Your Ultimate Guide to South Carolina R&D Tax Credit
The South Carolina research and development (R&D) tax credit is an incentive for businesses. You can use it to offset tax liabilities. It is available for businesses that perform specific research activities. Born in 1981, the R&D tax credit allows up to 13% of the credit for eligible expenses. Individuals, limited liability companies, sole proprietors, partnerships, S corporations, and C corporations can earn this credit to offset individual income tax or corporate income tax.
In South Carolina, the manufacturing industry has been the backbone of the local economy. With automotive industry giants like Boeing and BMW, a wide range of part manufacturers and sub-contractors work in the state. Like any other industry, the manufacturing sector also counts on R&D for economic growth. The federal and South Carolina government provide research credit to stimulate such R&D activities.
Businesses can earn the money through this credit if their research activities meet the following criteria:
- Improved or new software, processes, or products
- Elimination of uncertainty
- Technological in nature
- Process of experimentation
On 18th December 2021, the former American President, Barack Obama signed a bill to make this credit permanent. Today, startups and small businesses can use the credit against up to $250,000 taxes annually. Such taxes can be insurance premium tax, bank tax, savings and loan tax, or corporate license fees.
South Carolina State Qualified Research Expense Tax Credit
In South Carolina, eligible taxpayers can get up to 5% of research expense credit for stimulating research activities in a taxable year. It is one of the lowest in the Southeast region. Section 41 of the Internal Revenue Code has defined the qualified research expenses.
The credit should not be more than 50% of your businesses’ remaining tax liabilities post the total credit application. If you have an unused credit portion, you can carry forward it for 10 years from the date of eligible expenses.
Individuals or businesses must meet certain conditions to be eligible for South Carolina R&D tax credit. They have to fulfill the following steps:
- Filing the amended tax return application for the year that is out of the statute. (The carryforward of one or more open years is allowed for the claimed credit. The credit you carry forward must be lesser than the received amount).
- You should make maximum use of the South Carolina R&D tax credit in the year you received it. (It is liable to your remaining tax liabilities after all the expense credits are applied).
- You must claim the federal income tax credit for stimulating research efforts in the taxable year.
How to Get the SC R&D Tax Credit?
The South Carolina Research Authority provides a form to identify the amount of credit, taxpayer, and year. Taxpayers must retain that to get the SC R&D tax credit. They may also need to provide a copy of this form to the Department of Revenue. Eligible credits may not be used to take a deduction.
How to Calculate Credit Carryforward?
As discussed earlier, businesses can carry forward the South Carolina R&D tax credit for up to 10 years. Note that this credit is nonrefundable. In the case of reorganization, consolidation, or merger, the succeeding corporation can get the unused portion of credit and continue using it (in such cases, the remaining tax attributes may not create new eligibility).
Your business can assign rights to your unused portion of the credit to another business if it completely or substantially transfers all its assets of an operating division, business, or trade to another partnership or corporation.
If you are carrying forward the used credit for the next year, the carryforward tax amount will be the difference between the total credit you earned and the total credit you used in that taxable year. In such cases, you have to attach a schedule to the tax return application that confirms the amount of credit earned, the amount of credit used, and the year of credit.
Let us take an example. Suppose your business earns the SC R&D tax credit of $34,000 in 2022. Your tax liability in the same year is $9,000 and you have used the tax credit against it. So, you can carry forward the credit of $25,000 ($34,000-$9,000). The carryforward limit is 10 years in South Carolina. This means you can use the remaining tax credit against your tax liabilities in those 10 years.
How do I Apply for South Carolina R&D Tax Credit?
Claiming for South Carolina R&D tax credit is a complex process. Given the bunch of rules and guidelines, it’s wise to rely on the qualified and experienced tax consultants of the TIER Group for your claim. With over a decade of experience, expertise, skills, and knowledge, we help you get bigger returns.
Find out how much research credit your business can get. Book your call now and our team will get back to you within 1-2 days.