South Carolina taxable income is computed by making modifications to deductions provided in the Internal Revenue Code as follows:

(1) The disallowance of deductions relating to tax-exempt income required by Internal Revenue Code Section 265 applies if the related income is exempt for South Carolina income tax purposes, whether or not the income is exempt for federal purposes. If an expense or interest is disallowed under Section 265 for federal purposes, but is related to income taxed in South Carolina, that expense or interest may be deducted for South Carolina income tax purposes.

(2) The deduction for taxes permitted by Internal Revenue Code Section 164 is computed in the same manner as provided in Section 164 except there is no deduction for state and local income taxes, state and local franchise taxes measured by net income, other income taxes, or taxes measured with respect to net income. In addition, if a taxpayer elects, pursuant to Section 164, to deduct state and local sales taxes instead of state and local income taxes, the taxpayer may not deduct state and local sales and use taxes.

This modification is limited for individual taxpayers to the excess of itemized deductions over the standard deduction that would be allowed if the taxpayer had used the standard deduction for federal income tax purposes.

(3) For purposes of computing the deduction for estate taxes allowed by Internal Revenue Code Section 691(c), "estate tax" means the South Carolina Estate Tax including any South Carolina generation-skipping transfer tax.

(4) A net operating loss deduction is computed in accordance with the Internal Revenue Code except that:

(a) All items of income and deductions used in computing the net operating loss deduction are adjusted as provided in this article.

(b) No carrybacks are allowed.

(c) A federal election to carryback a net operating loss deduction does not affect the computation of this deduction for South Carolina income tax purposes.

(d) A net operating loss is subject to allocation and apportionment under Article 17 of this chapter in the year the loss is incurred.

(5) A corporation may not carry back a net capital loss as permitted by Internal Revenue Code Section 1212(a). A net capital loss may be carried forward to future years to the extent provided in Internal Revenue Code Section 1212(a).

(6) In computing the depletion deduction pursuant to Internal Revenue Code Sections 611 through 613, a taxpayer who allocates or apportions income pursuant to the provisions of Article 17 of this chapter has the option of:

(a) apportioning the deduction according to the appropriate South Carolina apportionment percentage provided in Sections 12-6-2252 through 12-6-2310; or

(b) allocating the deduction to South Carolina with respect to mines, oil and gas wells, and other natural deposits located in this State. The amount allocated to South Carolina may not exceed fifty percent of the net income apportioned to South Carolina by Sections 12-6-2252 through 12-6-2310.

(7) The limiting provisions of Internal Revenue Code Section 280C for certain expenses for which credits are allowable do not apply.

(8) Adjusted gross income and taxable income are computed without the deductions for certain unused business credits authorized by Internal Revenue Code Section 196.

(9) If for federal income tax purposes a taxpayer claims a credit which requires a reduction of basis to Section 38 property under Internal Revenue Code Section 50(c), the taxpayer may deduct the amount of the basis reduction for South Carolina income tax purposes by the amount of the basis reduction in the tax year in which basis is reduced for federal income tax purposes.

(10) If for federal income tax purposes a taxpayer's mortgage interest deduction is reduced pursuant to Internal Revenue Code Section 163(g), the taxpayer may deduct the amount of the federal interest deduction reduction.

(11) A dividend from a foreign corporation is treated as a dividend from a domestic corporation for the purposes of the dividends received deduction under Section 243 of the Internal Revenue Code.

(12) The deduction for charitable contributions allowed by Section 170 of the Internal Revenue Code is determined in the same manner as provided in Section 170 of the code except that no deduction is allowed unless, in addition to the requirements of Section 170 of the Internal Revenue Code, the contribution also meets the requirements of Section 12-6-5590.

(13) Adjusted gross income and taxable income are computed without the deduction allowed pursuant to Internal Revenue Code Section 199 relating to domestic production activities.

(14)(a) A deduction is not allowed a person for the accrual of an expense or interest if the payee is a related person and the payment is not made in the taxable year of accrual or before the payer's income tax return is due, without regard to extensions, for the taxable year of accrual. Except as provided in subitem (b), deductions disallowed pursuant to this section are allowed when the payment is made. The holder shall include the payment in income in the year the debtor is entitled to take the deduction. This section does not apply to payments deemed to be made by the application of South Carolina's adoption of Internal Revenue Code Section 482, 7872, a similar provision of the Internal Revenue Code or state law.

(b) Notwithstanding subitem (a), unless the director is satisfied that tax avoidance is not a significant purpose of the transaction, an interest deduction is not allowed for the accrual or payment of interest on obligations issued as a dividend or paid instead of paying a dividend. This interest must be treated as a dividend to the debtor's shareholders when it is paid, and if the holder of the obligation is not a shareholder at that time, a payment from the shareholders to the holder at that time.

(c) For purposes of this item, a related person includes a person that bears a relationship to the taxpayer as described in Section 267 of the Internal Revenue Code.

HISTORY: 1995 Act No. 76, Section 1; 2002 Act No. 334, Section 14, eff June 24, 2002; 2002 Act No. 363, Section 2, eff August 2, 2002, applicable for taxable years beginning after 2002; 2005 Act No. 145, Sections 10.A, 10.B, 43.A, eff June 7, 2005; 2005 Act No. 161, Section 22.A, eff June 9, 2005; 2007 Act No. 110, Section 55.A, eff June 21, 2007, effective for tax years after 2010; 2007 Act No. 116, Section 60.A, eff June 28, 2007, effective for tax years beginning after 2010.

Editor's Note

2005 Act No. 145, Section 42, provides as follows:

"Notwithstanding the ratification of another act during the 2004-2005 Session of the General Assembly affecting the sections of the 1976 Code amended in Sections 7, 8, 9, and 10 of this act, the ratification of this act is deemed to be the last action of the General Assembly regarding those code sections."

2005 Act No. 161, Section 22.B, provides as follows:

"This SECTION takes effect upon approval by the Governor and applies to taxable years beginning after 2005."

2007 Act No. 110, Section 55.E, and 2007 Act No 116, Section 60.A provide as follows:

"This section takes effect for tax years after 2010."

2010 Act No. 142, Section 2 provides:

"Public Law 111-126, relating to charitable deductions for Haiti relief enacted on January 22, 2010, is adopted for South Carolina income tax purposes, including the effective dates therein."