S.C. Code Ann. § 12-6-3415

S.C. Code Ann. § 12-6-3415 provides a nonrefundable tax credit equal to five percent of a taxpayer's qualified research expenditures made within South Carolina, provided a federal research credit is also claimed. This incentive allows businesses to offset up to fifty percent of their state income tax or corporate license fee liability, with a ten-year window to carry forward any unused credits.

The statutory framework established by S.C. Code Ann. § 12-6-3415 represents a fundamental pillar of the state’s economic development strategy, specifically targeted at fostering high-growth, technology-intensive industries. By aligning state incentives with federal standards under Internal Revenue Code Section 41, South Carolina creates a streamlined pathway for innovative firms to reduce their tax burden while anchoring high-value research activities within the state’s borders. The legal mechanics of this credit require a sophisticated understanding of both federal definitions and unique South Carolina administrative constraints, particularly regarding geographic nexus, credit ordering, and liability caps. As the global economy shifts toward knowledge-based production, the role of § 12-6-3415 has transitioned from a mere corporate benefit to a critical strategic lever for state-level industrial policy, directly influencing capital allocation and technical workforce development across the Palmetto State.

Historical Evolution and Legislative Intent

The South Carolina Research and Development (R&D) Tax Credit was not born in a vacuum but evolved as part of a concerted legislative effort to modernize the state's tax code and transition its economic base from traditional textiles and agriculture toward advanced manufacturing and software development. The formal codification of § 12-6-3415 followed the "South Carolina Income Tax Act" of 1995, which reorganized the state’s taxation of corporate and individual income to provide greater clarity and predictability.

The specific credit for research activities gained prominence through 2000 Act No. 283, which significantly expanded the types of businesses eligible for job and investment credits, including R&D facilities. This was further refined by the Research and Development Tax Credit Reform Act of 2007 (Acts 110 and 116), which ensured that the credit would apply not only to corporate income tax but also to corporate license fees, thereby providing a benefit even to companies in early stages of development that might lack immediate profitability but still face significant franchise-style fees.

The legislative intent behind these amendments was clearly articulated in the accompanying bills: to promote "technology intensive facilities" and to incentivize the "increasing of research activities" as defined by federal standards. By adopting federal definitions, the South Carolina General Assembly sought to reduce the administrative burden on both the taxpayer and the South Carolina Department of Revenue (SCDOR), ensuring that a single set of books—those prepared for federal IRC § 41 compliance—could serve as the basis for the state-level claim. This commitment to federal conformity is a hallmark of South Carolina’s tax policy, as seen in § 12-6-40, which generally adopts the Internal Revenue Code as amended through the end of the preceding year.

The Federal Foundation: Interplay with IRC Section 41

To understand the meaning of § 12-6-3415, one must fundamentally master IRC § 41, as the state statute explicitly incorporates the federal definitions of "qualified research expenses." The South Carolina credit is predicated on the taxpayer claiming a federal credit for the same taxable year. This creates a mandatory nexus: if an activity does not qualify for the federal R&D credit, it is, by definition, disqualified from the South Carolina credit.

The federal "Four-Part Test" is thus effectively imported into South Carolina law. For an activity to generate expenses qualifying for the credit under § 12-6-3415, it must meet the following criteria as established in federal jurisprudence and Treasury regulations:

1. Section 174 Test (Permissible Purpose): The expenditures must be eligible for treatment as research and experimental expenditures under IRC § 174. This means the costs must be incurred in connection with the taxpayer's trade or business and represent R&D costs in the experimental or laboratory sense.

2. Technological in Nature: The research must be performed to discover information that is technological in nature. This requires the process to rely on principles of the physical or biological sciences, engineering, or computer science.

3. Process of Experimentation: Substantially all of the activities must constitute a process of experimentation. This involves the identification of a design or performance objective, the identification of uncertainty, and a systematic method for evaluating alternatives to eliminate that uncertainty.

4. Business Component: The research must be intended to discover information that would eliminate uncertainty concerning the development or improvement of a "business component." A business component is defined as any product, process, computer software, technique, formula, or invention to be held for sale, lease, or license, or used by the taxpayer in its trade or business.

While South Carolina adopts these definitions, it diverges significantly in the calculation of the credit amount. Whereas the federal credit typically calculates the benefit based on an increase in R&D spending over a historical base period (using either the Regular Research Credit method or the Alternative Simplified Credit), the South Carolina credit is a flat percentage of total qualified research expenses made within the state during the tax year. This distinction is critical for taxpayers: it makes the South Carolina credit significantly more predictable and easier to calculate than its federal counterpart.

Defining "Qualified Research Expenses" in the South Carolina Context

Section 12-6-3415(A) limits the 5% credit to qualified research expenses "made in South Carolina." The interpretation of what constitutes an expense "made" in the state is a primary area of focus for the SCDOR and necessitates a detailed breakdown of the four categories of QREs allowed under federal law, but restricted by state geography.

Qualified Wages

Wages represent the most significant portion of most R&D claims. Under the South Carolina statute, these are wages paid to employees for "qualified services" performed within the physical boundaries of the state. This includes:

• Direct Research: Engineers, scientists, and developers physically working on the R&D project in South Carolina labs or offices.
• Direct Supervision: Managers who are physically present in the state to oversee the R&D personnel.
• Direct Support: Personnel providing immediate assistance to researchers, such as lab technicians or machinists creating prototypes, provided their work is performed in-state.

The SCDOR applies the federal "substantially all" rule (the 80% rule). If an employee spends at least 80% of their time on qualified R&D services in South Carolina, 100% of their wages may be included in the SC QRE calculation. Conversely, if an employee works remotely from another state for 50% of the time, only the wages attributable to the days they were physically working in South Carolina can be counted.

Qualified Supplies

Supplies include tangible property, other than land or improvements to real property and other than depreciable property, that is used in the conduct of qualified research. To be "made in South Carolina," the supplies must generally be consumed or utilized in an R&D project conducted at a South Carolina facility. This often includes materials used in the construction of prototypes or testing models.

Contract Research Expenses

Taxpayers may include 65% of the amount paid to any person (other than an employee of the taxpayer) for qualified research performed on the taxpayer's behalf. For South Carolina purposes, the key requirement is that the third-party contractor must perform the research within South Carolina. If a South Carolina firm hires an engineering firm in California to design a component, those expenses do not qualify for the § 12-6-3415 credit, even though they might qualify for the federal credit.

However, if the research is conducted by a "qualified research consortium," the allowable percentage of the expense increases from 65% to 75%. A qualified research consortium is typically a non-profit scientific research organization (such as a university-affiliated lab) that is exempt from taxation under IRC § 501(c)(3) or 501(c)(6) and is organized and operated primarily to conduct scientific research.

Computer Rental and Leasing Costs

Amounts paid for the right to use computers to conduct qualified research are eligible. In the modern cloud computing environment, this often applies to server time or specialized software-as-a-service (SaaS) platforms used for modeling. For South Carolina eligibility, the taxpayer must demonstrate that the R&D activity utilizing these computer resources was conducted by personnel in South Carolina.

QRE Category	Inclusion Rate	SC Requirement	Federal Basis
Wages	100% (of qualified)	Physical presence of employee in SC	IRC § 41(b)(2)
Supplies	100%	Consumed in R&D project in SC	IRC § 41(b)(2)
Contract Research	65%	Research must be performed in SC	IRC § 41(b)(3)
Consortium Research	75%	Research must be performed in SC	IRC § 41(b)(3)
Computer Lease	100%	Used by personnel located in SC	IRC § 41(b)(2)

Administrative Guidance: The South Carolina Department of Revenue (SCDOR)

The SCDOR provides the primary administrative oversight for the R&D credit, issuing guidance through three main channels: the South Carolina Tax Incentives for Economic Development (SCTIED) manual, various Revenue Rulings, and the instructions for Form SC Schedule TC-18. These documents clarify the practical application of the law and establish the standards for compliance.

The SCTIED Manual and Economic Policy

The SCTIED 2025 Edition serves as the definitive reference for all state-level tax incentives. Under Chapter 2, Part H, the manual outlines the Research Expenses Credit, reiterating the 5% rate and the 50% liability limitation. The manual is critical because it contextualizes the R&D credit within the broader hierarchy of South Carolina’s tax structure.

The SCDOR manual emphasizes that while the credit is broad, it is nonrefundable. This means the credit can only reduce a taxpayer's liability to zero; it cannot result in a check from the state treasury to the taxpayer. This policy reflects a conservative fiscal approach, ensuring that tax incentives are tied directly to the presence of taxable economic activity rather than acting as a direct grant program.

Revenue Ruling #08-3: Machines and Direct Use

While § 12-6-3415 governs income tax, the SCDOR has provided significant interpretive guidance on R&D in the context of sales and use tax, which provides insight into how the Department views "qualified research." Revenue Ruling #08-3 addresses "Research and Development Machines" under § 12-36-2120(56).

The ruling concludes that for a machine to be exempt from sales tax as an R&D machine, more than 50% of its total use must be for "direct use in research and development." The Department defines research and development here as occurring in the "experimental or laboratory sense," specifically focusing on "new products, new uses for existing products, or improvement of existing products." The ruling explicitly excludes "administrative uses" or "teaching" from the definition of research. This strict interpretation is often mirrored in income tax audits of § 12-6-3415 claims, where the Department may challenge the inclusion of supplies or wages that are deemed "indirect" or "administrative" rather than "direct" R&D.

Revenue Procedure #01-11 and Transferability

Although the R&D credit is generally not transferable (unlike certain conservation credits under § 12-6-3515), the SCDOR’s guidance on transferability for other credits provides a framework for how the Department handles entity changes. For the R&D credit, if a taxpayer transfers all or substantially all of its assets or a distinct trade or business to a succeeding taxpayer, the rights to the unused credit may follow the assets to the successor. This is a crucial provision for mergers and acquisitions (M&A) involving South Carolina tech companies.

The Mechanics of Claiming the Credit: Schedule TC-18

The formal process for claiming the R&D credit is dictated by Form SC Schedule TC-18. The structure of this form acts as a step-by-step enforcement of the statute’s limitations.

Part 1: Calculation of Current Year Credit

Taxpayers begin by entering their "Qualified research expenses made in South Carolina." This amount is multiplied by 5% to determine the "credit earned this year." If the credit is being received from a pass-through entity (such as an S-corporation or partnership), the taxpayer must instead enter the amount indicated on their SC Schedule K-1 and provide the entity’s name and Federal Employer Identification Number (FEIN).

Part 2: Total Credit Before Limitations

The taxpayer then adds any "Research expenses credit carried forward from previous years." This requires the attachment of a detailed schedule tracking the origin year of each carryforward amount to ensure they do not exceed the 10-year statutory limit.

Part 3: Applying the 50% Tax Liability Limit

The most complex portion of the calculation involves the liability cap. Section 12-6-3415(B) states the credit cannot exceed 50% of the taxpayer's "remaining tax liability after all other credits have been applied."

The TC-18 form guides the taxpayer through this "ordering" calculation:

1. Line 5: Enter tax liability before any credits.

2. Line 6: Subtract all other tax credits claimed (e.g., Jobs Tax Credit, Economic Impact Zone Credit).

3. Line 7: This represents the "remaining tax liability."

4. Line 8: Multiply Line 7 by 50% to find the maximum allowable R&D credit for the year.

5. Line 9: The credit used this year is the lesser of the total credit available (Line 4) or the 50% limit (Line 8).

Any amount remaining (Line 10) is the carryforward for the subsequent year.

TC-18 Row	Description	Formula / Source
1	SC QREs	Taxpayer Accounting Records
2	Current Year Credit	Line 1 x 0.05
3	Carryforward	Prior Year Form TC-18 Line 10
4	Total Available Credit	Line 2 + Line 3
5	Base Tax Liability	SC1120 or SC1040
6	Sum of Other Credits	SC1120TC or SC1040TC
7	Remaining Liability	Line 5 - Line 6
8	50% Cap	Line 7 x 0.50
9	Credit to Claim	min(Line 4, Line 8)
10	Carryforward to Next Year	Line 4 - Line 9

The Nuance of Credit Ordering and Interaction

One of the most significant insights regarding § 12-6-3415 is how it interacts with other state credits. South Carolina offers a plethora of incentives, including the Jobs Tax Credit (§ 12-6-3360), the Investment Tax Credit, and the Corporate Headquarters Credit (§ 12-6-3410).

Generally, S.C. Code § 12-6-3310 allows taxpayers to apply credits in any order they elect. However, § 12-6-3415 is one of the few credits that contains a specific "remaining tax liability" clause. This effectively forces the R&D credit to the end of the line.

The Impact of the 50% Cap

Many South Carolina credits are limited to 50% of the tax liability. When multiple "capped" credits are used, the effective utility of the R&D credit is drastically reduced.

For example, if a taxpayer has $10,000 in liability and a $6,000 Jobs Tax Credit (limited to 50%), they first reduce their liability to $5,000. If they also have an R&D credit, it is limited to 50% of that remaining $5,000, or $2,500. Total liability is reduced to $2,500, but the taxpayer still pays 25% of their original bill.

In contrast, if a taxpayer uses a "non-capped" credit (like a Conservation Credit) first, they might reduce the liability from $10,000 to $2,000. The R&D credit would then be limited to 50% of that $2,000, or $1,000. Strategic ordering is essential to maximize the use of credits that have shorter carryforward periods or no carryforward at all.

Entity-Specific Applications and Flow-Through Mechanics

The R&D credit is available to almost all business structures, but the administration varies significantly between C-corporations and pass-through entities.

C-Corporations and License Fees

For a C-corporation, the credit can be used to offset both the corporate income tax and the corporate license fee (§ 12-20-50). The corporate license fee is essentially an annual franchise tax based on the corporation's capital and surplus. Because early-stage technology companies often have significant capital (from venture investment) but no income, the ability to use R&D credits against the license fee is a unique and valuable feature of South Carolina law.

S-Corporations, Partnerships, and LLCs

In the case of pass-through entities, the R&D credit is calculated at the entity level based on the entity's SC QREs. The credit is then allocated to the shareholders, partners, or members according to their percentage of ownership or as specified in the operating agreement (subject to federal "substantial economic effect" rules).

The entity provides each owner with a Schedule K-1, which lists the owner’s share of the R&D credit. The owner then claims this on their own SC1040 income tax return by filing their own Schedule TC-18. For individual taxpayers, the 50% liability limit applies to their total individual income tax liability after other personal credits (like the Child Care Credit or the Two-Wage Earner Credit) are applied.

Consolidated Returns

South Carolina allows for the filing of consolidated corporate income tax returns. In a consolidated group, the R&D credit generated by one member of the group may generally be used to offset the combined tax liability of the group, subject to the overall 50% limitation. This is a significant benefit for larger enterprises that may house their R&D activities in a separate subsidiary from their revenue-generating production units.

Comprehensive Applied Example: Palmetto Bio-Systems, Inc.

To illustrate the full lifecycle of a § 12-6-3415 claim, consider the fictional case of Palmetto Bio-Systems, Inc. (PBS), an S-corporation based in Greenville, South Carolina, specializing in robotic surgical instruments.

Year 1: Research Activity and Expense Identification

In 2024, PBS embarked on a new project to develop a haptic feedback sensor. The company identifies the following expenses:

• Wages: PBS employs three researchers in Greenville. Total wages are $300,000. Two researchers spend 100% of their time on the sensor project. One researcher spends 50% of their time on the sensor project and 50% on existing product maintenance.
• Qualified SC Wages: (2 x $100,000) + (0.50 x $100,000) = $250,000.
• Supplies: PBS purchased $50,000 in specialized circuit boards and sensors for prototyping. All were used in the Greenville lab.
• Qualified SC Supplies: $50,000.
• Contract Research: PBS paid a software firm in Charleston $100,000 to develop the driver software for the sensor.
• Qualified SC Contract Research: $100,000 x 0.65 = $65,000.
• Total SC QREs: $250,000 + $50,000 + $65,000 = $365,000.

Year 1: Credit Calculation and Allocation

The total credit earned is $365,000 x 0.05 = $18,250.

PBS is owned equally by two shareholders, Alice and Bob.

• Alice’s K-1: $9,125 R&D Credit.
• Bob’s K-1: $9,125 R&D Credit.

Year 1: Individual Tax Filing (Alice)

Alice has a South Carolina income tax liability of $20,000. She also qualifies for a $5,000 New Jobs Credit (from another business venture) and a $1,000 Child Care Credit.

Alice’s TC-18 calculation:

1. Liability Before Credits: $20,000.

2. Other Credits: $5,000 (Jobs) + $1,000 (Child Care) = $6,000.

3. Remaining Liability: $20,000 - $6,000 = $14,000.

4. 50% R&D Cap: $14,000 x 0.50 = $7,000.

5. Credit Used: Alice uses $7,000 of her $9,125 R&D credit.

6. Carryforward: $9,125 - $7,000 = $2,125. This amount is carried forward for 10 years.

Year 2: Recapture and Continuity

Assume in Year 2, PBS fails to claim the federal R&D credit due to a change in IRS interpretation of their software development activities. Under § 12-6-3415(A), PBS is no longer eligible for the state credit for Year 2. However, the Year 1 credit remains valid and the carryforward can still be used, provided the Year 1 federal claim is not disallowed on audit.

Scenario Component	Value / Logic	Citation
Project Location	Greenville, SC	§ 12-6-3415(A)
Federal Status	Claimed § 41 Credit	§ 12-6-3415(A)
SC QRE Total	$365,000	IRC § 41(b) via SC Law
SC Credit Rate	5%	§ 12-6-3415(A)
Current Year Credit	$18,250	Form TC-18 Line 2
Entity Type	S-Corporation	Flow-through to K-1
Alice's Share	$9,125	50% Ownership
Ordering Priority	Applied after Jobs/Child Care	§ 12-6-3415(B)
Liability Base	$14,000	Net of other credits
Year 1 Usage	$7,000	50% Cap Rule
Carryforward	$2,125	10-Year Period

Legislative Trends and the "Small Business" Refundability Debate

A persistent point of discussion in South Carolina tax policy is the potential for making the R&D credit refundable. For many startups, a nonrefundable credit with a 10-year carryforward is of limited immediate utility compared to a cash refund that could be reinvested in further research.

House Bill 3592 (H 3592)

Several iterations of H 3592 have proposed amending § 12-6-3415 to provide that a taxpayer with less than 150 full-time employees could receive a refund for the portion of the R&D credit that exceeds their tax liability. Key features of this proposal include:

• Small Business Target: Limited to companies meeting the definition of a small business under § 12-6-3360.
• Refund Cap: The total amount of the refund could not exceed 75% of the taxpayer's liability (this phrasing in the bill is somewhat ambiguous and has been interpreted to mean the refund plus credit cannot exceed 75% of the pre-credit liability).
• Statewide Cap: The SCDOR would be prohibited from issuing more than $5 million in R&D refunds annually, with a pro-rata reduction for all claimants if the cap is exceeded.

While this legislation has been discussed in several sessions, it underscores the tension between the state's desire to support innovation and its commitment to fiscal stability. Currently, South Carolina remains in the non-refundable camp, positioning its credit as a reward for established profitability rather than a direct subsidy for research expenses.

Audit Defense and Compliance Best Practices

Given the high value of R&D credits and the specific geographic restrictions of § 12-6-3415, the SCDOR maintains a rigorous audit program for these claims. Taxpayers should implement the following compliance protocols:

Contemporaneous Record Keeping

The SCDOR requires that taxpayers maintain documentation that substantiates the "qualified" nature of the research at the time it was performed. This includes:

• Project Lists: A comprehensive list of all R&D projects claimed.
• Technical Reports: Documentation of the uncertainties identified and the experiments conducted (e.g., lab notebooks, white papers, CAD drawings).
• Personnel Records: Time-tracking data that clearly differentiates between R&D time and non-R&D time, specifically noting the physical location where the work was performed.

Handling "Out of Statute" Years for Carryforwards

A unique administrative rule in South Carolina allows taxpayers to file an amended return for a year that is "out of statute" (generally more than three years old) to claim a credit that can be carried forward to an "open" year. However, the SCDOR provides a cautionary rule: the credit carried forward must be reduced by the amount that could have been used in the out-of-statute years.

For example, if a taxpayer discovers in 2024 that they were eligible for an R&D credit in 2018 (an out-of-statute year), they can amend 2018 to establish the carryforward. But if they had a tax liability in 2019, 2020, and 2021 that would have consumed that credit, they must subtract those hypothetical usages before bringing the remaining balance into their 2024 return.

The Nexus with Federal Audits

Since the state credit is contingent on the federal claim, a federal audit that disallows R&D expenses will automatically trigger a state-level disallowance. Taxpayers are required to notify the SCDOR of any final federal adjustments to their income or credits. Conversely, a successful defense of a federal R&D audit provides a strong (though not entirely bulletproof) defense for the technical merits of the South Carolina claim.

Economic Implications and the Role of "Technology Intensive Facilities"

The inclusion of "Technology Intensive Facilities" in the legislative history of § 12-6-3415 highlights the state's broader goal of clustering innovation. Under § 12-6-3360, these facilities are defined by their engagement in research, development, and high-tech manufacturing.

For these firms, the R&D credit often works in tandem with the Jobs Tax Credit. Because R&D activities are typically labor-intensive, the wages that qualify for the R&D credit also often qualify for the Jobs Tax Credit, which provides a credit of up to $25,000 per job depending on the county's developmental tier. The fact that the Jobs Tax Credit is applied before the R&D credit in the ordering rules is a significant policy choice, effectively prioritizing the creation of the job over the nature of the work being performed, while still allowing for a residual benefit for the R&D itself.

County Tier	Unemployment/Income Rank	Job Credit Value (Example)	R&D Credit Synergy
Tier I (Developed)	Top 11 (Lowest Unemployment)	Lower Credit	Strong Base for Labs
Tier II (Mod. Dev.)	Next 11	Moderate Credit	Growing Tech Hubs
Tier III (Underdev.)	Next 12	Higher Credit	Incentive for Relocation
Tier IV (Distressed)	Bottom 12 (Highest Unemp.)	Highest Credit	Rare for R&D

The geographic distribution of R&D activity in South Carolina is heavily skewed toward developed and moderately developed counties (Tiers I and II), such as Greenville, Charleston, and Richland (Columbia), where university partnerships and existing industrial bases provide the necessary infrastructure. The R&D tax credit acts as a "sweetener" to maintain these high-cost facilities in an environment where other states (like North Carolina or Georgia) are competing aggressively for the same talent.

Interaction with Sales and Use Tax Exemptions

The definition of R&D in South Carolina is not limited to income tax. A holistic view of the state's support for innovation must include § 12-36-2120(56), which provides a sales and use tax exemption for machines used directly and primarily in research and development.

The SCDOR’s interpretation of this exemption—requiring 50% "direct and primary" use—often creates a data set that taxpayers can use to support their § 12-6-3415 income tax claims. If a company successfully classifies a machine as an R&D machine for sales tax purposes, the supplies consumed by that machine and the wages of the personnel operating it are highly likely to be considered qualified SC QREs. However, the inverse is not always true; an activity may qualify as R&D for income tax purposes (under the federal four-part test) but fail the "direct use" requirement for the sales tax machine exemption.

Final Thoughts: The Strategic Integration of S.C. Code Ann. § 12-6-3415

S.C. Code Ann. § 12-6-3415 is more than a simple calculation of five percent of expenses; it is a complex intersection of federal conformity, state geographic mandates, and precise administrative ordering rules. Its nonrefundable nature and the 50% liability cap reflect a state policy that encourages sustainable growth by requiring businesses to maintain some level of tax contribution while simultaneously rewarding their investments in the future.

The requirement that research be "made in South Carolina" serves as a powerful localized economic multiplier, ensuring that the tax dollars sacrificed by the state treasury result in the employment of high-skilled workers and the consumption of supplies within the local economy. For the corporate practitioner or the small business owner, the credit offers a significant opportunity for tax mitigation, provided they maintain the rigorous contemporaneous documentation required to survive an SCDOR audit. As South Carolina continues to evolve into a Southeastern hub for advanced aerospace, automotive, and life sciences, § 12-6-3415 will remain the cornerstone of its commitment to innovation-led economic development.