Did a South Carolina resident have to report his share of an out-of-state S corporation's income, and could he claim a credit for tax paid to the other state?

Plain-English summary

South Carolina Revenue Ruling 87-2 explained how a South Carolina resident who is a shareholder in an out-of-state Subchapter S corporation reports that income. In the facts, the resident actively and materially managed a wholesale florist business organized as an S corporation with no South Carolina-source income.

Because South Carolina income starts from federal taxable income (Section 12-7-410) and conforms to Subchapter S (Section 12-7-235(b)), the shareholder's pass-through share was already in his federal figure reported on line 1 of the SC1040. He then adjusted his South Carolina income on line 42 to remove the S corporation income, losses, and deductions that were not taxable to South Carolina under the allocation and apportionment rules of Article 9.

The ruling drew a line between allocated and apportioned items. Pass-through dividends, interest not connected with the business, and gains or losses from selling intangible personal property not connected with the business were allocable to South Carolina (the state of residence) and remained taxable there. All other business income, losses, and deductions were apportioned to the other state, because no business was conducted in South Carolina, and were modified out of South Carolina income. Any Form 1099 dividends or W-2 wages reported to the shareholder were taxable to South Carolina. A credit for tax paid to the other state was allowed only on personal-service income (W-2 wages) that was both taxable to South Carolina and taxed by the other state.

Common questions

Q: Did the resident owe South Carolina tax on the out-of-state S corporation income? He reported his federal income (which included the S corporation share) and then modified out the portion apportioned to the other state; only certain items stayed South Carolina-taxable.

Q: Which items stayed taxable to South Carolina? Pass-through non-business dividends, non-business interest, and non-business intangible gains — allocable to the state of residence — plus wages and dividends reported to him.

Q: Could he claim a credit for the other state's tax? Only on personal-service (W-2) wages taxed by both states.

Q: Why wasn't a broader credit available? The business income was apportioned to the other state and modified out of South Carolina income, so it was not doubly taxed and no credit was needed.

Citations and references

• S.C. Code § 12-7-410 (South Carolina income conformed to the IRC with modifications)
• S.C. Code § 12-7-235(b) (S corporation and shareholders treated as under Subchapter S)
• S.C. Code § 12-7-430(e) (modification for allocation/apportionment under Article 9)
• IRC Subchapter S (pass-through treatment of shareholders)

Subject

Income from a Subchapter S Corporation

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR87-2.pdf

Original ruling text

SC REVENUE RULING #87-2

SUBJECT:

Income from a Subchapter S Corporation

SUPERSEDES:

All previous documents and any oral directives in conflict herewith.

REFERENCE:

S.C. Code Sections 12-7-410, 12-7-430
12-7-435, 12-7-235

AUTHORITY:

S.C. Code Section 12-3-170

SCOPE:

A Revenue Ruling is the Commission's official interpretation of how tax
law is to be applied to a specific set of facts. A Revenue Ruling is public
information and remains a permanent document until superseded by a
Regulation or is rescinded by a subsequent Revenue Ruling.

Question:
Does a shareholder (resident of South Carolina) have to report to South Carolina his share of
income from another states Subchapter S Corporation and, if so, would he be eligible for credit
against tax paid on the same income in that other state?
Facts:
The a resident of South Carolina, is a shareholder in an out-of-state corporation which is electing
Subchapter S status. The corporation has no income from South Carolina sources. The taxpayer
actively and materially manages this wholesale florist business.
Discussion:
Section 12-7-410 as amended, states that the South Carolina gross income, adjusted gross
income and taxable income of an individual is the same as determined under the Internal
Revenue Code with the modifications specified in Sections 12-7-430 and 12-7-435. Section 127-430(e) provides that if the income of a taxpayer is subject to allocation or apportion- ment, or
both, pursuant to Article 9, of this Chapter, the South Carolina taxable income is modified as
provided in that article.

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Section 12-7-235(b) as amended, provides that for South Carolina income tax purposes, an
electing small business corporation and the shareholders are treated in the same manner provided
in Subchapter S of the Internal Revenue Code. Pursuant to Subchapter S, shareholders are
treated in essentially the same manner as partners in a partnership. Certain items of income, loss
and deduction are "passed-through" to the shareholders. Each such item is treated as if it were
realized by the shareholder directly from the source from which it was realized by the
corporation or as if it were incurred by the shareholder in the same manner as incurred by the
corporation.
Conclusion:
The taxpayer would report his federal taxable income on line 1 of his South Carolina tax return
(SC1040). This would include his share of the Subchapter S corporation's income. On line 42,
the taxpayer would modify his South Carolina income for the Subchapter S income, losses, and
deductions not taxable to South Carolina pursuant to the allocation and apportionment provisions
of Article 9. Pass through items of dividend, interest not connected with the business and gains
or losses from the sale of intangible personal property not connected with the business would be
allocable to South Carolina. All other income, losses and deductions would be apportioned to the
other state since under the facts in this case no business is conducted in South Carolina, and
South Carolina income would be modified for these items. Form 1099 dividends or W-2 wages
reported to the shareholder are taxable to South Carolina. A tax credit would be allowed only on
income earned from personal services (W-2 wages) taxable to South Carolina and also taxed by
the other state. (March 24, 1987)

SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard
S. Hunter Howard, Chairman

s/John M. Rucker
John M. Rucker, Commissioner

s/Howard E. Duvall
Howard E. Duvall, Commissioner

Columbia, South Carolina
March 24
, 1987

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