Does South Carolina follow the federal IRC Section 163(j) limit on deducting business interest expense, or can taxpayers deduct their full business interest for South Carolina income tax purposes?

Plain-English summary

The 2017 federal Tax Cuts and Jobs Act (TCJA) turned IRC § 163(j) into a broad cap on how much business interest expense a business can deduct — generally 30% of adjusted taxable income (temporarily 50% for 2019–2020 under the CARES Act), with the excess carried forward. SC Revenue Ruling #21-2 delivers good news for South Carolina taxpayers: South Carolina doesn't follow that limit.

South Carolina's adoption of the Internal Revenue Code is selective, not automatic. When the General Assembly passed the South Carolina Taxpayer Protection and Relief Act (2018 Act 266) on October 13, 2018, it specifically declined to adopt the TCJA's expanded IRC § 163(j) interest-limitation (and the related carryover provisions in IRC §§ 381(c)(20) and 382(d)(3)). See Code § 12-6-50(5B). So for tax years beginning after 2017, South Carolina decouples from § 163(j).

What that means in practice:

• No state interest limit. Eligible taxpayers deduct 100% of their business interest expense each year for South Carolina, without regard to § 163(j).
• No § 163(j) carryforward — either direction. Because South Carolina no longer adopts § 163(j), its carryforward mechanics are gone: a pre-2018 disallowed-interest carryforward can't be deducted in South Carolina, and any federal § 163(j) interest carryforward a taxpayer is allowed to deduct federally is disallowed for South Carolina and added back to South Carolina taxable income.
• NOLs instead. Interest that can't be deducted against income in the year incurred may create a South Carolina net operating loss — the ordinary NOL rules, rather than a special interest carryforward, do the carrying.

Note the ruling states that, as of December 2020, South Carolina had not adopted the CARES Act (which had temporarily bumped the federal limit to 50%) — but since South Carolina doesn't apply § 163(j) at all, that federal change didn't affect the state result.

What this means for you

Businesses with significant interest expense

For South Carolina income tax, deduct your full business interest — the federal § 163(j) haircut doesn't apply. This is a decoupling adjustment: your South Carolina return will differ from your federal return by the amount of interest the federal limit disallowed.

Taxpayers with a federal 163(j) carryforward

Watch the add-back. When you later deduct a federal § 163(j) interest carryforward on your federal return, South Carolina disallows that carryforward and treats it as an addition to South Carolina taxable income — because you already got the full deduction for South Carolina in the original year.

Accountants and tax professionals

Track the difference every year: fully deduct current-year business interest for South Carolina, add back any federal 163(j) carryforward deducted federally, and remember that unused pre-2018 § 163(j) carryforwards are lost for South Carolina (interest may instead feed a South Carolina NOL). Always confirm the current § 12-6-50 IRC-conformity year for the tax year at issue.

Common questions

Q: Does South Carolina limit my business interest deduction like the federal 30% rule?
A: No. For tax years beginning after 2017, South Carolina doesn't adopt IRC § 163(j), so you deduct 100% of your business interest expense for South Carolina income tax.

Q: What happens to my federal 163(j) interest carryforward on my South Carolina return?
A: It's disallowed for South Carolina and added back to South Carolina taxable income when deducted federally, because South Carolina already allowed the full deduction in the year the interest was incurred.

Q: Can I still use a pre-2018 disallowed-interest carryforward in South Carolina?
A: No. Since South Carolina no longer adopts § 163(j), its carryforward provisions don't apply, so a pre-2018 carryforward can't be deducted for South Carolina.

Q: If I can't use all my interest against income this year, is it just lost?
A: Not necessarily — interest that can't be deducted against income in the year incurred may create a South Carolina net operating loss.

Citations and references

Statutes:

• S.C. Code Ann. § 12-6-50 (and § 12-6-50(5B)) — South Carolina's selective IRC adoption; declines to adopt IRC § 163(j) and IRC §§ 381(c)(20), 382(d)(3)
• IRC § 163(j) — federal limit on the business interest expense deduction (as expanded by the TCJA, P.L. 115-97)
• 2018 Act No. 266 — the South Carolina Taxpayer Protection and Relief Act (Section 3.A.)

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR21-2.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 #21-2

SUBJECT:

Internal Revenue Code Section 163(j) (Income Tax)

EFFECTIVE DATE:

Tax Years Beginning on or after January 1, 2018

SUPERSEDES:

All previous advisory opinions and any oral directives in conflict
herewith.

REFERENCES:

S.C. Code Ann. Section 12-6-50 (Supp. 2019)

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
and Department personnel. 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.

OVERVIEW OF INTERNAL REVENUE CODE SECTION 163(j)
For tax years beginning before January 1, 2018, Internal Revenue Code Section 163(j) limited
business interest expense deductions for certain interest paid or accrued by corporations. IRC
Section 163(j) was significantly altered and expanded to become a limitation on business
interest expense deductions by the Tax Cuts and Jobs Act of 2017 (TCJA). 1 In addition to the
yearly business interest expense limitation, IRC Section 163(j) contains interest expense
carryforward provisions for interest expense it disallows. These changes made by the TCJA
were effective for tax years beginning after December 31, 2017.

1

Pub. Law 115-97. IRC Section 163(j) was further amended by the Coronavirus Aid, Relief, and Economic Security
(CARES) Act (Pub. Law 116-136) enacted March 27, 2020, and in part, temporarily increased the business interest
expense limitation from 30% to 50% for tax years beginning in 2019 and 2020. As of December 2020, South
Carolina has not adopted the CARES Act.

SOUTH CAROLINA TAX TREATMENT
South Carolina’s adoption of the Internal Revenue Code is not automatic and is not all
inclusive. Prior to the enactment of the federal changes in the Tax Cuts and Jobs Act in
December 2017, South Carolina adopted the IRC Section 163(j) corporate interest expense
limitation for purposes of calculating South Carolina taxable income. On October 13, 2018,
South Carolina’s General Assembly enacted “The South Carolina Taxpayer Protection and
Relief Act.” 2 This Act did not adopt all of the federal changes and provisions enacted in the Tax
Cuts and Jobs Act of 2017. It specifically did not adopt IRC Section 163(j) relating to limitation
on business interest expense and IRC Sections 381(c)(20) and 382(d)(3) relating to the
carryover of limited business interest in IRC Section 163(j)(2). See Section 3.A. of SC 2018 Act
266 and Code Section 12-6-50(5B).
As a result, for tax years beginning in 2018, South Carolina’s tax treatment of a business
interest expense deduction under IRC Section 163(j) decouples from the federal tax treatment.
South Carolina’s tax treatment is as follows:
Limitation on Business Interest Expense. For tax years beginning after 2017, South
Carolina does not limit the business interest expense deduction under IRC Section 163(j).
Eligible taxpayers may deduct 100% of their business interest expense, without regard to
IRC Section 163(j), in calculating their South Carolina taxable income each year.
Interest Expense Carryforward Provisions. Since South Carolina no longer adopts IRC
Section 163(j), the carryforward provisions in IRC Section 163(j) are no longer adopted for
tax years beginning after December 31, 2017. As a result, any interest expense carryforward
from years beginning before 2018 cannot be deducted.
Summary. For tax years beginning after 2017, there is no South Carolina business interest tax
limitation and no carryforward. Any interest expense that cannot be deducted against income
in the year incurred may create a South Carolina net operating loss. Any federal interest
expense carryforward allowed for federal income tax purposes is disallowed for South
Carolina income tax purposes and is treated as an addition to South Carolina taxable income.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/W. Hartley Powell
W. Hartley Powell, Director
January 26
, 2021
Columbia, South Carolina

2

2018 Act 266.

2