SC Schedule TC-18 (Research Expenses Credit)

The South Carolina Schedule TC-18 is the primary tax form used by businesses to claim a nonrefundable credit equal to five percent of qualified research expenses incurred within the state. This credit mechanism provides an essential incentive for technological innovation and is fundamentally contingent upon the taxpayer’s eligibility for and concurrent claim of the federal research credit under Internal Revenue Code Section 41 for the same taxable year.

The statutory foundation of this incentive, codified in South Carolina Code Section 12-6-3415, represents a sophisticated intersection of state economic policy and federal tax conformity. By anchoring the state credit to the definitions and requirements of the Internal Revenue Code (IRC), South Carolina ensures that the rigorous standards for qualified research established at the federal level are imported into the state’s tax ecosystem. This administrative link allows the South Carolina Department of Revenue (SCDOR) to benefit from the extensive body of federal case law and Treasury Regulations governing research and development (R&D) activities while maintaining a distinct state-level calculation method that prioritizes simplicity and predictability. Unlike the federal credit, which often utilizes complex incremental base amounts or the Alternative Simplified Credit (ASC) method, South Carolina employs a non-incremental approach, offering a flat percentage of current-year expenditures. This provides a direct and immediate reward for every dollar invested in South Carolina’s research infrastructure, effectively lowering the cost of innovation for manufacturers, software developers, and technology firms alike.

Statutory Foundations and Legislative History

The South Carolina Research Expenses Credit was established by 2000 Act No. 283 and became effective for taxable years beginning after June 30, 2001. Over the subsequent decades, the South Carolina General Assembly has amended the statute several times—most notably in 2003 and twice in 2007—to refine its application and ensure its continued relevance in a rapidly evolving technological landscape. The statute is located within Chapter 6 of the South Carolina Income Tax Act, which serves as the broad legal framework for personal and corporate income taxation in the state.

Section 12-6-3415(A) stipulates that a taxpayer who claims a federal income tax credit pursuant to Section 41 of the Internal Revenue Code for increasing research activities is allowed a credit against any tax due pursuant to Chapter 6 (Income Tax) or Section 12-20-50 (Corporate License Fees). This dual application is a critical feature of the South Carolina system, as it allows the credit to offset both the 5% corporate income tax and the corporate license fees that businesses are required to pay to maintain their registration in the state.

Legislative Reference	Provision Description	Impact on Taxpayer
S.C. Code § 12-6-3415(A)	5% Credit on Qualified Research Expenses (QREs)	Primary calculation for state benefit
S.C. Code § 12-6-3415(B)	50% Limitation after other credits	Cap on annual credit utilization
S.C. Code § 12-6-3415(B)	10-Year Carryforward	Protection for unused credit amounts
S.C. Code § 12-20-50	Applicability to Corporate License Fees	Expansion of credit-eligible liabilities
IRC Section 41	Federal Conformity on QRE Definitions	Alignment with federal R&D standards

The evolution of the statute reflects South Carolina’s broader commitment to becoming a hub for advanced manufacturing and aerospace innovation. By allowing the credit to be carried forward for up to 10 years, the legislature provided a mechanism for capital-intensive startups to accumulate credits during their early research phases and utilize them as they transition into profitable operations. However, the statute also preserves fiscal stability for the state by imposing a 50% limit on the amount of tax liability that can be offset in any single year, ensuring that all profitable entities contribute at least a portion of their income to the state’s general fund.

Federal Conformity and the Definition of Qualified Research

The South Carolina credit is deeply intertwined with the federal definition of qualified research expenses (QREs) as provided in IRC Section 41(b). This conformity means that for an expense to be eligible for the 5% state credit and reported on Schedule TC-18, it must first meet the federal Four-Part Test. This test serves as the qualitative filter through which all activities must pass.

The Four-Part Test in Narrative Context

The first component of the test is the Section 174 Test, which requires that the expenditures be eligible for treatment as research and experimental expenses under IRC Section 174. This implies that the activities must be performed in connection with the taxpayer’s trade or business and represent research and development costs in the experimental or laboratory sense. The second component is the Technological Information Test, requiring that the research be undertaken for the purpose of discovering information that is technological in nature. This means the process must rely on the principles of physical science, biological science, engineering, or computer science.

The third component is the Business Component Test, which mandates that the research be intended for use in developing a new or improved business component of the taxpayer, such as a product, process, software, technique, formula, or invention. Finally, the Process of Experimentation Test requires that substantially all of the activities constitute elements of a process of experimentation designed to resolve a technological uncertainty. This involves the evaluation of alternatives through modeling, simulation, or systematic trial and error.

Categories of Qualified Research Expenses

Once an activity is deemed qualified, the associated costs are categorized into three primary areas for inclusion on Line 1 of Schedule TC-18, provided they are incurred within South Carolina:

Qualified Wages: This encompasses the portion of wages paid to employees for qualified services, which include direct participation in research, as well as direct supervision or support of research activities. In the South Carolina context, these employees must be physically located in the state while performing the research.

Qualified Supplies: These are the costs of tangible property (other than land or improvements to real property) that is consumed or used in the performance of qualified research. This typically includes prototypes, chemicals, and laboratory materials.

Contract Research Expenses: These represent 65% of the amounts paid or incurred by the taxpayer to any person (other than an employee) for qualified research conducted on the taxpayer’s behalf. For Schedule TC-18, the contractor must perform the research within South Carolina.

QRE Category	Federal Treatment (IRC § 41)	South Carolina Requirement
In-House Wages	100% of qualified wages	Work must be performed in SC
In-House Supplies	100% of qualified supply costs	Supplies used in SC research
Contract Research	65% of contract payments	Research performed at an SC site
Base Amount	Incremental calculation required	No state-level base amount

Administrative Guidance from the South Carolina Department of Revenue

The SCDOR provides a structured hierarchy of guidance to assist taxpayers in navigating the Research Expenses Credit. Understanding the weight and purpose of these various Advisory Opinions is essential for professional compliance and audit defense.

Types of Advisory Opinions

A Revenue Ruling is the Department’s official advisory opinion regarding how laws are to be applied to a specific issue or set of facts. While it does not have the force of law, it is provided as guidance for all persons and remains in effect until superseded by a change in statute or a subsequent ruling. A Revenue Procedure provides procedural guidance to the public and Department personnel to assist in the administration of laws. Private Letter Rulings are issued to specific taxpayers regarding their unique fact patterns, while Information Letters are used to disseminate general information or remind taxpayers of existing law.

Guidance on Credit Utilization and Ordering

The SCDOR has provided significant guidance on the General Rules for tax credits, which directly impact the filing of Schedule TC-18. One of the most important rules is that credits must be used in the year they are earned based on tax liability. Furthermore, the Department has clarified that while many credits can be applied in any order, the Research Expenses Credit is one of a few limited credits that must be applied to the remaining tax liability after all other credits have been accounted for.

This ordering rule is mathematically significant. Because the TC-18 credit is capped at 50% of the remaining liability, taking it early in the calculation process would result in a larger credit utilization but potentially smaller carryforwards for other credits. Conversely, taking other non-capped credits first reduces the base upon which the 50% R&D cap is calculated, potentially pushing more of the R&D credit into a carryforward position. The SCDOR encourages taxpayers to model both options to determine the most advantageous sequencing.

Decoupling from IRC Section 280C

A distinctive feature of the South Carolina tax code is its explicit decoupling from the federal add-back requirements of IRC Section 280C. At the federal level, Section 280C(c) dictates that no deduction is allowed for the portion of QREs that is equal to the amount of the research credit claimed. This is intended to prevent a double benefit where a taxpayer deducts an expense and also takes a credit for the same dollar of spending. Alternatively, federal taxpayers may elect a reduced credit under Section 280C(c)(3) to avoid the deduction reduction.

However, South Carolina Code Section 12-6-1130(7) provides that the limiting provisions of IRC Section 280C do not apply for South Carolina income tax purposes. This means that for state purposes, a taxpayer can take the full 5% credit on Schedule TC-18 while still deducting 100% of those research expenses from their South Carolina taxable income. This effectively creates a super-deduction scenario at the state level that is not available at the federal level, significantly increasing the net value of the South Carolina R&D incentive compared to states that conform to Section 280C.

Comparison of State R&D Credit Policies

State	R&D Credit Rate	Base Amount Method	IRC § 280C Conformity
South Carolina	5% of QREs	Non-incremental	Does Not Conform (No Add-back)
California	15% of QREs	Incremental (Base Required)	Conforms (Add-back Required)
Delaware	10% of QREs	Incremental or ASC	Conforms (Add-back Required)
Florida	10% of QREs	Incremental (4-year average)	Conforms (Add-back Required)
Georgia	10% of QREs	Incremental (Base Required)	Conforms (Add-back Required)

The decision by the South Carolina legislature to ignore the 280C limitation is a powerful economic development tool. It recognizes that the administrative burden of tracking federal add-backs often discourages small businesses from claiming the credit. By simplifying the state-level calculation and allowing the full deduction, South Carolina positions itself as a tax-friendly jurisdiction for R&D-intensive industries.

Comprehensive Breakdown of Schedule TC-18

Schedule TC-18 is structured as a single-page document with nine primary lines that lead the taxpayer from the gross qualified spend to the final allowable credit for the tax year.

Mechanical Workflow of the Form

Line 1 requires the input of Qualified research expenses made in South Carolina. This is the figure derived from the taxpayer’s internal R&D study, representing the sum of in-state wages, supplies, and 65% of in-state contract research. Line 2 multiplies this amount by the 5% statutory rate to determine the credit earned this year.

Line 3 accounts for credits carried forward from the previous ten tax years. Line 4 then sums the current year credit and the carryforward. Lines 5 through 9 execute the statutory limitation check. Line 5 captures the taxpayer’s total tax liability before any credits are applied. Line 6 is the sum of all other non-R&D credits claimed by the taxpayer. Line 7 is the remaining liability, and Line 8 applies the 50% multiplier to that remainder. Line 9 is the final lesser of calculation, determining the actual credit that can be used on the return.

TC-18 Line	Instruction Summary	Critical Decision Point
Line 1	Total SC QREs	Verify geographic nexus of all researchers
Line 2	5% Calculation	Standard statutory rate application
Line 3	Carryforward Amount	Audit the 10-year expiration date for each layer
Line 5	Pre-Credit Liability	Includes Income Tax and License Fees
Line 6	Other Credits Total	Apply ordering rules as per SCDOR guidance
Line 9	Allowable Credit	Lesser of available credit or 50% limit

Pass-Through Entity Reporting

For partnerships, S corporations, and LLCs, the credit is calculated at the entity level on Schedule TC-18, but the utilization occurs at the owner level. The entity must provide the name and Federal Employer Identification Number (FEIN) of the pass-through entity making the research expenses. Owners then enter the amount of credit received from the entity on Line 2 of their own TC-18, as reported on their South Carolina K-1. This ensures that the 50% liability cap is applied correctly to the individual partner or shareholder’s personal tax liability.

Detailed Case Study: Palmetto Innovative Manufacturing (PIM)

To illustrate the practical application of Schedule TC-18, consider Palmetto Innovative Manufacturing (PIM), a C corporation headquartered in Charleston that designs advanced propulsion systems. In Year 1, PIM invests $4,000,000 in research activities, all of which take place at its Charleston facility. PIM has a total tax liability (Income Tax + License Fee) of $250,000 and is also eligible for a $50,000 New Jobs Credit.

Year 1 Calculation

PIM first determines its QREs:

Wages for SC-based engineers: $2,500,000

Supplies for prototypes used in SC: $500,000

Contract research with an SC university ($1,000,000 x 65%): $650,000

Total SC QREs (Line 1): $3,650,000

PIM then calculates the credit earned:

Credit Earned (Line 2): $3,650,000 x 5% = $182,500

PIM applies the limitation (Year 1):

Tax Liability before credits (Line 5): $250,000

New Jobs Credit (Line 6): $50,000

Remaining Liability (Line 7): $200,000

50% Limitation (Line 8): $200,000 x 50% = $100,000

Allowable R&D Credit (Line 9): $100,000 (Lesser of $182,500 or $100,000)

Result: PIM pays $100,000 in tax and carries forward $82,500 of R&D credit to Year 2.

Year 2 Calculation

In Year 2, PIM’s research spending decreases to $1,000,000, but its profits increase, leading to a tax liability of $400,000. It has no other credits.

New Credit Earned: $1,000,000 x 5% = $50,000

Carryforward from Year 1: $82,500

Total Available Credit (Line 4): $132,500

Tax Liability (Line 5): $400,000

50% Limitation (Line 8): $400,000 x 50% = $200,000

Allowable R&D Credit (Line 9): $132,500 (Lesser of $132,500 or $200,000)

Result: PIM utilizes its entire R&D credit balance and pays $267,500 in tax.

Calculation Phase	PIM Year 1	PIM Year 2
SC Qualified Expenses	$3,650,000	$1,000,000
New Credit Earned	$182,500	$50,000
Carryforward Utilized	$0	$82,500
Total Tax Liability	$250,000	$400,000
Other Credits	($50,000)	$0
Final Credit Used	$100,000	$132,500
Carryforward to Next Year	$82,500	$0

Interaction with the 2021 Pass-Through Entity Tax Election

A major shift in South Carolina tax policy occurred with the passage of Act No. 61 of 2021, which added Code Section 12-6-545(G). This allows partnerships and S corporations to elect to pay an entity-level income tax of 3% on active trade or business income. This election is designed as a SALT cap workaround, shifting the tax burden from the individual owners to the entity.

The SCDOR issued Revenue Ruling #21-15 and #22-5 to clarify the implications of this election for tax credits. If a pass-through entity makes the election, the active trade or business income taxed at the entity level is not included in the owners’ South Carolina income. Consequently, the Research Expenses Credit generated by the entity can be used to offset the 3% entity-level tax, rather than being passed through to the owners’ individual returns. This requires a strategic decision by the entity’s management: whether the credit is more valuable offsetting the 3% entity tax or being passed through to owners who may be subject to higher marginal rates (up to 7% for individuals) but who are also subject to the 50% liability limitation on their total tax due.

Audit Risks and Compliance Protocols

The nonrefundable nature of the Research Expenses Credit, combined with its high value, makes it a frequent target for SCDOR audits. Taxpayers must be prepared to defend their claims by providing documentation that is contemporaneous with the research activities.

Quantitative Audit Triggers

The Department frequently looks for discrepancies between the federal Form 6765 and the South Carolina Schedule TC-18. If a taxpayer claims a larger amount of QREs on the state form than on the federal form (after accounting for the geographic nexus), it serves as an immediate red flag. Additionally, the SCDOR may request payroll records to verify that the employees whose wages are included in Line 1 were indeed performing work within South Carolina.

Qualitative Audit Defense

The Process of Experimentation test remains the most common point of contention. To defend this, taxpayers should maintain project-specific folders containing:

Initial project goals and identified technological uncertainties.

Evidence of alternative designs or methods considered.

Test results, logs of failures, and records of iterations.

Final outcomes and the business component to which the research was applied.

Taxpayers who file an amended return to claim the credit—which is permitted within the three-year statute of limitations—face a higher level of scrutiny. The SCDOR often requires an exhaustive narrative of the research activities and a detailed reconciliation of the financial data before approving a refund based on an amended R&D claim.

Economic Impact and Policy Outlook

The South Carolina Revenue and Fiscal Affairs Office (RFA) produces annual tax expenditure reports that track the impact of the Research Expenses Credit on the state’s budget. These reports itemize the estimated loss of General Fund revenue from the credit, providing policymakers with data to evaluate the incentive’s return on investment.

Historically, the Research Expenses Credit has been a significant tax expenditure, often totaling millions of dollars annually. However, the state justifies this cost through the indirect benefits of high-wage job creation and the attraction of global corporations to South Carolina’s industrial corridors. The credit is particularly effective when stacked with other incentives, such as the New Jobs Credit and the Investment Tax Credit for manufacturing equipment.

The future outlook for the credit remains stable, as there is currently no expiration date for the statute. However, changes in federal tax law—such as the recent restoration of immediate expensing for domestic R&D under the 2025 One Big Beautiful Bill Act (OBBBA)—will require the South Carolina General Assembly to pass new conformity legislation to ensure that the state remains aligned with the federal definition of Section 174 expenses.

Filing and Printing Requirements

For individual filers using professional tax software, such as GoSystem Tax RS, specific procedural steps must be followed to ensure Schedule TC-18 is printed and attached correctly. Taxpayers must select Sch TC – Tax Credits and ensure that Line 8 (the 50% limitation) has a valid value before performing a full recompute and printing. If the taxpayer files electronically, the SCDOR recommends maintaining a copy of all supporting schedules in their permanent tax records, as the disallowance of credits can occur if necessary schedules are not properly integrated into the filing.

For business entities, the SCDOR’s MyDORWAY portal is the preferred method for filing and managing tax accounts. The portal allows businesses to link their federal ID numbers to their South Carolina corporate tax accounts, facilitating the direct entry of credit data and the management of multi-year carryforwards.

Final Thoughts

The South Carolina Schedule TC-18 represents a vital bridge between state tax liability and industrial innovation. By providing a flat 5% credit on qualified research expenses and decoupling from the restrictive federal add-back rules of IRC Section 280C, South Carolina has created a uniquely advantageous environment for R&D-intensive businesses. The credit’s 10-year carryforward period ensures long-term utility for growing firms, while the 50% liability cap maintains a balanced contribution to the state’s fiscal health. For tax professionals, navigating this framework requires a dual mastery of the federal Four-Part Test and the specific South Carolina ordering and allocation rules. As the state continues to attract world-class manufacturing and technology projects, the Research Expenses Credit will undoubtedly remain a cornerstone of the South Carolina tax landscape, driving the technological breakthroughs of tomorrow.