Can a South Carolina employer that claimed the federal Employee Retention Credit deduct the wages that were disallowed on its federal return?

Plain-English summary

South Carolina Revenue Ruling #22-4 answers a narrow but valuable question for employers who claimed the federal Employee Retention Credit (ERC) during the pandemic: can you still deduct, on your South Carolina return, the wages the IRS made you give up? The answer is yes.

The federal problem. The ERC (originally CARES Act § 2301, later codified as IRC § 3134) is a refundable employer payroll-tax credit on qualified wages. Federal law says "rules similar to IRC § 280C(a)" apply — meaning an employer's federal deduction for those qualified wages (including qualified health-plan expenses) is reduced by the amount of the ERC it claimed (confirmed by IRS Notice 2021-20, Q&A 60). In short: take the federal credit, lose the corresponding federal wage deduction.

South Carolina's answer. South Carolina does not adopt IRC § 3134 (S.C. Code § 12-6-50(16)) and has no ERC of its own. And under S.C. Code § 12-6-1130(7), the § 280C expense limitations tied to certain federal credits do not apply for South Carolina purposes. The Department's longstanding position is to allow a deduction for wages disallowed because of a federal credit when there's no matching South Carolina credit. Even though the ERC disallowance runs through "rules similar to" § 280C rather than § 280C directly, the Department treats it the same way.

The result — a subtraction on your SC return. A South Carolina return starts from federal taxable income. To the extent the ERC reduced your federal wage deduction in 2020 or 2021, you make a modification on the South Carolina return — a subtraction from federal taxable income — to effectively restore the deduction for those qualified wages when computing South Carolina taxable income.

The window. This modification applies only to qualified wages paid or accrued after March 12, 2020 and before January 1, 2022 (the ERC's qualified-wage period for 2020 and 2021).

What this means for you

Employers that claimed the ERC

If you claimed the federal ERC for 2020 or 2021 and had to reduce your federal wage deduction because of it, don't leave the deduction on the table for South Carolina. Make the subtraction modification on your SC income tax return for the disallowed qualified wages (including qualified health-plan expenses) for that period. If you already filed SC returns for those years without the modification, an amended South Carolina return may recover it (subject to the statute of limitations — the ruling applies to all periods open under statute).

Accountants and tax professionals

Tie the SC subtraction to the federal § 280C-style disallowance amount actually taken for the ERC in 2020–2021. The authority is § 12-6-1130(7) (SC ignores the § 280C credit-related expense limitation) plus § 12-6-50(16) (SC doesn't adopt § 3134). Confirm the wage amounts against the federal ERC computation and IRS Notice 2021-20 (and the later quarterly notices), and keep the modification within the 3/12/2020–1/1/2022 qualified-wage window. This is a state-conformity/decoupling item — it doesn't affect federal ERC eligibility.

Everyone else

This is specific to employers that took the federal ERC. It doesn't affect individuals who weren't claiming that employer credit, and it isn't a sales, property, or general income-tax change. Included here for completeness of South Carolina's advisory-opinion library.

Common questions

Q: What does RR 22-4 let me do?
A: Subtract, on your South Carolina income tax return, the qualified wages you couldn't deduct federally because you claimed the federal Employee Retention Credit in 2020 or 2021.

Q: Why does South Carolina allow the deduction when the IRS doesn't?
A: South Carolina doesn't adopt IRC § 3134 and, under § 12-6-1130(7), doesn't apply the § 280C credit-related expense limitation. Since there's no South Carolina ERC, the state allows the wage deduction.

Q: Which wages and years qualify?
A: Qualified wages (including qualified health-plan expenses) paid or accrued after March 12, 2020 and before January 1, 2022 — i.e., the 2020 and 2021 ERC period.

Q: How do I claim it?
A: As a modification (subtraction from federal taxable income, the starting point of the SC return) when computing South Carolina taxable income. If prior-year SC returns missed it, an amended return may recover it for open periods.

Q: Does this affect whether I qualified for the federal ERC?
A: No. This ruling addresses only the South Carolina income-tax treatment of the disallowed wage deduction, not federal ERC eligibility.

Citations and references

Statutes:

• S.C. Code Ann. § 12-6-1130(7) — the IRC § 280C expense limitations related to certain federal credits do not apply for South Carolina, allowing the wage-deduction modification
• S.C. Code Ann. § 12-6-50(16) — South Carolina does not adopt IRC § 3134
• IRC § 3134 — the federal Employee Retention Credit (as codified)
• IRC § 280C(a) — the federal rule disallowing a wage deduction equal to certain employment credits
• CARES Act § 2301 (Pub. L. 116-136) — the original Employee Retention Credit

Also referenced: IRS Notice 2021-20 (Question & Answer 60) confirming the federal wage-deduction reduction, plus Notices 2021-23, 2021-49, and 2021-65 for the 2021 quarters; the American Rescue Plan Act of 2021 (Pub. L. 117-2, § 9651) codifying the credit at § 3134.

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR22-4.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 #22-4

SUBJECT:

Federal Employee Retention Credit – Modification for Qualified Wages
for Tax Years 2020 and 2021
(Income Tax)

EFFECTIVE DATE: Applies to all periods open under statute, but only with respect to qualified
wages paid or accrued after March 12, 2020, and before January 1, 2022
REFERENCES:

Internal Revenue Code Sections 3134 and 280C
S.C. Code Ann. Section 12-6-1130(7) (2014)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2014)
S.C. Code Ann. Section 1-23-10(4) (2005)
S.C. 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.

QUESTION
Is a taxpayer allowed a modification from federal taxable income on its South Carolina income
tax return for qualified wages disallowed as a deduction for federal income tax purposes when
the disallowance results from the taxpayer claiming the federal employee retention credit in 2020
and 2021?
CONCLUSION
Yes. The taxpayer is allowed a modification to its federal taxable income on its South Carolina
income tax return. They may deduct qualified wages disallowed for federal tax purposes as a
result of claiming the federal employee retention credit.
The modification to federal taxable income on the South Carolina income tax return is only
applicable to qualified wages paid or accrued after March 12, 2020, and before January 1, 2022.
1

LAW AND DISCUSSION
Overview – Federal Coronavirus Employee Retention Credit
In 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act)
that included a new employee retention credit along with various other relief programs aimed at
alleviating the economic fallout from COVID-19. 1 The employee retention credit is a refundable
employer payroll tax credit based on qualified wages paid to an employee during a prescribed
period of time. Subsequent federal legislation modified and then repealed the employee retention
credit for specific periods (calendar quarters) during 2021. 2 In the American Rescue Plan Act of
2021, 3 the employee retention credit, originally enacted as an uncodified provision in the
CARES Act (Section 2301), was codified as Section 3134 of the Internal Revenue Code. 4
CAUTION: The Internal Revenue Service (IRS) released various guidance regarding the federal
legislative developments, quarterly payroll periods, and procedures applicable to the employee
retention credit and qualified wages paid in 2020 and 2021. 5 Before claiming a federal employee
retention credit, the legislation and IRS guidance should be reviewed to address compliance with
the various technical modifications to the credit during 2020 and 2021.
Federal Wage Deduction Disallowance
The relevant federal legislation concerning the employee retention credit includes the following
limitation: “For purposes of this section, rules similar to [… IRC Section] 280C(a) shall apply.”
(Emphasis added)
IRC Section 280C(a), “Rule For Employment Credits,” provides:
No deduction shall be allowed for that portion of the wages or salaries paid or
incurred for the taxable year which is equal to the sum of the credits determined
for the taxable year under sections 45A(a), 45P(a), 45S(a), 51(a), and 1396(a). ...
The employee retention credit is not specified in the list of IRC sections subject to this federal
statutory disallowance provision.
However, the relevant federal authorities applicable to the employee retention credit (including
IRC Section 3134(e)) provide that “rules similar to” IRC Section 280C(a) shall apply. IRS
Notice 2021-20 (Section III Guidance; L. Special Issues for Employers: Income and Deduction)
specifically addressed the scope of this limitation in Question and Answer 60 of that Notice. 6
Pub. L. No. 116-136, Section 2301.
Pub. L. No. 116-260, Sections 206 and 207; Pub. L. No. 117-2, Section 9651; and Pub. L. No. 117-58, Section
80604.
3
The American Rescue Plan Act of 2021, Pub. L. No. 117-2, Section 9651.
4
South Carolina does not adopt Section 3134 of the Internal Revenue Code. See SC Code Section 12-6-50(16).
5
Selected IRS Guidance: Notice 2021-20, 2011-11 I.R.B. 922 (wages paid in 2020); Notice 2021-23, 2021-16
I.R.B. 1113 (wages paid in Q1 and Q2, 2021); Notice 2021-49, 2021-34 I.R.B. 316 (wages paid in Q3, 2021;
retroactively limited); and Notice 2021-65, 2021-51 I.R.B. 880 (wages paid in Q4, 2021).
6
IRS Notice 2021-20, 2021-11 I.R.B. 922.
1
2

2

Question 60: Does the employee retention credit reduce the expenses that an
eligible employer could otherwise deduct on its federal income tax return?
Answer 60: Yes. Section 2301(e) of the CARES Act provides that rules similar to
section 280C(a) of the Code shall apply for purposes of applying the employee
retention credit. Section 280C(a) generally disallows a deduction for the portion
of wages or salaries paid or incurred equal to the sum of certain credits
determined for the taxable year. Accordingly, a similar deduction disallowance
applies under section 2301(e) of the CARES Act with regard to the employee
retention credit, such that an employer’s deduction for qualified wages, including
qualified health plan expenses, is reduced by the amount of the employee
retention credit. ... (Emphasis added)
South Carolina Income Tax Treatment of Qualified Wages
Code Section 12-6-1130(7) provides that the IRC Section 280C expense limitations related to
certain federal tax credits do not apply. As a result, this statutory provision allows a modification
to federal taxable income for the applicable portion of wages that were unable to be deducted in
2020 or 2021 for federal income tax purposes as a result of IRC Section 280C. While the
deduction disallowance for the payment of wages claimed under the employee retention credit is
not done directly through IRC 280C, but under “rules similar to” that statute, the Department
will follow IRS Notice 2020-21 and treat the federal disallowance of the wage deduction as
though that reduction occurred pursuant to IRC Section 280C. In addition, the longstanding
position of the Department is to allow a deduction for wages that are disallowed as a result of a
federal tax credit since there is no South Carolina tax credit for these wages. Accordingly, Code
Section 12-6-1130(7) will apply and an employer may make a modification to federal taxable
income on its South Carolina income tax return to allow a subtraction for any qualified wages
paid that were disallowed under the federal employee retention credit provisions.
To the extent an taxpayer’s deduction for qualified wages is reduced by the amount of the
employee retention credit for federal income tax purposes in 2020 and 2021, that reduction is a
modification on the South Carolina income tax return (i.e., a subtraction from federal taxable
income, the starting point of the South Carolina return) in computing South Carolina taxable
income.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/W. Hartley Powell
W. Hartley Powell, Director
June 10
, 2022
Columbia, South Carolina

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