If I receive a South Carolina tax credit for donating to a charity, does that reduce the charitable contribution deduction I can claim on my federal and South Carolina income tax returns?

Plain-English summary

Some states, including South Carolina, hand out an income tax credit when you donate to certain funds or causes. That created a federal problem: taxpayers were donating, taking a big charitable deduction federally, and collecting a state credit — effectively getting paid twice for one gift. The IRS closed that with Treasury regulations, and because South Carolina adopts the relevant Internal Revenue Code sections and follows those regulations, SC Revenue Ruling #21-4 explains how the rules hit South Carolina returns. It supersedes SC Information Letter #19-10.

The core rule (Treas. Reg. § 1.170A-1(h)(3), final August 11, 2020). If you make a payment to a charity and get (or expect to get) a state or local tax credit in return, your federal charitable contribution deduction is reduced by the amount of that credit. Example from the ruling: donate $1,000, receive a 70% state credit ($700), and your federal charitable deduction drops to $300.

• 15% safe harbor. The deduction is not reduced if the credit is 15% or less of your payment (or of the fair-market value of donated property). A state/local deduction (as opposed to a credit) also doesn't trigger the reduction, as long as it doesn't exceed the payment.
• Flows to South Carolina. Because South Carolina adopts IRC § 170 and follows the Treasury regulations, whatever reduction applies federally also reduces your South Carolina charitable deduction.

Two federal "re-characterization" rules for the disallowed amount:

• Business-expense route (IRC § 162 / Treas. Reg. § 1.162-15(a)). A trade or business can deduct the payment as a business expense instead of a charitable gift if it bears a direct business relationship and is made expecting a financial return. A C corporation has a safe harbor: it may deduct an amount equal to the state/local credit it receives that reduces a tax imposed on it. A comparable safe harbor exists for certain pass-through entities.
• State-and-local-tax route (IRC § 164 / Treas. Reg. § 1.164-3(j)). An individual who itemizes may treat the disallowed portion (paid in cash) as a payment of state or local tax under IRC § 164 — subject to the $10,000 SALT cap (§ 164(b)(6)).

The South Carolina catch — the addback. South Carolina credit statutes require you to add back the federal deduction that produced the credit. The ruling lists South Carolina credits affected by the federal regulations: the Conservation Credit (§ 12-6-3515), the Community Development Credit (§ 12-6-3530, no longer available unless the General Assembly funds it), the Industry Partnership Fund Credit (§ 12-6-3585), and the Exceptional Needs Children's Fund Credit (§ 12-6-3790(H)(1)). Both § 12-6-3790(D)(2)(c) and § 12-6-3585(I) require the addback on the South Carolina return. And South Carolina never allows a deduction for state and local income taxes (§ 12-6-1130(2)) — so an individual who deducted a disallowed contribution as a SALT payment may have to add back some or all of it on the South Carolina return. The two worked examples (a corporation and an individual, each donating to the Exceptional Needs Children's Fund) show the deduction being fully added back to South Carolina taxable income.

What this means for you

Individuals who donate for a South Carolina credit

You generally cannot both claim the South Carolina credit and keep a full deduction for the same donation. Federally your charitable deduction shrinks by the credit; on your South Carolina return, the addback rules typically wipe out the deduction for these credit programs. The 15% safe harbor is the main way a small credit leaves your deduction intact.

C corporations and pass-through entities

The federal safe harbors let a business deduct the payment as an ordinary business expense equal to the credit — but South Carolina's § 12-6-3790(D)(2)(c) / § 12-6-3585(I) addback rules then pull that business-expense deduction back into South Carolina taxable income for the affected credits. In the ruling's corporate example, the entire $40,000 business-expense deduction is added back.

Accountants and tax professionals

Watch three moving parts: (1) whether the federal deduction is reduced at all (the 15% safe harbor), (2) which federal bucket the disallowed amount lands in (charitable, § 162 business expense, or § 164 SALT), and (3) the specific South Carolina addback for the credit claimed. Note that the refundable Exceptional Needs credit under § 12-6-3790(H)(2) (tuition for an exceptional-needs child) is not a charitable contribution and is not affected by this ruling.

Common questions

Q: I got a South Carolina credit for my donation. Can I still deduct the full gift?
A: Generally no. Federally, your charitable deduction is reduced by the credit (unless the credit is 15% or less of the payment). And for the affected South Carolina credits, an addback rule typically removes the deduction on your South Carolina return.

Q: What is the 15% safe harbor?
A: If the state or local tax credit is 15% or less of your cash payment (or of the value of donated property), your charitable contribution deduction is not reduced.

Q: Which South Carolina credits does this affect?
A: The Conservation Credit (§ 12-6-3515), the Community Development Credit (§ 12-6-3530), the Industry Partnership Fund Credit (§ 12-6-3585), and the Exceptional Needs Children's Fund Credit (§ 12-6-3790(H)(1)).

Q: Can a business just deduct the donation as a business expense instead?
A: Federally, often yes (IRC § 162 safe harbors, including one for C corporations). But South Carolina requires an addback of that deduction for the affected credits, so it usually doesn't help on the South Carolina return.

Q: Does this change the refundable exceptional-needs tuition credit?
A: No. The refundable credit under § 12-6-3790(H)(2) for tuition payments is not a charitable contribution and is not impacted by this ruling.

Citations and references

South Carolina statutes:

• § 12-6-3790 (Supp. 2019) — Educational Credit for Exceptional Needs Children; addback at § 12-6-3790(D)(2)(c); refundable tuition credit at (H)(2) (not affected)
• § 12-6-3585 — Industry Partnership Fund Credit; addback at (I)
• § 12-6-3515 (Conservation), § 12-6-3530 (Community Development)
• § 12-6-1130(2) — South Carolina deduction for taxes; no deduction for state and local income taxes

Federal law and regulations:

• IRC § 170 (charitable contributions), § 162 (business expenses), § 164 (state and local taxes; $10,000 cap under § 164(b)(6))
• Treas. Reg. § 1.170A-1(h)(3) (deduction reduced by credit; 15% safe harbor), § 1.162-15(a) (business-expense treatment), § 1.164-3(j) (SALT treatment of disallowed amount)

Superseded guidance (described in prose, not linked): this ruling supersedes SC Information Letter #19-10. See also SC Revenue Ruling #19-1 for the state tax deduction for individuals who itemize.

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR21-4.pdf

Original ruling text

STATE OF SOUTH CAROLINA

DEPARTMENT OF REVENUE
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 125, Columbia, South Carolina 29214-0575

SC REVENUE RULING #21-4
SUBJECT:

Impact of Treasury Regulations on Charitable Contribution Deduction and
State Tax Credits
(Income Tax)

EFFECTIVE DATE: Effective for all periods open under statute, except to the extent the
Department follows federal regulations, those regulations are effective as
of the date each regulation is effective for federal income tax purposes.
REFERENCES:

S.C. Code Ann. Section 12-6-3790 (Supp. 2019)
Internal Revenue Code Section 162
Internal Revenue Code Section 164
Internal Revenue Code Section 170
Treasury Regulation 1.162-15(a)
Treasury Regulation 1.164-3(j)
Treasury Regulation 1.170A-1(h)(3)

SUPERSEDES:

SC Information Letter #19-10

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2014)
S.C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public. 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 Department advisory opinion.

PURPOSE
In April 2019, the Department issued SC Information Letter #19-10 informing taxpayers of the
issuance of proposed Treasury Regulation 1.170A-1(h)(3) 1 which may impact a taxpayer’s
charitable contribution deduction amount if the taxpayer receives, or expects to receive, a
corresponding South Carolina tax credit.

1

Proposed Treasury Regulation 1.170A-1(h)(3) was published by the IRS on August 27, 2018.

1

On August 11, 2020, Treasury Regulation 1.170A-1(h)(3) became final and generally adopted
the rules contained in the proposed regulation with only clarifying and technical changes. The
IRS also issued Treasury Regulations 1.162-15(a) and 1.164-3(j) that explain when a payment
that would otherwise qualify as a charitable contribution can be treated as an ordinary and
necessary business expense under Internal Revenue Code (“IRC”) Section 162 or a payment of
state and local taxes under IRC Section 164. 2
South Carolina adopts IRC Sections 170, 162, and 164 and will apply the Treasury regulations
promulgated under IRC Sections 170, 162, and 164 in calculating South Carolina taxable
income. The regulations impact a taxpayer’s tax treatment of contributions made to a charitable
organization for both federal and South Carolina income tax purposes when the taxpayer
receives or expects to receive a state tax credit in exchange for the contribution.
These regulations and their impact on South Carolina taxpayers are discussed below. Examples
are provided to illustrate the impact for a corporate and an individual South Carolina taxpayer
receiving a state income tax credit.
FEDERAL TREASURY REGULATIONS - OVERVIEW 3
A. Charitable Contribution Deduction Reduced when Taxpayer Receives a State or Local
Tax Credit
Internal Revenue Code Section 170(a) generally allows a federal income tax deduction for
charitable contributions made to an organization described in Code Section 170(c) (charitable
organization). 4 Treasury Regulation 1.170A-1(h)(3), however, provides that if a taxpayer makes
a payment or transfers property to a charitable organization and receives a state or local tax credit
for that contribution, the amount of the taxpayer’s charitable contribution deduction for federal
income tax purposes is reduced by the amount of the tax credit received.
Exception: The regulation provides that the charitable contribution is not reduced if the amount
of the state or local tax credit does not exceed 15% of the taxpayer’s payment or 15% of the fair
market value of the property transferred by the taxpayer. If, rather than a credit, the taxpayer
receives a state or local tax deduction that does not exceed the amount of payment or the fair
market value of the property transferred, the taxpayer is not required to reduce its federal
charitable deduction because of the state or local tax deduction.
Example: Individual A makes a $1,000 payment to a charitable organization. In exchange for the
payment, A receives a state tax credit equal to 70% of the amount paid to the charitable
organization. A’s charitable contribution deduction for federal purposes is reduced by $700
($1,000 contribution x 70% tax credit). Accordingly, A’s federal charitable contribution
deduction for the $1,000 payment is $300.
The effective date of these final regulations is August 11, 2020; however, the dates of applicability are earlier than
the effective date of the final regulations and are located in Treasury Regulations 1.162-15(a)(4), 1.164-3(j)(7), and
1.170A-1(h)(3)(x) and (h)(4)(iii). Final Treasury Regulation 1.170A-1(h)(3) applies to amounts paid or property
transferred by the taxpayer after August 27, 2018.
3
This is a brief overview of the Treasury regulations. Questions regarding the federal income tax consequences of
these regulations should be directed to the Internal Revenue Service or your tax advisor.
4
Qualifying organizations under IRC Section 170(c) include states and their political subdivisions.
2

2

B. Treatment of Contribution as a Business Expense Deductible under IRC Section 162
Under Treasury Regulation 1.162-15(a)(1) and (2), a taxpayer that operates a trade or business
can deduct a payment or transfer made to a charitable organization as a business expense under
Code Section 162, rather than a charitable deduction under Code Section 170, if the payment or
transfer: (1) bears a direct relationship to taxpayer’s trade or business and (2) is made with a
reasonable expectation of financial return (other than the state or local tax credit itself)
commensurate with the amount of the payment or transfer.
Exception for Payments in Cash or Cash Equivalents. Notwithstanding the above, the regulation
provides a safe harbor exception for C corporations. Under the safe harbor, a C corporation that
makes a payment of cash or a cash equivalent to or for the use of a charitable organization and in
return receives a state or local tax credit that reduces a tax imposed on it may deduct an amount
equal to the credit received, or expected to be received, as a business expense. Treasury
Regulation 1.162-15(a)(3)(i), (iii) and (iv).
The regulation also provides a safe harbor for pass through entities if the credit received, or to be
received, will not reduce a state or local income tax and the entity: (1) is regarded as an entity
separate from its owners and (2) is subject to a state or local tax incurred in carrying on its trade
or business that is imposed directly on the entity. Treasury Regulation 1.162-15(a)(3)(ii), (iii)
and (iv).
C. Treatment of Disallowed Contribution as a Payment of State and Local Taxes
Deductible under IRC Section 164
Internal Revenue Code Section 164 provides a deduction for state and local taxes for individuals
who itemize deductions. Under Treasury Regulation 1.164-3(j), an individual who itemizes
deductions may treat the portion of a charitable contribution disallowed under Treasury
Regulation 1.170A-1(h)(3) and made in cash or a cash equivalent as a payment of state or local
tax under IRC Section 164, subject to the $10,000 state and local tax limit under IRC Section
164(b)(6).
IMPACT ON SOUTH CAROLINA TAXPAYERS
Treasury Regulation 1.170A-1(h)(3) affects the charitable contribution deduction amount
claimed on a taxpayer’s South Carolina income tax return if the taxpayer receives or expects to
receive a state or local tax credit in exchange for the contribution.
Because South Carolina adopts IRC Section 170 and currently follows the Treasury regulations
thereunder for determining a taxpayer’s South Carolina taxable income, any reduction in a
taxpayer’s federal charitable contribution deduction required under Treasury Regulation 1.170A1(h)(3) will also reduce the taxpayer’s South Carolina charitable contribution deduction.

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South Carolina tax credits affected by the Treasury regulations include:
•

Conservation Credit - Code Section 12-6-3515 5

•

Community Development Credit - Code Section 12-6-3530 6

•

Industry Partnership Fund Credit - Code Section 12-6-3585 7

•

Exceptional Needs Children’s Fund Credit - Code Section 12-6-3790(H)(1) 8

In addition to the reduction of a charitable contribution deduction when a taxpayer receives a
South Carolina tax credit, effects of the federal regulations may include:
•

The treatment of a contribution as a business expense deduction.

•

The treatment of the disallowed portion of contribution as an itemized deduction for state and
local taxes.

•

Requiring the taxpayer to add back the “deduction” for purposes of South Carolina income
taxes.
This requirement may apply whether the deduction is a charitable contribution deduction, a
business expense deduction, or an itemized deduction for state and local taxes. Code Section
12-6-3790(D)(2)(c) (Exceptional Needs Children’s Fund credit) and Code Section 12-63585(I) (Industry Partnership Fund credit) both require this addback on the South Carolina
income tax return. See Examples 1 and 2 below.
In addition, the South Carolina deduction for taxes permitted by IRC Section 164 is computed
in the same manner as provided in IRC Section 164 except no deduction is allowed for state
and local income taxes. 9 Therefore, regardless of the credit statute, an individual who deducts
a disallowed charitable contribution as a state and local income tax may have to add back
some or all of the “deduction” for purposes of South Carolina income taxes. 10

Subject to the caps and conditions in Code Section 12-6-3515, a taxpayer that qualifies for and claims a
charitable deduction for a gift of land for conservation or for a qualified conservation contribution may
claim a credit equal to 25% of the total amount of the deduction attributable to the gift of land or the
qualified real property interest located in this State.
6
This credit is no longer available unless more funds are authorized by the General Assembly.
7
For South Carolina income tax purposes, a taxpayer cannot deduct the contributions that give rise to the Industry
Partnership Fund credit pursuant to Code Section 12-6-3585(I).
8
The refundable credit under Code Section 12-6-3790(H)(2) for tuition payments to eligible schools for an
exceptional needs child in the taxpayer’s custody or care is not a charitable contribution; it is not impacted by this
advisory opinion.
9
Code Section 12-6-1130(2).
10
See SC Revenue Ruling #19-1 for additional guidance on the state tax deduction for individuals who itemize
deductions.
5

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EXAMPLES – Illustrating the impact of the treasury regulations on the Exceptional Needs
Children’s Fund credit
Note: Each particular credit and each taxpayer’s specific tax situation could result in a different
answer.
The simplified examples illustrate the South Carolina tax consequences of the regulations for a
corporate taxpayer and an individual taxpayer claiming the Exceptional Needs Children’s Fund
credit in Code Section 12-6-3790(H)(1).
The exceptional needs children’s fund credit illustrated is equal to 100% of the taxpayer’s
qualified contribution. The amount of the credit that can be claimed is limited to 60% of the
taxpayer’s tax liability. If a taxpayer deducts the amount of the contribution on his federal return
and claims this credit, the taxpayer must add back the amount of the deduction for purposes of
South Carolina income taxes pursuant to Code Section 12-6-3790(D)(2)(c).
The examples assume:
(a) The taxpayer meets the South Carolina income tax credit requirements; and
(b) The Exceptional Needs Children’s Fund qualifies as an organization described in IRC
Section 170(c).
Example 1 – Corporation Contributes Cash to the SC Exceptional Needs Children’s Fund
Facts: In January 2021, Corporation C donates $40,000 in cash to the SC Exceptional Needs
Children’s Fund and receives a $40,000 credit. Under Treasury Regulation 1.170A-1(h)(3), C’s
federal charitable deduction is reduced by the SC credit received. C has determined for federal
income tax purposes that it meets the requirements in Treasury Regulation 1.162-15(a) to treat
the disallowed contribution amount as a business expense (and not as a charitable contribution).
Corporation C has sufficient tax liability to use the entire credit in 2021.
Exceptional Needs Children’s Fund Credit Code Corporate Donor
Section 12-6-3790(H)(1)
Charitable Contribution and SC Credit
Contribution Payment for SC Credit
$40,000
SC Income Tax Credit - 100% of contribution
$40,000
($40,000 contribution x 100%)
Federal Impact
Federal Charitable Contribution Deduction
Allowed under Regulation 1.170A-1(h)(3)
Federal Business Expense Deduction
Allowed under Regulation 1.162-15(a)

$0
($40,000 contribution less $40,000 SC credit)
$40,000

SC Impact
SC Credit
SC Charitable Contribution Deduction
SC Income Tax Addition Adjustment –
Addback of the federal business expense deduction
allowed for the contribution under IRC Section 162
See Note below

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$40,000
$0 (same as federal)
No SC adjustment is required
$40,000 addition to SC taxable income on Form SC
1120

Note: In this example, for South Carolina income tax purposes, Corporation C is allowed the SC
credit, but is not allowed a deduction for its contribution. Code Section 12-6-3790(D)(2)(c)
requires a taxpayer to add back any federal deduction claimed as a result of the payment that
generated this credit. The addback results in the disallowance of the entire $40,000 federal
business expense deduction for South Carolina income tax purposes.
Example 2 – Individual Contributes Cash to the SC Exceptional Needs Children’s Fund
Facts: In January 2021, Individual D donates $8,000 in cash to the SC Exceptional Needs
Children’s Fund and receives an $8,000 credit. Under Treasury Regulation 1.170A-1(h)(3), D’s
federal charitable deduction is reduced by the SC credit received. D itemizes his deductions. D
paid $3,000 of South Carolina income taxes during the year and $1,000 in property taxes (before
consideration of any disallowed charitable deduction). Individual D files a joint tax return and
has sufficient tax liability to use the entire credit in 2021.
Exceptional Needs Children’s Fund Credit
Code Section 12-6-3790(H)(1)
Charitable Contribution and SC Credit
Contribution Payment for SC Credit
SC Income Tax Credit - 100% of contribution

Individual Donor
$8,000
$8,000
($8,000 contribution x 100%)

Federal Impact
Federal Charitable Contribution Deduction
Allowed under Regulation 1.170A-1(h)(3)

$0
($8,000 contribution less $8,000 SC tax
credit)
$10,000
($3,000 SC income taxes and $1,000 SC
property taxes paid plus $6,000 of the $8,000
SC tax credit disallowed as a charitable
contribution claimed as itemized deduction)

Federal Itemized Deduction for State and
Local Taxes under IRC Section 164
Note: Currently, the state and local tax
deduction cannot exceed $10,000 11
SC Impact
SC Credit
SC Charitable Contribution Deduction

$8,000
$0 (same as federal)
No SC adjustment is required
SC Income Tax Addition Adjustment - due to $9,000 addition to SC taxable income on
charitable contribution treated as an itemized Form SC 1040
deduction under IRC Section 164 and SC Code ($10,000 state and local cap less $1,000
Section 12-6-1130(2)
property taxes)
See Note below

The federal Tax Cuts and Jobs Act of 2017 amended IRC Section 164 for tax years beginning January 1, 2018
through December 31, 2025 by adding IRC Section 164(b)(6) to limit the individual federal itemized tax deduction
to a combined, total deduction of $10,000 ($5,000 if “married filing separate”).
11

6

Note: In this example, for South Carolina income tax purposes, Individual D is allowed the SC
credit, but is not allowed a deduction for his contribution. Also, SC Code Section 12-6-1130(2)
provides, in part, that the deduction for taxes permitted by IRC Section 164 is computed in the
same manner as provided in IRC Section 164 except there is no deduction for state and local
income taxes. Therefore, Individual D in this example must add back the $6,000 of state taxes
that he deducted on his federal individual income tax return for the disallowed charitable
contribution, and the $3,000 of state income taxes he paid and deducted on his federal income
tax return.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/W. Hartley Powell
W. Hartley Powell, Director
February 10
, 2021
Columbia, South Carolina

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