Which federally deducted taxes had to be added back when computing South Carolina taxable income under the 2009 guidance?

Plain-English summary

The South Carolina Department of Revenue explained that a tax deductible under federal Internal Revenue Code § 164 was not automatically deductible when computing South Carolina taxable income.

Under S.C. Code § 12-6-1130(2), taxpayers could not deduct state or local income taxes, state or local franchise taxes measured by net income, or any other income tax or tax measured by or with respect to net income. A federal deduction for one of those taxes therefore required a South Carolina add-back.

The ruling also said that a taxpayer electing the federal deduction for state and local sales taxes instead of state and local income taxes could not deduct those sales and use taxes for South Carolina purposes. It provided a survey table applying the rule to 16 named state, local, and foreign taxes and cautioned that foreign-tax treatment depended on the facts.

What this means for you

Corporate tax preparers

Classify the tax by what legally measures it, not simply by its label. An income tax or franchise tax measured by net income fell within the add-back rule described.

Multistate businesses

The ruling addressed taxes imposed by South Carolina, other states, local governments, the District of Columbia, and foreign countries. Each non-obvious tax required review of its actual base.

Individual filers

The ruling's quoted rule also addressed the federal election to deduct state and local sales taxes in place of income taxes: South Carolina disallowed that elected sales-and-use-tax deduction.

Common questions

Q: Did South Carolina allow a federal deduction for state income tax?
A: No. The ruling required an add-back for state income-based taxes.

Q: What about local or out-of-state income taxes?
A: The same statutory bar applied to state and local income taxes, regardless of whether South Carolina or another jurisdiction imposed them.

Q: Are all franchise taxes added back?
A: The statute specifically disallowed state and local franchise taxes measured by net income. The legal measure of the particular tax controlled.

Q: What if the federal return deducted state and local sales taxes instead of income taxes?
A: The ruling said South Carolina did not allow that sales-and-use-tax deduction.

Q: How were foreign taxes treated?
A: The ruling's footnote said their treatment depended on the facts, so it did not establish one result for every foreign tax.

Citations and references

• S.C. Code § 12-6-1130(2) (South Carolina modifications to federally allowed tax deductions)
• Internal Revenue Code § 164 (federal deduction for specified taxes)
• SC Revenue Ruling 03-6 (superseded by this ruling)

Source

• Official page: https://dor.sc.gov/income-tax-state-tax-add-backs-0
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR09-10.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC REVENUE RULING #09-10

SUBJECT:

State Tax Add-Backs
(Income Tax)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

SC Revenue Ruling #03-6 and all previous advisory opinions and
any oral directives in conflict herewith.

REFERENCES:

S.C. Code Ann. Section 12-6-1130 (Supp. 2008)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 2008)
S. C. Code Ann. Section 1-23-10(4) (2008)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the
public and to Department personnel. It is an advisory opinion
issued to apply principles of tax law to a set of facts or general
category of taxpayers. It is the Department’s position until
superseded or modified by a change in statute, regulation, court
decision, or another Departmental advisory opinion.

Background Information:
The purpose of this advisory opinion is to provide written guidance from the Department
concerning certain taxes that are not allowed as a deduction from South Carolina taxable income.
Initially, this project began as an informal response to a Bureau of National Affairs, Inc.
(“BNA”), survey of state tax departments covering numerous questions on corporate income tax
related issues. Because of the number of questions received by the Department concerning
whether state, local, and foreign taxes deductible under Internal Revenue Code Section 164 are
deductible for South Carolina purposes, the Department is issuing its responses to the BNA
survey as an advisory opinion that reflects the Department’s official position regarding these
specific tax modifications.

1

Law:
Code Section 12-6-1130, providing for modifications to South Carolina taxable income,
reads, in part:
South Carolina taxable income is computed by making modifications to
deductions provided in the Internal Revenue Code as follows:

(2) The deduction for taxes permitted by Internal Revenue Code Section 164
is computed in the same manner as Section 164 except there is no deduction
for state and local income taxes, or state and local franchise taxes measured
by net income, or any income taxes, or any taxes measured by or 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….

State Tax Add-Back Survey Responses:
Below is a summary of selected taxes which are allowed or disallowed as deductions under
SC Code Section 12-6-1130(2) in arriving at South Carolina’s taxable income, assuming they
are allowed as a deduction under Internal Revenue Code Section 164.
Deduction Allowed

Deduction Disallowed
(no add-back required) (add-back required)

1. State income-based taxes imposed by South Carolina
2. State income-based taxes imposed by other states
3. Local income-based taxes imposed by South Carolina
   local governments1
4. Local income-based taxes imposed by out-of state
   local governments
5. Foreign taxes (other countries)2
6. State franchise taxes based on capital stock or net worth
7. State gross receipts taxes3
8. District of Columbia Unincorporated Business Tax
9. Kentucky License Tax
   1

South Carolina does not have any local income-based taxes imposed by South Carolina local governments, but if it
did, the deduction would be disallowed.
2
The treatment of foreign taxes depend on facts.
3
Gross receipts taxes are not state sales and use taxes.

2

10. Michigan Business Tax4 – modified gross receipts tax

11. Michigan Business Tax – business income tax
12. New Hampshire Business Profits Tax
13. Ohio Commercial Activity Tax5
14. Texas Margin Tax 6
15. Washington Business and Occupation Tax
16. West Virginia Business and Occupation Tax
    SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Ray N. Stevens
Ray N. Stevens, Director
July 17
, 2009
Columbia, South Carolina

4

The Michigan Business Tax is the successor to the Michigan Single Business Tax.
The Ohio Commercial Activity Tax is the successor to the Ohio Franchise Tax
6
The Texas Margin Tax is the successor to the Texas Franchise Tax.
5

3