Could an S corporation earn South Carolina's historical job tax credit and use the carryforward after converting to a C corporation under PLR 95-3?

Plain-English summary

South Carolina Private Letter Ruling 95-3 concluded that the addressed manufacturing company could earn the historical job tax credit while it was an S corporation and carry unused credit into later years after becoming a C corporation.

The company had created jobs in a less-developed county while operating as an S corporation. Although it generally had no corporate-level income-tax liability, the Department said it was still "subject to" the corporate tax statute because an S corporation could owe entity-level tax on items such as excess passive income, built-in gains, investment-credit recapture, or LIFO recapture.

That status allowed the company to earn the five-year job tax credit if every statutory requirement was met. Unused credit could carry forward for 10 years from the close of the year earned. Because the S corporation and later C corporation were the same taxpayer after revocation of the S election, the carryforward could offset later corporate-level tax, subject to the historical limit of 50% of the qualifying annual liability.

The ruling did not determine how many jobs qualified or when they were created because the taxpayer had not supplied those details. It also noted that the taxpayer did not qualify to pass the credit through to shareholders under the fee-in-lieu provision.

Common questions

Q: Did the absence of ordinary S-corporation tax prevent the company from earning credit? No. The Department treated the S corporation as subject to corporate tax for eligibility purposes.

Q: Could unused credit survive the conversion to C-corporation status? Yes, because the company remained the same taxpayer.

Q: How long did the historical carryforward last? Ten years from the close of the tax year in which each credit was earned.

Q: Could the credit eliminate all corporate tax? No. The ruling quoted a limit of 50% of qualifying corporate or premium tax liability for the year.

Q: Can another company rely on this PLR? No. The ruling states that it has no precedential value and only the addressed taxpayer may rely on it.

Citations and references

• S.C. Code Ann. §§ 12-7-1220 and 12-7-230 (historical job credit and corporate tax)
• S.C. Code Ann. §§ 12-7-235 and 12-7-415 (S-corporation treatment)
• IRC § 1362(a) (S-election revocation identified in the facts)
• SC Revenue Ruling 25-5 (current comprehensive New Jobs Credit guide; described in prose without an invented link)

Subject

Job Tax Credit

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR95-3.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

SC PRIVATE LETTER RULING #95-3 (TAX)

TO:

ABC Company

SUBJECT:

Job Tax Credit
(Income Tax)

DATE:

March 20, 1995

REFERENCE:

S. C. Code Ann. Section 12-7-1220 (Supp. 1993)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1993)
SC Revenue Procedure #94-1

SCOPE:

A Private Letter Ruling is an official advisory opinion issued by the
Department of Revenue to a specific person.

NOTE:

A Private Letter Ruling may only be relied upon by the person to whom it
is issued and only for the transaction or transactions to which it relates. A
Private Letter Ruling has no precedential value.

Question:
Is ABC Company, an S corporation from 1986 to December, 1993 and a C corporation from
December, 1993 and thereafter, eligible for the five year job tax credit provided in Code Section
12-7-1220?
Conclusion:
ABC Company, an S corporation from 1986 to December, 1993 and a C corporation from
December, 1993 and thereafter, is eligible for the five year job tax credit provided in Code
Section 12-7-1220, providing all statutory requirements of Code Section 12-7-1220 are met.
Since ABC Company did not have a corporate level tax liability during the years it was an S
corporation, any job tax credit earned during those years may be carried forward for 10 years
from the time earned and used, to the extent not previously used, to offset any corporate level tax
liability incurred during the next ten years, including any years it is a C corporation.

1

Facts:
ABC Company, (ABC), is a manufacturing corporation located in AAA county, a less developed
county for purposes of the job tax credit. ABC qualified to do business in South Carolina on
September 2, 1986 as an S corporation when it purchased the assets of another company. As an
S corporation, ABC added a number of employees between September 2, 1986 and December
18, 1993. During this time, ABC paid no corporate level taxes. Also, ABC did not qualify under
Code Section 12-7-1220(J) to pass its job tax credit through to its shareholders.
On December 18, 1993, ABC revoked its S election under Internal Revenue Code Section
1362(a). For tax purposes, ABC, as a C corporation, is the same taxpayer.
Discussion:
Code Section 12-7-1220(B) provides for a job tax credit for new-full time jobs created in less
developed counties, such as AAA County. This subsection provides, in part:
Corporations operating manufacturing...facilities in counties designated by the
commission as less developed are allowed a job tax credit for taxes imposed by
Section 12-7-230...equal to one thousand dollars annually for each new full-time
employee job for five years beginning with years two through six after the creation of
the job.

(H) For purposes of this section:
(3) "Corporation" means a business entity which is subject to South Carolina taxes as
contained in Section 12-7-230 and Chapter 7, Title 38. (Emphasis added).
Code Section 12-7-230 imposes a tax on corporations and reads:
(A) Every corporation organized under the laws of this State, whose entire business is
transacted or conducted within this State, shall make a return and shall pay annually
an income tax equivalent to five percent of the entire net income received by the
corporation during the income tax year...
Code Section 12-7-235 provides for an exemption from tax for S corporations and reads, in part:
(b) If a small business corporation makes a valid election under the provisions of
Subchapter S of the Internal Revenue Code to be exempt from federal income taxes
to the extent provided in Subchapter S of the Internal Revenue Code, the small
business corporation is similarly exempt from the tax imposed by '12-7-230. The
shareholders shall include in their South Carolina taxable income their proportionate
share of the corporation's South Carolina taxable income...
2

Generally, income earned by an S corporation is taxed only once, at the shareholder level.
However, the following situations can cause the S corporation itself to be subject to tax:

1. excess net passive income tax;
2. capital gains tax and built-in gains tax;
3. investment credit recapture tax; and,
4. LIFO recapture tax.
   Code Section 12-7-415 provides that the South Carolina gross income and taxable income of a
   corporation...is the corporation's gross income and taxable income as determined under the
   Internal Revenue Code with the modifications specified in Code Section 12-7-430. No
   modifications are set forth in Code Section 12-7-430 for South Carolina taxable income of S
   corporations with respect to excess passive income, built in gains, and the like. Accordingly,
   South Carolina would impose a corporate tax on excess net passive income, built-in gains, and
   the like, added to the federal income of an S corporation.
   Based upon the above analysis, an S corporation is "subject to" taxes under Code Section 12-7230. Very few S corporations generate a corporate tax liability in South Carolina. The lack of
   corporate tax, however, does not prevent an S corporation from claiming a job tax credit and
   carrying forward the credit as provided below in Code Section 12-7-1220(G).
   Code Section 12-7-1220(G) reads:
   A credit claimed under this section but not used in a taxable year may be carried
   forward for ten years from the close of the tax year in which the credit is earned by
   the corporation. However, the credit established by this section taken in one year
   must be limited to an amount not greater than fifty percent of the taxpayer's state
   corporate income tax or premium tax liability which is attributable to income or
   premiums derived from operations in the State for that year. The statute, therefore,
   provides that the job tax credit may be used by corporations "subject to" taxes
   imposed under Code Section 12-7-230 as follows:
   (1) to offset corporate taxes imposed under Code Section 12-7-230 (see Code
   Section 12-7-1220(B)),
   (2) carried forward for ten years from the close of the tax year in which the
   credit is earned when no corporate tax liability exists (see Code Section 12-71220(G)), or,

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(3) to offset individual income taxes of S corporation shareholders when the S
corporation qualifies to use the fee in lieu of property taxes and the S
corporation has no corporate level tax liability (see Code Section 12-7-1220
(J)(1)). 1
Under the rule of statutory construction of statutes in pari materia, statutes are not to be
considered as isolated fragments of law, but as a whole, or as parts of a great, connected,
homogenous system. Such statutes are considered as if they constituted but one act, so that
sections of one act may be considered as though they were parts of the other act, as far as this
can reasonably be done. Indeed, as a general rule, where legislation dealing with a particular
subject consists of a system of related general provisions indicative of a settled policy, new
enactments of a fragmentary nature on that subject are to be taken as intended to fit into the
existing system and to be carried into effect conformably to it, unless a different purpose is
shown plainly. 73 Am.Jur.2d Statutes Section 188.
In reviewing Code Section 12-7-1220 in its entirety, the legislature intended the job tax credit to
be available as an economic incentive to encourage businesses subject to corporate level taxes to
expand work forces in South Carolina. Although it is rare that S corporations are subject to
corporate level taxes and it is rare that S corporations convert to C corporations, S corporations
may earn and carryover a job tax credit.
Based upon the facts presented, ABC Company is "subject to" taxes imposed under Code
Section 12-7-230 and, therefore, is eligible for the five year job tax credit for jobs created on
September 2, 1986 and thereafter, provided all the statutory requirements have been met. The
statute provides that the credit may be carried forward for ten years from the close of the tax year
in which the credit was earned.
ABC did not provide any specific information concerning the number of new full-time jobs
created or the year in which the qualifying jobs were created. If, for example, the new full-time
jobs created by ABC in 1986 met all statutory requirements and qualified for the job tax credit
for the five years 1987 - 1991, then the first year of the credit available in 1987 could be carried
forward ten years, the second year of the credit available in 1988 could be carried forward for ten
years, and the credit available in years 1989, 1990 and 1991 could be carried forward for ten
years, providing the statutory requirements continue to be met.

1

ABC does not qualify to use the fee in lieu of property taxes.
4