Does South Carolina follow the federal final 'tangible property' regulations on capitalizing or deducting property costs (per SC IL #14-11)?

Plain-English summary

For income tax purposes, South Carolina follows the IRS's final "tangible property" regulations under I.R.C. §§ 162(a) and 263(a) — the rules that decide when a business must capitalize a cost versus deduct it as a repair. These regulations govern amounts paid to acquire, produce, or improve tangible property.

The IRS issued the final regulations in September 2013 (T.D. 9636), replacing the earlier temporary regulations. They generally apply to tax years beginning on or after January 1, 2014, and under the transition rules taxpayers may elect to apply them to tax years beginning on or after January 1, 2012.

South Carolina reaches the same result through conformity: the state generally adopts the Internal Revenue Code for income tax purposes under S.C. Code § 12-6-40 (with the exceptions listed in § 12-6-50), and it has adopted I.R.C. §§ 162(a) and 263(a) and the regulations under them. So the Department will follow the final regulations to the extent they apply to the tax year in question.

The letter adds a cross-tax caution: adopting the final regulations may affect other South Carolina taxes. For example, subject to limits, some South Carolina property taxes are calculated using the property's income tax basis (see S.C. Code § 12-37-930 and Regs. 117-1840.1), so a change in how costs are capitalized for income tax can carry over.

What this means for you

If you own a business with tangible property

Apply the federal capitalize-vs-deduct rules on your South Carolina income tax the same way you apply them federally, for the years the final regulations cover. Because South Carolina conforms to the Code, there is no separate state rule to track here.

If you hold property subject to South Carolina property tax

Watch the knock-on effect: where property tax is based on the income tax basis, how you capitalize or deduct costs for income tax can change that basis. Coordinate the two.

Common questions

Q: Does South Carolina follow the federal tangible property (repair) regulations?
A: Yes, for income tax purposes, because South Carolina conforms to I.R.C. §§ 162(a) and 263(a) and their regulations under S.C. Code § 12-6-40.

Q: What years do the final regulations cover?
A: They generally apply to tax years beginning on or after January 1, 2014, and may be applied to years beginning on or after January 1, 2012 under the transition rules.

Q: Can this affect any tax other than income tax?
A: Yes. Some South Carolina property taxes are computed using the property's income tax basis, so the change can carry over to property tax.

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/IL14-11.pdf

Original ruling text

State of South Carolina

Department of Revenue
300A Outlet Point Blvd., P.O. Box 12265, Columbia, South Carolina 29211
Website Address: http://www.sctax.org

SC INFORMATION LETTER #14-11

SUBJECT:

Final Treasury Regulations – Capitalization and Deduction for
Tangible Personal Property

DATE:

September 3, 2014

AUTHORITY:

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

REFERENCES: S.C. Code Ann. Section 12-6-40 (2014)
S.C. Code Ann. Section 12-6-50 (2014)
S.C. Code Ann. Regs. 117-1840 (2012)
SCOPE:

An Information Letter is a written statement issued to the public to
announce general information useful in complying with the laws
administered by the Department. An Information Letter has no
precedential value.

In September 2013, the Internal Revenue Service issued final regulations under I.R.C. §§
162(a) and 263(a) relating to when taxpayers must capitalize or deduct expenses for
amounts paid to acquire, produce, or improve tangible personal property. 1 The final
regulations replace temporary regulations under I.R.C. §§ 162(a) and 263(a) and
generally apply to taxable years beginning on or after January 1, 2014. 2
For income tax purposes, South Carolina has adopted I.R.C. §§ 162(a) and 263(a) and the
regulations thereunder. 3 Accordingly, for income tax purposes, the Department will
follow the final regulations under I.R.C. §§ 162(a) and 263(a) to the extent that the final
regulations are applicable to the tax year(s) in question. In addition, adoption of the final
regulations may impact other South Carolina taxes. For example, subject to certain
limitations, some South Carolina property taxes are calculated using the property’s
income tax basis. See S.C. Code Ann. § 12-37-930 (2014); S.C. Code Ann. Regs. 1171840.1 (2012).

1

T.D. 9636, 2013-43 I.R.B. 331.
As provided in the regulation transition rules, taxpayers may apply the final regulations
to tax years beginning on or after January 1, 2012.
3
South Carolina generally conforms to the I.R.C. for income tax purposes. Code Section
12-6-40. See Code Section 12-6-50 for sections of the I.R.C. specifically not adopted by South
Carolina.
2

1