represent a significant annual savings.

Audit and Documentation Best Practices

The SCDOR maintains the right to audit R&D credit claims within the standard three-year statute of limitations. However, because the R&D credit is often carried forward, the “audit window” can effectively stay open for the validity of the credit’s generation year. Companies should maintain a “Contemporaneous Documentation” file that includes:

• Project Lists: A comprehensive list of all research projects active during the tax year.
• Technical Descriptions: Narrative descriptions for each project explaining how it meets the Four-Part Test.
• Time Tracking: Records showing the percentage of time each employee spent on qualified research activities.
• General Ledger Detail: Invoices and supply receipts categorized by research project.
• Federal Forms: Copies of the filed IRS Form 6765, as the state credit is contingent upon the federal claim.

Future Outlook and Policy Trends

The South Carolina tax landscape is subject to periodic review and reform. Reports from the Tax Foundation and the South Carolina Taxation Realignment Commission have noted that while the state has a low corporate income tax rate (5%), the “base” is heavily carved out by credits like the R&D incentive.

There is an ongoing debate among policymakers regarding the shift from non-refundable credits to “refundable” incentives for high-growth startups. While South Carolina currently uses the Job Development Credit (JDC) as its primary “refund” mechanism for research facilities, there is pressure to adopt small-business-specific R&D refunds similar to those in Arizona or the federal government. The current system benefits large, profitable corporations that have the liability to offset, but it can leave young, pre-revenue biotech or software companies with millions in carryforwards they cannot use.

The Role of Exceptional SC and Revitalization Limits

The 75% limitation seen in programs like Exceptional SC or the Abandoned Retail Facility Revitalization Act may signal a future trend where the state allows for deeper offsets of liability for specific high-priority investments. If South Carolina were to increase the R&D credit limitation from 50% to 75%, it would bring the state closer to jurisdictions like Virginia or Maryland that allow for more aggressive utilization of R&D assets.

Final Thoughts

The South Carolina Research and Development tax credit remains a vital, albeit limited, incentive for in-state innovation. The standard 5% credit rate on total qualified research expenditures provides a straightforward benefit to a wide range of industries, from automotive manufacturing to software development. While the credit is capped at 50% of the taxpayer’s remaining liability and is fundamentally non-refundable, the broader economic development context in South Carolina offers alternative “refund” paths through the Job Development Credit program for facilities that meet job and wage targets.

Taxpayers should be wary of conflating the R&D credit with other programs that utilize a 75% limitation threshold, such as the Exceptional SC donation credit or the property tax revitalization credit. Accurate reporting on Form TC-18, adherence to federal IRC Section 41 definitions, and rigorous documentation of the “Four-Part Test” are essential for ensuring that credits are sustained upon SCDOR review. As South Carolina continues to evolve its tax code, the interplay between these non-refundable offsets and the cash-flow requirements of high-tech firms will remain a central theme in the state’s economic development narrative.