Claiming the Federal Research and Development Tax Credit? Don’t Overlook the State Opportunity

Submitted by Margaret Krajcer, JD, vice president and general counsel of Tax Credits Group. TCG is a Cleveland-based firm specializing in federal and state R&D tax credits and the Employee Retention Credit. She can be reached at maggie@taxcreditsgroup.com.

South Carolina is home to an active economy comprised of many versatile industries such as aerospace and aviation, automotive manufacturing, and many other areas of advanced manufacturing. Many of these innovative businesses have come to rely upon the federal Research and Development (R&D) tax credit as a tax tool that they can depend on annually to reduce their tax liability.

Yet, despite the reliable nature of the federal incentive, many of these same businesses continue to leave money on the table by failing to assess the South Carolina state credit opportunity.

Since the requirements associated with claiming the state credit largely follow those of the federal, it is likely that many S.C. businesses would find themselves with eligibility for both.   In fact, a unique requirement to claiming the S.C. state credit is that a taxpayer must also claim the federal R&D credit for the same taxable year.

Let’s take a closer look at the state credit incentive, along with other key considerations and requirements for claiming it.

What is the South Carolina R&D Tax Credit?

In order to reward innovative industries and companies, South Carolina offers a state-specific R&D tax credit to businesses that are conducting qualifying research activities.  As defined in S.C. Code Section 12-6-3415, this credit specifically encompasses only qualified research activities that are conducted within the state of South Carolina and works to offset corporate income tax and corporate license fees. The S.C. state credit is equal to 5% of the total research expenses within the tax year that the credit is being claimed.

South Carolina mirrors Section 41 of the Internal Revenue Code regarding federal qualified research expenditures (QREs). Section 41 defines QREs as the sum of in-house research expenses and contract research expenses:

• In-House Research Expenses – Include wages paid to employees who are performing qualified R&D activities as well as amounts paid for supplies used to conduct research and development.
• Contract Research – Is 65% of the amount paid to any outside vendor or person who performs qualified research on behalf of the company.

Other Important Items to Note:

• As previously noted, a taxpayer must claim the federal R&D credit for the same taxable year
• The credit cannot exceed 50% of the company’s tax liability for the year after all other credits have been applied
• The credit is non-refundable
• The credit can be carried forward 10 years
• The credit has a 3-year statute of limitations, thus taxpayers who failed to take advantage of the credit on an originally filed return still have an opportunity to amend for it

Credit Calculation Example:

A South Carolina manufacturer designs and develops custom parts and propellers for the aerospace industry. The related research activities take place solely within the state of South Carolina. The company is claiming the federal R&D tax credit in 2021.

Claiming the Credit:

In order to claim the South Carolina R&D tax credit, taxpayers will use the SC Schedule TC-18 tax form. This form requires the following information:

• South Carolina Qualified research expense details
• Research expenses credit carried forward from previous years
• Total Research expenses credit before limitations
• Tax liability before claiming credits
• Total of all other credits other than the Research Expenses credit

The Schedule TC-18 form is submitted with the annual South Carolina state return.

It is advisable that businesses claiming the state credit maintain detailed documentation for audit compliance purposes, pertaining to the underlying R&D activities and the associated QREs.

Conclusion:

South Carolina provides an R&D tax credit in order to promote the investment in new technology and innovation within the state.  This investment is intended to grow existing businesses and entice new ones to the state, which is critical to the South Carolina economy.  For businesses, the credit offers tax savings, increased cash flow, and the opportunity to grow their operations with the State’s assistance.  The South Carolina R&D credit may be a significant tax savings opportunity for businesses, especially for those already taking advantage of the federal R&D credit.