If a partnership or S corporation pays another state's pass-through entity tax, can a South Carolina resident owner claim South Carolina's credit for taxes paid to other states?

Plain-English summary

South Carolina Revenue Ruling #22-5 answers a question that got common as states rolled out pass-through entity (PTE) taxes to sidestep the federal $10,000 SALT deduction cap: if a partnership or S corporation pays another state's entity-level income tax, can its South Carolina resident owner claim South Carolina's credit for taxes paid to other states (§ 12-6-3400)? It modifies the earlier RR #21-15 (Questions 25 and 26) and RR #97-7.

First, how South Carolina taxes resident owners — and it's unusual. South Carolina does not tax residents on all worldwide income. Residents are taxed on their worldwide personal-service income (wages, salaries, guaranteed payments for services) plus other income allocated or apportioned to South Carolina. Residents are not taxed on their out-of-state, non-personal-service business income (that income is subtracted in getting to SC taxable income). Investment income (interest, dividends, capital gains) is allocated to the owner's state of domicile.

The § 12-6-3400 credit lets a resident individual offset SC tax with income tax paid to another state on income that is taxed by both states. The key is that overlap — no double taxation, no credit.

Applying that to another state's entity-level (PTE) tax:

• Personal-service income → credit allowed. Because SC taxes residents on worldwide personal-service income, when an out-of-state entity pays that state's tax on income that includes the resident's personal-service income, the SC resident may take the § 12-6-3400 credit — but only for the personal-service portion that would have been taxed to the individual in the other state had the entity not paid at the entity level. The outcome is the same whether or not the entity made an entity-level election. (Modifies RR #21-15, Q26.)
• Non-personal-service business income → no credit. Since SC doesn't tax residents on out-of-state business income at all, there's no double taxation, so no credit for the entity-level tax another state charged on that business income. (Modifies RR #21-15, Q25.) Example: an SC resident's out-of-state S-corp manufacturing income that isn't apportioned to SC isn't in SC taxable income, so the credit simply doesn't apply.

Nonresident owners. The § 12-6-3400 credit does not apply to nonresidents — whether or not the entity pays tax at the entity level. Instead, the nonresident's home state generally gives them a credit for the SC tax on their SC-earned personal-service income. Nonresident owners report their SC-apportioned share (personal-service income for services rendered in SC is allocated to SC under § 12-6-2220(6)), individually or via a composite return (§ 12-6-5030).

How the credit is computed (§ 12-6-3400(A)(2)). It's the lesser of: (a) the ratio of SC income subject to tax in the other state to total federal income (as adjusted) × SC income tax before the credit; or (b) the tax actually paid to the other state on income also taxed by SC. Because the entity paid the other state's tax, the resident makes this adjustment manually on SC Form 1040, Schedule TC, computing the credit only for the personal-service income.

South Carolina's own entity-level election (for contrast). Under § 12-6-545(G) (Act 61 of 2021, effective 2021), a "qualified" pass-through entity may elect to pay a 3% entity-level tax on its South Carolina "active trade or business income" (ATBI) — and that income is then excluded from the owners' SC taxable income. But the SC election is strictly limited to ATBI: it excludes personal-service income, capital gains (including IRC § 1231 gains), and passive investment income. A firm whose income is entirely personal services (a typical law or accounting partnership) cannot make the SC entity-level election. Other states' PTE taxes have different, often broader bases (some tax all income, including personal services), which is exactly why the credit question arises.

What this means for you

South Carolina residents who are partners or S-corp shareholders

Split your income by type. For your personal-service share earned through an entity that paid another state's PTE tax, you can claim the SC credit for taxes paid to other states — but you'll likely have to compute it by hand on Schedule TC, limited to that personal-service portion. For your out-of-state, non-personal-service business income, expect no SC credit — but remember SC also isn't taxing that income, so you're not double-taxed. Watch the base mismatch: another state may have taxed income at the entity level that South Carolina treats very differently.

Personal-service firms (law, accounting, consulting) operating in multiple states

You cannot make South Carolina's § 12-6-545(G) entity-level election (it's ATBI-only), but you may be able to elect in other states that allow PTE tax on personal-service income. If you do, your SC resident partners can generally credit their share of that entity-level tax against SC tax on their personal-service income — coordinate the entity election with the owners' SC Schedule TC computations.

Accountants and tax professionals

The decision tree is income character (personal-service vs. non-personal-service business) and owner residency (resident vs. nonresident). Residents: credit for personal-service income taxed by both states (§§ 12-6-2220(6), 12-6-3400); no credit for out-of-state business income SC doesn't tax. Nonresidents: no § 12-6-3400 credit; look to the home state. Apply the § 12-6-3400(A)(2) lesser-of computation manually when the entity paid the other state's tax. Note this ruling modifies RR #21-15, Q25/Q26 and RR #97-7 — use it, not the superseded answers.

Common questions

Q: My out-of-state partnership paid another state's PTE tax. Do I get an SC credit?
A: As an SC resident, yes for the personal-service income portion taxed by both states; no for non-personal-service business income that South Carolina doesn't tax in the first place.

Q: Why no credit for the business income?
A: South Carolina doesn't tax residents on out-of-state, non-personal-service business income, so there's no double taxation to relieve — the § 12-6-3400 credit only applies to income taxed by both states.

Q: I'm a nonresident owner — can I use § 12-6-3400?
A: No. The credit doesn't apply to nonresidents. Your home state generally credits the SC tax on your SC-earned personal-service income instead.

Q: Can my law firm make South Carolina's entity-level election?
A: No, if its income is entirely personal services. South Carolina's § 12-6-545(G) election covers only "active trade or business income," which excludes personal-service income, capital gains, and passive investment income.

Q: How do I claim the credit when the entity — not I — paid the other state's tax?
A: Compute it manually on SC Form 1040, Schedule TC, limited to your personal-service income, as the lesser of the § 12-6-3400(A)(2) ratio amount or the tax actually paid to the other state on income also taxed by SC.

Citations and references

Statutes:

• S.C. Code Ann. § 12-6-3400 — the resident-individual credit for income taxes paid to another state (with the (A)(2) computation)
• S.C. Code Ann. § 12-6-2220(6) — allocation of personal-service income (worldwide for residents; SC-rendered for nonresidents)
• S.C. Code Ann. § 12-6-545 and § 12-6-545(G) — "active trade or business income" and the qualified PTE 3% entity-level tax election
• S.C. Code Ann. § 12-6-560 — taxation of a resident individual's income
• S.C. Code Ann. § 12-6-590 / § 12-6-600 — S corporations and partnerships are generally not subject to SC income tax (income flows to owners)
• S.C. Code Ann. § 12-6-5030 — composite returns for nonresident owners

Related Department rulings (described in prose, not linked): RR #22-5 modifies RR #21-15 (Questions 25 and 26, "Active Trade or Business Income – Annual Election by Pass-Through Entity to Pay Tax at Entity Level") and RR #97-7 ("Personal Service Income of Resident Partners"); RR #08-2 addresses passive investment income. The ruling reproduces § 12-6-3400 in an appendix and includes detailed worked examples.

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR22-5.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 #22-5
SUBJECT:

Income Taxes Paid by a Pass-Through Entity to Other States on Personal
Service Income and Other Business Income and the Credit for Taxes Paid
to Other States
(Income Tax)

EFFECTIVE DATE: All periods open under the statute.
MODIFIES:

SC Revenue Ruling #21-15, Questions 25 and 26
SC Revenue Ruling #97-7

REFERENCES:

S.C. Code Ann. Section 12-6-3400
S.C. Code Ann. Section 12-6-2220(6)
S.C. Code Ann. Section 12-6-545(A) through (F) (2014)
S.C. Code Ann. Section 12-6-545(G) (Supp. 2021)

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.

PURPOSE
The purpose of this advisory opinion is to supplement the guidance published in SC Revenue
Ruling #21-15, “Active Trade or Business Income – Annual Election by Pass-Through Entity to
Pay Tax at Entity Level” and SC Revenue Ruling #97-7, “Personal Service Income of Resident
Partners” with respect to the credit for resident individuals for income taxes paid to other states
on personal service income provided in Code Section 12-6-3400 and with respect to the taxation
of other business income when a pass-through entity is operating in more than one state.
Questions from resident and nonresident owners of pass-through entities have arisen during this
filing season regarding the availability of a South Carolina credit for income taxes paid to other
states on either their personal service income or other business income in light of many
1

states now permitting an income tax to be imposed on, and paid by, a pass-through entity to work
around the individual partner’s or shareholder’s federal limit of $10,000 for the itemized
deduction of state and local taxes on their federal income tax return. 1
A pass-through entity may continue to pass income through to its owners in the traditional
manner, or if it meets South Carolina’s definition of a “qualified” pass-through entity, it may
elect to tax only its’ South Carolina “active trade or business income” at the entity level, and if it
is a multi-state business, it may make an entity level tax election in other states that allow it.
Note: Other states’ pass-through entity taxes have a different base. South Carolina’s passthrough entity election is strictly limited to “active trade or business income” as defined in Code
Section 12-6-545 and is only available to certain pass-through entities as provided in Code
Section 12-6-545(G).
This advisory opinion discusses the following areas of pass-through entity taxation in South
Carolina, whether or not an entity level tax election is made in South Carolina, and whether or
not a South Carolina credit for taxes paid to other states is applicable.

1. A non-personal service partnership or S corporation (e.g., a manufacturer) operating:
   • solely in South Carolina;
   • in multiple states, including South Carolina, where some of the other states may have a
   pass-through entity level tax statute; or
   • in one or more states, excluding South Carolina, where a South Carolina resident is a
   partner or shareholder in the out-of-state entity.
2. A personal service partnership or S corporation (e.g., performing legal or accounting
   services) operating:
   • solely in South Carolina;
   • operating in multiple states, including South Carolina, where some of the other states
   have a pass-through entity level tax statute; or
   • in one or more states, excluding South Carolina, where a South Carolina resident is a
   partner or shareholder in the out-of-state entity.
   South Carolina Revenue Ruling #21-15, Questions 25 and 26 addressed the issue of a credit for
   entity level taxes paid on active trade or business income of an entity making a South Carolina
   entity election under Code Section 12-6-545(G). This ruling will address the issue of a credit
   under Code Section 12-6-3400 when an entity makes an election in another state and where the
   entity pays tax on the personal service income of the individual owner of the entity.
   Code Section 12-6-3400 provides a credit for a resident individual for income tax paid to another
   state in certain situations, and reads, in part:
   (A)(1) Resident individuals are allowed a credit against the taxes imposed by this
   chapter for income taxes paid to another state on income from sources within that
   state which is taxed under both this chapter and the laws of that state regardless of the
   taxpayer’s residence.
   Note: South Carolina’s recent Code Section 12-6-545(G), providing for the entity level active trade or business
   income tax, does not have a sunset provision, however, the federal individual itemized tax deduction limitation of
   $10,000 enacted in the Tax Cuts and Jobs Act of 2017 (Public Law 115-97) contained a sunset provision for tax
   years beginning on or after January 1, 2026.

1

2

QUESTIONS AND ANSWERS
ENTITY TAXATION and ENTITY LEVEL TAXATION ELECTION - AN OVERVIEW

1. Q. In general, how does South Carolina tax pass-through entity income?
   A. Generally, an entity treated as a partnership for federal income tax purposes is not subject
   to South Carolina income tax. Each partner includes its share of South Carolina
   partnership income on the partner’s income tax return. 2 An S corporation having a valid
   “S” election under IRC Subchapter S is not subject to South Carolina income tax to the
   extent it is exempt from federal corporate income tax. Each shareholder includes its share
   of the South Carolina S corporation’s income on the shareholder’s income tax return. 3
   The starting point of South Carolina taxation for S corporations and partnerships is
   federal taxable income. South Carolina law provides for modifications to be made from
   federal taxable income in determining South Carolina taxable income. South Carolina
   businesses are only taxed on income directly allocated to South Carolina and on the
   South Carolina apportioned share of income. South Carolina has a single sales (gross
   receipts) formula. See Code Sections 12-6-590, 12-6-600, and 12-6-2210 through 12-62295. Investment income (e.g., interest, dividends, capital gains, etc.) is allocated to the
   state of domicile of the partner or shareholder.
   Effective for tax years beginning 2021, Act No. 61 of 2021 added Code Section 12-6545(G) to provide an optional election for certain pass-through entities to report “active
   trade or business income” (as defined in Code Section 12-6-545(A)(1)) directly on the
   entity’s tax return and pay a 3% entity level income tax on it.
2. Q. What is South Carolina’s recent entity level tax election on “active trade or business
   income” and how does it impact the entity and the owner?
   A. Effective for tax years beginning 2021, Code Section 12-6-545(G) provides an optional
   election for certain “qualified” pass-through entities to report “active trade or business
   income” (as defined in Code Section 12-6-545(A)(1)) apportioned to South Carolina
   directly on the entity’s South Carolina tax return and pay a South Carolina entity level
   income tax on it at 3%.
   Income listed in Code Section 12-6-545(A)(1) that is not active trade or business income
   includes: amounts reasonably related to personal services; capital gains and losses
   (including IRC Section 1231 gains); and passive investment income 4 and expenses

SC Code Section 12-6-600. See IRC Section 701.
SC Code Section 12-6-590. See IRC Section 1363(b).
4
IRC Section 1362(d) defines passive investment income and provides exceptions. The regulations under IRC
Section 1362, and other guidance such as federal rulings and cases, should be considered in determining whether
income is “passive investment income.” See SC Revenue Ruling #08-2 for examples of passive investment income,
including royalties, rents, dividends, and interest, and exceptions of when these items may not be passive investment
income.
2
3

3

related to passive investments. 5 Amounts related to personal services include, but are not
limited to, all amounts paid as compensation (e.g., wages, salaries, bonuses, etc.)
including guaranteed payments for services. 6
For entities making an entity election under Code Section 12-6-545(G), income that is not
active trade or business income, including amounts related to personal services, and
separately stated items (e.g., charitable contributions, retirement contributions, certain
royalty income, 7 etc.) not considered part of the “active trade or business income”
calculation are passed through to the partner or shareholder.
Note: South Carolina’s pass-through entity election is limited to South Carolina active
trade or business income. A partnership whose ordinary business income is derived
entirely from personal services, is not permitted to make a South Carolina active trade or
business election to pay tax at the entity level under Code Section 12-6-545(G). See
Example 1, page 24, SC Revenue Ruling #21-15. 8
NOTE: Each state’s law should be reviewed to determine the income and deductions
eligible to be included in the entity level tax computation.
For owners of electing entities, to the extent such an election is made by a qualified
entity, and South Carolina tax is paid on the active trade or business income at the entity
level, that income is excluded from the entity owners’ South Carolina taxable income.
RESIDENT INDIVIDUAL PARTNERS AND SHAREHOLDERS – GENERAL
OVERVIEW

3. Q. What is South Carolina’s method for taxing resident individual partners and
   shareholders?
   A. South Carolina has an unusual method for computing the income of resident partners and
   shareholders. Unlike most states, South Carolina does not tax residents on all of their
   worldwide income. South Carolina residents are taxed on their worldwide personal
   service income and their other income allocated or apportioned to South Carolina. South
   Carolina residents are not taxed on their out-of-state, non-personal service business
   income.
   Code Section 12-6-2220 addresses the taxation of personal service income of residents.

Whether an activity is an “active trade or business” or a “passive investment” is determined at the entity level for
purposes of the 3% rate. See Code Section 12-6-545 and SC Revenue Ruling #08-2.
6
Guaranteed payments for capital are not considered amounts reasonably related to personal service income.
7
For example, royalties from mineral, oil, and gas are generally passive investment income, however royalty
income derived in the ordinary course of business of franchising or licensing property is active trade or business
income.
8
Since tax year 2006, Code Section 12-6-545(A) through (F) has allowed, and continues to allow, individuals,
estates, or trusts to use an “optional” income tax rate (currently 3%) to compute the tax on “active trade or business
income or loss” received from a pass-through business in lieu of the “standard” income tax rate (currently the
highest marginal rate is 7%) under Code Section 12-6-510.
5

4

Code Section 12-6-2220(6) provides that all income from personal services received by a
resident individual is allocated to South Carolina. A resident individual partner receiving
personal service income reported on a Schedule K-1 or a resident individual shareholder
receiving personal service income from South Carolina and one or more other states must
report all personal service income to South Carolina pursuant to Code Section 12-62220(6) for individual income tax purposes. The statute does not allow an individual to
report only his apportioned share of South Carolina personal service income to South
Carolina.
Note: The answer is the same whether or not a Code Section 12-6-545(G) election is
made for South Carolina income tax purposes, and whether or not a pass-through entity
tax election is made in another state under that state’s tax law.
A. EXAMPLE - TAXATION OF PERSONAL SERVICE INCOME
Example – Resident Earns Personal Service Income in Another State. A South Carolina
resident is a partner in a North Carolina law firm that solely provides personal services in
North Carolina. The resident receives $200,000 of compensation from the partnership.
The $200,000 personal service income is included in South Carolina taxable income. The
South Carolina partner is allowed a tax credit for taxes paid to North Carolina on the
personal service income taxed in both South Carolina and North Carolina. See Questions
4 through 6 below and Code Sections 12-6-560, 12-6-2220, and 12-6-3400. See also SC
Revenue Ruling #97-7 for additional guidance.
B. EXAMPLES - TAXATION OF OTHER BUSINESS INCOME
The following examples illustrate the taxation of non-personal service business income:
Example 1 - Resident Shareholder Receiving Non-personal Service Business Income
from Outside South Carolina. A South Carolina resident receives business income from
an S corporation for which he performs no personal services. The S corporation operates
a manufacturing business only in Florida and Alabama. The resident receives $100,000 of
out-of-state business income from the S corporation (i.e., the $100,000 is not apportioned
to South Carolina). The $100,000 is not included in the individual resident’s South
Carolina taxable income.
Example 2 - Resident Shareholder Receiving Non-personal Service Business Income
from Another State and South Carolina. A South Carolina resident individual receives
business income from his S corporation for which he performs no personal services. The
S corporation operates a manufacturing business only in South Carolina and Georgia. The
resident receives $100,000 of business income from the S corporation. The South
Carolina allocation and apportionment statutes apportion 30% of the S corporation’s
income to South Carolina. The South Carolina resident is taxed on $30,000 (30% of his S
corporation income is apportioned to South Carolina). The $70,000 of business income
not apportioned to South Carolina is not included in his South Carolina taxable income.

5

Example 3 - Resident Shareholder Receiving Non-personal Service Business Income
Only from South Carolina. A South Carolina resident receives business income from his
S corporation for which he performs no personal services that operates a manufacturing
business only in South Carolina. The resident receives $100,000 South Carolina business
income from the S corporation. The entire $100,000 is included in the individual
resident’s South Carolina taxable income.

4. Q. Does South Carolina have a statute allowing a credit for taxes paid to other states?
   A. Code Section 12-6-3400 provides a resident individual a credit for taxes paid to other
   states and, reads in part:
   (A)(1) Resident individuals are allowed a credit against the taxes imposed
   by this chapter for income taxes paid to another state on income from
   sources within that state which is taxed under both this chapter and the
   laws of that state regardless of the taxpayer’s residence.
   Note: For reference, Code Section 12-6-3400 is reproduced in its entirety in the
   Appendix.
5. Q. Does South Carolina allow a resident partner or shareholder a credit for entity level
   income tax paid directly by the entity on the entity’s tax return of another state for their
   personal service income taxed in the other state?
   A. Yes. Since South Carolina taxes residents on worldwide personal service income, Code
   Section 12-6-3400 provides resident individuals an income tax credit for taxes paid to
   another state on their personal service income. This credit alleviates double taxation of
   personal service income taxed by South Carolina and another state.
   With respect to partnerships or S corporations making an election in another state to directly
   pay income tax by the entity on the entity’s tax return of another state on its income
   (which includes personal service income), a South Carolina resident can take credit for
   the partnership or S corporation level taxes paid for, and only for, their personal service
   income that would have been taxed to the individual in the other state if the partnership or
   S corporation did not pay income taxes at the entity level. Code Sections 12-6-2220(6)
   and 12-6-3400. Note: This modifies Revenue Ruling #21-15, Question 26.
   The result is the same for a resident partner or shareholder whose partnership or S
   corporation makes an election to pay tax at the entity level as it is for a resident partner or
   shareholder whose partnership or S corporation does not make an entity election to pay
   tax at the entity level. In either case, double taxation of personal service income does not
   result.
6. Q. Does South Carolina allow a resident partner or shareholder a credit for entity level
   income tax paid directly by the entity on the entity’s tax return of another state for the
   entity’s non-personal service business income?
   6

A. No. Since South Carolina does not tax residents on out-of-state business (non-personal
service) income (this income is subtracted from federal taxable income on SC 1040 in
arriving at South Carolina taxable income), the credit for entity level income taxes paid
directly on the entity’s tax return to other states on non-personal service business income
for South Carolina residents is not applicable. The credit in Code Section 12-6-3400 is
only available to South Carolina residents for taxes paid on income taxed in both South
Carolina and another state (e.g., personal service income).
Example. A South Carolina resident receives business income from his S corporation for
which he performs no personal services. The S corporation operates a manufacturing
business only in South Carolina and North Carolina. The resident receives $100,000 of
business income from the S corporation. The entity’s business income is apportioned
10% to South Carolina ($10,000 to the resident). South Carolina only taxes residents on
their South Carolina apportioned share of business income. Since the other $90,000 of
business income is not included in the individual resident’s South Carolina taxable
income, the credit for taxes paid on income taxed in two states is not applicable. Note:
This modifies Revenue Ruling #21-15, Question 25 and Code Section 12-6-3400.
NONRESIDENT INDIVIDUAL PARTNERS AND SHAREHOLDERS – GENERAL
OVERVIEW

7. Q. What is South Carolina’s method for taxing nonresident individual partners or
   shareholders?
   A. Nonresident partners and shareholders are responsible for reporting their apportioned
   share of South Carolina partnership or S corporation income to South Carolina.
   Code Section 12-6-2220(6) provides that all income from personal services received by a
   nonresident individual for services rendered in South Carolina is allocated to South
   Carolina. A nonresident individual receiving personal service income from South
   Carolina and one or more other states reports only his South Carolina personal service
   income to South Carolina for individual income tax purposes.
   South Carolina reporting of income by nonresident partners and shareholders may be
   done by each owner filing a nonresident individual income tax return or by the
   partnership filing a composite return computing and reporting the income tax of its
   nonresident individual partners or shareholders. See Code Section 12-6-5030.
8. Q. Does Code Section 12-6-3400 allow a nonresident individual a credit for taxes paid to
   other states for pass-through income tax paid by a partnership or S corporation electing to
   pay tax on its ordinary business income (which may include personal service income) at
   the entity level under the laws of another state?
   A. No. Code Section 12-6-3400 does not apply to nonresidents, whether or not the entity
   pays taxes on its income at the entity level. Generally, the partner’s or shareholder’s state
   of residence will allow a credit for South Carolina taxes paid on his personal service
   income earned in and taxed by South Carolina to prevent double taxation.
   7

CREDIT FOR TAXES PAID TO OTHER STATES – COMPUTATION

9. Q. How is the credit for taxes paid to another state computed on the resident individual’s
   personal service income taxed in another state at the entity level?
   A. Code Section 12-6-3400(A)(2) provides for the computation of credit for taxes paid and
   reads:
   The credit allowed is the lesser of:
   (a) the product of the fraction in which the numerator is total South
   Carolina income which is subject to income tax in another state and the
   denominator is total federal income adjusted by the modifications
   provided in Article 9 of this chapter and subject to allocation and
   apportionment as provided in Article 17 of this chapter, multiplied by
   South Carolina income tax before the credit allowed by this section; or
   (b) the income tax actually paid to the other state on income taxed under
   this chapter.
   Note: To correctly compute South Carolina income tax credit allowed to the resident
   partner or shareholder, the resident individual taxpayer will need to make this adjustment
   manually to their SC Form 1040, Schedule TC. The computation for the credit for taxes
   paid only for the personal service income should be included with the SC Form 1040.
   EXAMPLES – SC CREDIT FOR TAXES PAID BY ENTITY TO ANOTHER STATE
   EXAMPLE 1 – Pass-through entity that only has income from personal services.
   • Entity makes an out-of-state election to pay tax at entity level in State X.
   • Entity cannot make a valid SC election to pay SC tax at the entity level since it has no “active
   trade or business income” as defined in Code Section 12-6-545.
   • SC credit for taxes paid to other states is allowed only to resident partner A.
   Facts: The taxpayer, a Delaware partnership, is owned by 50 individuals who are engaged in
   providing accounting services regionally. South Carolina resident Partner A owns a 1% share
   and SC nonresident Partner B owns a 2% share. The partnership compensates the partners
   through an allocation of partnership income, and not by guaranteed payments. The partnership
   has a 5% SC apportionment factor. The partnership made a pass-thru entity tax election (PET) in
   State X with a 15% apportionment factor and a 10% state tax rate. Unlike South Carolina, State
   X permits personal service pass-through entities to pay tax at the entity level on all income. The
   partnership has non-partner employees and pays wages. The partnership’s ordinary business
   income is $20,000,000 (after PET deductions for State X of $300,000) and is entirely from
   personal services. The partnership has no other separately stated items of income, deduction, or
   credit. Neither individual is an owner of any other pass-through entities. For South Carolina
   income tax purposes, the entity has no “active trade or business income,” and whether or not it
   has made an election at the entity level, no tax will be paid to South Carolina at the entity level,
   see Code Section 12-6-545(G) regarding valid entity elections.
   8

Below is information prepared by the entity to determine federal taxable income, South Carolina
taxable income, and income and taxes paid in State X for Partner A, a SC resident partner, and
Partner B, a SC nonresident partner. The entity made a pass-through entity election in State X to
pay tax on its business income at the entity level in State X. (The same information prepared for
other partners is not shown in this example.)
Partnership Items of
Income and Deduction

Federal Sch. K
Information of
Partnership
(As listed on the
federal Schedules
K and K-1)

Adjusted SC
Amounts from
Federal K-1
(after
apportionment)

Ordinary Business
Income

$20,000,000 9

$1,015,000 10

SC Active Trade or
Business Income
SC Tax Paid Directly by
Electing Partnership
SC Amount Passed
Through to All Resident
and Nonresident
Partners

Federal Sch. K
Adjusted SC Amounts
State X Apportioned Income
State X Pass through entity tax –
10% tax rate (after
adjustments) 11

SC “Active
Trade or
Business
Income”
and Related
Deductions of
Electing
Partnership
$0
(all personal
service income)

Total SC NonActive Trade or
Business Income
and Related
Deductions

$1,015,000

$1,015,000

Partner A – 1% Ownership
SC Resident
$200,000 (1% x $20 million)
$10,150 (1% x $1,015,000)
$30,450 (15% x $20.3 million x 1%)
$3,000

Partner B – 2% Ownership
SC Nonresident
$400,000 (2% x $20 million)
$20,300 (2% x $1,015,000)
$60,900 (15% x $20.3 million x
2%)
$6,000

Entity Level Income and Tax Computation. The partnership has no South Carolina active trade
or business income as all income is related to personal services. In this example, the
partnership’s ordinary business income computed for federal income tax purposes ($20,000,000)
is not the same as South Carolina active trade or business income ($0) as defined in Code
Section 12-6-545. Therefore, the qualified entity cannot pay any South Carolina entity level tax
since all income is related to personal services.
Information Reported to the Partners on their Schedule SC K-1, Line 1. The entity reports to
each partner their share of the entity’s total net federal taxable income of $20,000,000 so that
each individual can complete his SC Form 1040 and other state income tax returns. The entity
reports $200,000 to SC resident Partner A and $400,000 to SC nonresident Partner B. Neither
partner qualifies to use the safe harbor provision or file Form I-335. See Code Section 12-6545(E), SC Revenue Ruling #21-15, and SC Revenue Ruling #08-2.
All compensation paid to the partners is income related to personal services.
$20,000,000 + $300,000 PET in State X times 5% SC apportionment factor.
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Assume State X does not allow the deduction of state taxes.
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9

Below is information prepared by Partners A and B to determine their SC Individual Income Tax
and SC Tax Credit Calculation for Pass-Through Entity Taxes Paid on Personal Service Income
SC Income Tax Calculation

Partner A (SC Resident)
Explanation

1. Federal Taxable Income
2. SC Addback PET Tax Paid in
   State X
   3.a. SC Resident Taxable
   Income
   3.b. SC Nonresident Taxable
   Income

$200,000
$3,000

4. SC I-335 ATBI Adjustment
5. SC Income Taxable at 7%
6. SC Income Tax Before
   Credits
7. SC Credit for Taxes Paid in
   State X

n/a
$203,000
$14,210
($2,132)

See Line 15
below

8. SC Tax Due – after credit for
   taxes paid in State X. (The credit
   computation was not shown for
   taxes paid in states other than
   X.)

$12,078

Line 6 less
Line 7

$203,000

(1% x
$300,000)
Lines 1 + 2

Partner B (SC Nonresident)
Explanation

$400,000

$20,300

Line 5 x 7% 12

SC Credit Calculation for Taxes Paid to State X – See
Code Section 12-6-3400
See Form SC 1040 TC – Worksheet for Taxes Paid

9. SC Gross Income of Individual
10. Portion of Line 9 taxed by State X (see above)
11. Line 10 divided by Line 9 (percentage of SC income
    taxed by another state)
12. Amount of SC tax from Line 6 above
13. Tentative SC Credit (Line 11 x Line 12)
14. PET Paid in State X on Line 2 above
15. Allowable Credit (Lesser of Line 13 or Line 14)

(2% x
$1,015,000)
see above

n/a
$20,300
$1,421
NONE –
Nonresident
individual taxpayer
$1,421

Partner A – State X
$203,000
$30,450
15%

Partner B – State X*

$14,210
$2,132
$3,000
$2,132

*Nonresident individuals do not receive a credit against South Carolina income for taxes paid to another state under
Code Section 12-6-3400.

EXAMPLE 2 – Pass-through entity only has income from a manufacturing business for which
the taxpayer performs no personal services.
• Entity makes out-of-state election to pay tax at entity level in State X.
• Entity chooses not to make a SC election to pay tax at entity level this year under Code
Section 12-6-545(G).
• Resident shareholder A, however, chooses to make an individual election to treat his
shareholder income as “active trade or business income” as allowed under Code Section 126-545(A) – (F) subject to the 3% SC tax rate.
For simplicity, this assumes the current 7% tax rate, although SC has a graduated tax rate. See Code Section 12-6510 for the rates.
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•

No SC credit for taxes paid to other states is allowed to resident shareholder A who has no
income taxed in SC and another state or to nonresident shareholder B. See explanation at end
of this example.

Facts: The taxpayer, a Delaware S corporation, is a manufacturer owned by 50 individuals
engaged in a multi-state business. South Carolina resident shareholder A owns a 1% share and
SC nonresident shareholder B owns a 2% share. Shareholders A and B perform no personal
services and receive no other income from any other source. The S corporation has a 5% SC
apportionment factor. The S corporation did not make an election to pay its tax at the entity level
in South Carolina, but did make a pass-through entity tax election (PET) in State X with a 15%
apportionment factor and a 10% state tax rate. Its remaining income was earned in Texas and
Florida. The S corporation has non-shareholder employees and pays wages. The S corporation’s
ordinary business income is $20,000,000 (after deductions including a PET deduction for State X
of $300,000) and its’ income is entirely from nonpersonal services. The S corporation has no
other separately stated items of income, deduction, or credit. Neither individual is an owner of
any other pass-through entities. For South Carolina income tax purposes, the entity chooses
not to elect under Code Section 12-6-545(G) to pay tax at the entity level this year, however,
each shareholder chooses to make an individual election to treat their shareholder income as
“active trade or business income” as defined in Code Section 12-6-545 subject to the 3% SC tax
rate.
Below is information prepared by the entity to determine federal taxable income, South Carolina
taxable income, and income and taxes paid in State X for Shareholder A, a SC resident, and
Shareholder B, a SC nonresident. The entity made a pass-through entity election in State X to
pay tax on its business income at the entity level in State X. The entity did NOT make a passthrough entity election to pay tax on its business income at the entity level in South Carolina.
S corporation Items of
Income and Deduction

Federal Sch. K
Information of S
corporation
(as listed on the
federal Schedules
K and K-1)

Adjusted SC
Amounts from
Federal K-1
(after
apportionment)

Ordinary Business
Income
Active Trade or Business
Income
SC Tax Paid Directly by
Electing S corporation
Total Amount of SC
Income Passed Through
to All Resident and
Nonresident
Shareholders

$20,000,000

$1,015,000 13

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SC “Active
Trade or
Business
Income”
and Related
Deductions of
Electing S
corporation
$0

SC Active Trade
or Business
Income and
Related
Deductions

$1,015,000

$0
$0
$1,015,000

$20,000,000 + $300,000 PET in State X times 5% SC apportionment factor.

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Federal Sch. K
Adjusted SC Amounts
Out of State Income – amount
calculated by S corporation
State X Apportioned Income
State X Pass through entity tax –
10% tax rate

Shareholder A – 1% Ownership
SC Resident
$200,000 (1% x $20 million)
$10,150 (1% x $1,015,000)
$192,850

Shareholder B – 2% Ownership
SC Nonresident
$400,000 (2% x $20 million)
$20,300 (2% x $1,015,000)
$385,700

$30,450 (15% x $20.3 million x
1%)
$3,000

$60,900 (15% x $20.3 million x 2%)
$6,000

Information Reported to each Shareholder on their Schedule SC K-1, Line 1. The entity reports
to each shareholder their share of the entity’s total net federal taxable income of $20,000,000 so
that each individual can complete states’ income tax returns. The entity reports $200,000 to SC
resident owner A and $400,000 to SC nonresident owner B. Neither owner qualifies to use the
safe harbor provision. See Code Section 12-6-545(E), SC Revenue Ruling #21-15, and SC
Revenue Ruling #08-2.
Below is information prepared by shareholders A and B to determine their SC Individual Income
Tax and SC Tax Credit Calculation, if any, for Pass-Through Entity Taxes Paid on NonPersonal
Service Income
SC Income Tax Computation:

1. Federal Taxable Income
2. Addback PET Tax Paid in
   State X
3. Out of State Income
4. SC Nonresident Apportioned
   Income
5. SC I-335 ATBI Adjustment –
   Election made by shareholder
   under Section 12-6-545(A) – (F)
6. Non-ATBI SC Taxable
   Income (Lines 1 through 5)
   7.a SC ATBI Tax at 3%
   7.b SC Income Tax at 7% on
   Non-ATBI
7. SC Income Tax Before
   Credits
8. Credit for Taxes Paid in
   State X
9. SC Tax Due

Shareholder A (SC Resident)
Explanation
$200,000
$3,000
(1% x $300,000)
($192,850)

See above

($10,150)

See above

$0
$305
$0
$305
NONE* –
No personal
service
income
$305

Shareholder B (SC Nonresident)
Explanation
$400,000

$20,300
($20,300)

(2% x
$1,015,000)
see above

$0
3% x $10,150
All ATBI
income
Lines 7.a + 7.b

Line 8 less Line
9

$609
$0

3% x $20,300

$609

Lines 7.a + 7.b

NONE* The credit in 12-63400 applies only to
SC residents
$609

Line 8 less Line
9

*No credit for taxes paid to other states is allowed to resident shareholder A or nonresident
shareholder B. In this example, resident shareholder A has no income taxed in SC and another
state. Nonresident shareholder B is not eligible for a credit against South Carolina income for taxes

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paid by a resident to another state under Code Section 12-6-3400. This is consistent with South
Carolina’s taxation of nonresidents, regardless of whether or not a pass-through entity election is
made to pay tax at the entity level.

SOUTH CAROLINA DEPARTMENT OF REVENUE

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

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APPENDIX
Code Section 12-6-3400
(A)(1) Resident individuals are allowed a credit against the taxes imposed by this chapter
for income taxes paid to another state on income from sources within that state which is
taxed under both this chapter and the laws of that state regardless of the taxpayer’s
residence.
(2) The credit allowed is the lesser of:
(a) the product of the fraction in which the numerator is total South Carolina
income which is subject to income tax in another state and the denominator is total
federal income adjusted by the modifications provided in Article 9 of this chapter and
subject to allocation and apportionment as provided in Article 17 of this chapter,
multiplied by South Carolina income tax before the credit allowed by this section; or
(b) the income tax actually paid to the other state on income taxed under this
chapter.
(3) A copy of the income tax return filed with the other state must be filed with the
South Carolina tax return at the time credit is claimed. If the credit is claimed because
of a deficiency assessment notice, a copy of the notice and a receipt showing the
payment must be filed.
(B) If a taxpayer is refunded or credited taxes paid to another state for which a credit has
been allowed under this section, then a tax equal to that portion of the credit allowed is
due and payable from the taxpayer within sixty days from the date the refund or the
notice of the credit is received. If the amount of the tax is not paid within sixty days of
receipt or notice, the taxpayer is subject to penalties and interest for failure to pay
provided in Chapter 54 of this title.
(C) When a taxpayer is considered a resident of this State and is also considered a
resident of another state under the laws of the other state, the department may, at its
discretion, allow a credit against South Carolina income taxes for those taxes paid to the
other state on income taxed under this chapter.

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