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Income Tax Basics by Burnie Maybank, South Carolina Economic Development 101, December 2011
 

Income Tax Basics by Burnie Maybank, South Carolina Economic Development 101, December 2011

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Burnie Maybank hosted the Nexsen Pruet Newbie Seminar on December 1, 2011. The Newbie Seminar is designed for those new to the economic development field in South Carolina or those who would like ...

Burnie Maybank hosted the Nexsen Pruet Newbie Seminar on December 1, 2011. The Newbie Seminar is designed for those new to the economic development field in South Carolina or those who would like some brushing up. Covered topics included basic property, sales and income taxes, as well as Bonds, the utility tax credit and FOIA.

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    Income Tax Basics by Burnie Maybank, South Carolina Economic Development 101, December 2011 Income Tax Basics by Burnie Maybank, South Carolina Economic Development 101, December 2011 Presentation Transcript

    • NEWBIE SEMINAR Income Tax BasicsSales Tax Exemptions Burnet R. Maybank, III Nexsen Pruet, LLC 1230 Main Street, Suite 700 Columbia, SC 29201 803-771-8900 bmaybank@nexsenpruet.com
    • Income Taxes
    • South Carolina Corporate Income and License Tax Basics INCOME AND LICENSE TAXES The starting point of South Carolina taxation for corporations, partnerships, limited liability companies, individuals, estates, and trusts is federal taxable income. South Carolina law provides for modifications to be made from federal taxable income in determining South Carolina taxable income.B.R. Maybank, III
    • INCOME AND LICENSE TAX BASICS South Carolina’s corporate income tax rate of 5% is among the lowest income tax rate in the Southeast.B.R. Maybank, III
    • INCOME AND LICENSE TAX BASICS South Carolina’s license fee, or franchise tax, is imposed on the privilege of doing business as a corporation in South Carolina. The measure of the license fee is based on (1) the capital stock and paid-in or capital surplus of the corporation or (2) South Carolina gross receipts and property. Most corporations pay an annual license fee based on capital (.001 of the corporation’s capital stock and paid- in-surplus, plus $15).B.R. Maybank, III
    • INCOME AND LICENSE TAX BASICS Almost every city and some seven counties impose a business license tax on businesses operating within the corporate limits of the county or city. The annual business license tax normally takes the form of a gross receipts tax on the revenues of the business located within the limits of the county or city.B.R. Maybank, III
    • CALCULATION OF INCOME TAXES FOR MULTI- STATE MANUFACTURER C CORPORATION1. Taxpayer (Txp) calculates its federal income taxes2. Txp makes certain add-backs (e.g. bonus depreciation) and deductions to federal taxable income3. Txp subtracts allocations made to other states (e.g. income from the sale of real property in another state.)This equals net income subject to apportionment.
    • CALCULATION OF INCOME TAXES FOR MULTI- STATE MANUFACTURER C CORPORATION4. Txp takes net income subject to apportionment and multiples by apportionment ratio5. Txp adds back allocations made to South Carolina (e.g. income from sale of property in South Carolina)This equals total South Carolina net income.
    • CALCULATION OF INCOME TAXES FOR MULTI- STATE MANUFACTURER C CORPORATION6. Txp subtracts South Carolina Loss carry forwardsThis equals total South Carolina net income subject to tax7. Txp multiplies this amount by corporate income tax rate of 5%8. Txp subtracts tax credits (e.g. Job Tax Credit, ITC, etc.)9. Txp subtracts certain adjustments (e.g. Tax Withholdings) and this equals tax due
    • INCOME TAXES ALLOCATION AND APPORTIONMENT OF INCOME South Carolina Code §12-6-2210 provides for the determination of whether taxable income of a business will be apportioned. A taxpayer whose entire business is transacted or conducted in South Carolina is subject to income tax based on the entire taxable income of the business for the taxable year. A taxpayer that transacts or conducts its business partly within and partly outside of South Carolina is subject to income tax based on the portion of its business carried on in South Carolina. This portion is determined through allocation and apportionment of income. The sum of these amounts is South Carolina taxable income.B.R. Maybank, III
    • INCOME TAXES ALLOCATION OF INCOME South Carolina Code §§12-6-2220 and 12-6-2230 provide that certain classes of income, less related expenses, are allocated. Items directly allocated include nonbusiness interest, nonbusiness dividends, nonbusiness rents and royalties from the lease or rental of real estate or tangible personal property, gains and losses from the sale of real property, and nonbusiness gains and losses from sales of intangible property.B.R. Maybank, III
    • INCOME TAXES APPORTIONMENT OF INCOME The income remaining after allocation is apportioned in accordance with South Carolina Code §12-6-2240. South Carolina generally requires the use of one of the following apportionment methods: 1. A single factor apportionment method (based on sales) for taxpayers whose principal business in South Carolina is dealing in tangible personal property. 2. A “gross receipts” apportionment method for taxpayers not dealing in tangible personal property. This method is typically used by financial businesses and service businesses. See South Carolina Code §§12-6- 2290 and 12-6-2295.B.R. Maybank, III
    • INCOME TAXES APPORTIONMENT OF INCOME 3. A “special” apportionment method provided in South Carolina Code §12-6-2310 for certain companies, such as railroad companies, telephone companies, pipeline companies, airline companies, and shipping lines. 4. An individualized apportionment method tailored to a particular taxpayer (a) because the standard method for that taxpayer does not fairly represent the extent of the taxpayer’s business in South Carolina, or (b) as an economic incentive allowed the taxpayer.B.R. Maybank, III
    • INCOME TAXES APPORTIONMENT METHODS Single Sales Factor Apportionment Method South Carolina Code §12-6-2252 provides that a taxpayer whose principal business in South Carolina is manufacturing or any form of collecting, buying, assembling or processing goods and materials in this state shall apportion income to South Carolina by multiplying the net income remaining after allocation by the sales factor defined in South Carolina Code §12-6-2280. The single sales factor apportionment method is typically used by manufacturers and retailers having income in South Carolina.B.R. Maybank, III
    • INCOME TAXES APPORTIONMENT OF INCOME FOR MULTI-STATE MANUFACTURERSFor many years multi-state taxpayers used a standard three-factor formula to calculate apportionment ratio; the factorswere property, payroll and sales.
    • INCOME TAXES APPORTIONMENT OF INCOME FOR MULTI-STATE MANUFACTURERSOriginal Apportionment ratio: Sales in SC Property in SC Payroll in SC * * Sales everywhere Property everywhere Payroll everywhere
    • INCOME TAXES APPORTIONMENT OF INCOME FOR MULTI-STATE MANUFACTURERSIn about 1996, South Carolina joined a then small list ofstates that double-weighted the sales factor. (This wassometimes referred to as “doubleweighted sales” or “fourfactor” apportionment.)Apportionment Ratio 1996-2007: Sales SC * Sales SC * Property SC * Payroll SCSales everywhere Sales everywhere Property everywhere Payroll everywhere
    • APPORTIONMENT OF INCOME FOR MULTI-STATE MANUFACTURERSBeginning in 2007, manufacturers began moving from three-factor formula to 100% sales factor. The three-factorapportionment formula is eliminated entirely in tax year 2011.
    • APPORTIONMENT OF INCOME FOR MULTI-STATE MANUFACTURERS 2011 Apportionment Formula Apportionment Ratio = Sales in SC Sales everywhere
    • APPORTIONMENT OF INCOME FOR MULTI-STATE MANUFACTURERS Definition of “Sales” in South CarolinaThe term “sales in this State” includes sales of goods,merchandise, or property received by a purchaser in this State.The place where goods are received by the purchaser after alltransportation is completed is considered the place which thegoods are received by the purchaser. Direct delivery into thisState by the taxpayer to a person designated by a purchaserconstitutes delivery to the purchaser in this State.
    • CALCULATION OF INCOME TAXES FOR MULTI- STATE MANUFACTURER C CORPORATION1. Taxpayer (Txp) calculates its federal income taxes2. Txp makes certain add-backs (e.g. bonus depreciation) and deductions to federal taxable income3. Txp subtracts allocations made to other states (e.g. income from the sale of real property in another state.)This equals net income subject to apportionment.
    • CALCULATION OF INCOME TAXES FOR MULTI- STATE MANUFACTURER C CORPORATION4. Txp takes net income subject to apportionment and multiples by apportionment ratio5. Txp adds back allocations made to South Carolina (e.g. income from sale of property in South Carolina)This equals total South Carolina net income.
    • CALCULATION OF INCOME TAXES FOR MULTI- STATE MANUFACTURER C CORPORATION6. Txp subtracts South Carolina Loss carry forwardsThis equals total South Carolina net income subject to tax7. Txp multiplies this amount by corporate income tax rate of 5%8. Txp subtracts tax credits (e.g. Job Tax Credit, ITC, etc.)9. Txp subtracts certain adjustments (e.g. Tax Withholdings) and this equals tax due
    • USE OF TAX CREDITS BY PASS THROUGH ENTITIES ♦ Pass Through Entity Specifically Qualifying for Credit South Carolina Code §12-6-3310(B) contains special provisions concerning the use of income tax credits by pass through entities. Unless specifically prohibited, an S corporation, limited liability company taxed as a partnership, or partnership that qualifies for a credit pursuant to Article 25 of Chapter 6, Title 12 may pass through the credit earned to each shareholder of the S corporation, member of the limited liability company, or partner of the partnership.B.R. Maybank, III
    • USE OF TAX CREDITS BY PASS THROUGH ENTITIES (CONT.) NOTE: The statutory language of a particular tax credit controls whether a credit generated by an entity may be used by a partner, shareholder, or member. Great majority pass through.B.R. Maybank, III
    • SALES TAXES
    • SALES TAXES South Carolina imposes a "general” sales tax, equal to 6% of the gross proceeds of sales, upon every person engaged or continuing within this State in the business of selling tangible personal property at retail.B.R. Maybank, III
    • SALES TAXES The tax will therefore be applicable if:  a person is engaged or continuing in the business of selling,  the person is selling tangible personal property in South Carolina, and  the sales of tangible personal property in South Carolina are retail. The tax, if the above conditions are met, will be based upon the "gross proceeds” of sales.B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS South Carolina enjoys a lengthy list of sales tax exemptions for manufacturers
    • MANUFACTURER’S SALES TAX EXEMPTIONS Tangible Personal Property that is an “Ingredient or Component Part” or “Used Directly” in the ProcessSouth Carolina does not tax the sale of tangible personalproperty to a manufacturer or compounder that is an ingredientor component part of the tangible personal property or productsmanufactured or compounded for sale, section 12-36-120(2).
    • MANUFACTURER’S SALES TAX EXEMPTIONS Tangible Personal Property that is an “Ingredient or Component Part” or “Used Directly” in the ProcessFurther, South Carolina does not tax the sale of tangible personalproperty “used directly” in manufacturing, compounding, or processingtangible personal property for sale, section 12-36-120(3). An item isused directly if the materials or products so used come in directcontact with and contribute to bring about some chemical or physicalchange in the ingredient or component properties during the period inwhich the fabricating, converting or processing takes place, see DORReg. 117-302.1
    • MANUFACTURER’S SALES TAX EXEMPTIONS 12-36-2120(9)(a)-(d) - Coal, coke, or other fuel for manufacturers, transportation companies, electric power companies, and processorsB.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS 12-36-2120(50) - The following items when used by a qualified recycling facility: recycling property, electricity, natural gas, fuels, gasses, fluids and lubricants, ingredients or component parts of manufactured products, property used for the handling or transfer of postconsumer waste or manufactured products or in or for the manufacturing process, and machinery and equipment foundationsB.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS 12-36-2120(51) - Material handling systems and material handling equipment used in the operation of a distribution facility or a manufacturing facility of a taxpayer that invests at least $35 million in South CarolinaB.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS 12-36-2120(52) - Parts and supplies used by persons engaged in the-business of repairing or reconditioning aircraft owned by or leased to the federal government or commercial air carriers. This exemption does not extend to tools and other equipment not attached to, or that do not become a part of, the aircraft.B.R. Maybank, III
    • SALES TAX EXEMPTIONS TECHNOLOGY INTENSIVE FACILITY 12-36-2120(65)(a) and 12-36-2120(66) - Computer equipment used in connection with, and electricity and certain fuel used by, a technology intensive facility (defined in South Carolina Code §12-6-3360(M)(14)(b)) that invests $300 million over 5 years, creates at least 100 new jobs during the 5 years with an average cash compensation of 150% of the per capita income of the state, and spends at least 60% of the $300 million investment on computer equipmentB.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS 12-36-2120(65)(b) - Computer equipment used in connection with a manufacturing facility where the taxpayer invests at least seven hundred fifty million dollars in real or personal property or both comprising or located at the facility over a seven-year period and creates at least three thousand eight hundred full- time new jobs at the facility during that seven-year period. This exemption is effective November 1, 2009 and only applies to taxpayers that notify the Department prior to October 31, 2015 of their intent to utilize the exemption.B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS 12-36-2120(67) - Construction material used in the construction of a single manufacturing or distribution facility, or one that serves both purposes, that invests at least $100 million at a single site in South Carolina over an 18 month period. This exemption will be phased-in from July I, 2007 - July 1, 2011. After July, 1, 2011, the exemption will be fully phased-in.B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS ELECTRICITY The sale of electricity used by manufacturers, processors, miners, quarriers, or cotton gins to manufacture, mine, or quarry tangible personal property for sale is exempt from the tax under section 12-36-2120(19). This exemption applies to electricity that provides lighting necessary for the operation of machines used in manufacturing tangible personal property for sale and to electricity used to control plant atmosphere as to temperature and/or moisture content, in the quality control of tangible personal property being manufactured or processed for sale.B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS ELECTRICITY This exemption does not apply to sales of electricity used in administrative offices, supervisory offices, parking lots, storage warehouses, maintenance shops, safety control and comfort air conditioning.B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS MACHINE EXEMPTION Section 12-36-2120(17) exempts machines used in manufacturing, processing, recycling, compounding, mining, or quarrying tangible personal property for sale.B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS MACHINE EXEMPTION – GENERAL RULE A machine qualifies for the machine exemption if the machine meets the following three requirements: 1. The machine is used at a manufacturing facility whose purpose is manufacturing a product "for sale." It does not apply to machines used at a facility whose purpose may be retailing, wholesaling, or distributing. For example, machines used by an industrial baker manufacturing breads for sale may be exempt; however, similar machines used by a local retail bakery are not exempt;B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS MACHINE EXEMPTION – GENERAL RULE The machine is used in, and serves an essential and indispensable component part of the manufacturing process and is used on an ongoing and continuous basis during the manufacturing process. Note: A machine "integral and necessary" to the manufacturer, such as a machine used solely for warehouse, distribution, or administrative purposes, is not exempt under the machine exemption since it is not "integral and necessary" to the manufacturing process;B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS MACHINE EXEMPTION – GENERAL RULE The machine must be substantially used (not necessarily exclusively used) in manufacturing tangible personal property for sale, i.e., more than one-third of a machines use is for manufacturing.B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS MACHINE EXEMPTION – GENERAL RULE A machine meeting the above requirements may be exempt even if it does not have moving parts or is a fixture upon the real estate where it stands. However, buildings and parts of buildings, as well as other improvements which benefit the land generally and may serve other users of the land, are not exempt.B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXEMPTIONS Machines Used Substantially in Manufacturing (Dual Usage Machines)“Substantial” use, but not “exclusive” use, of a machine in the manufactureof tangible personal property for sale is required in order for the machineexemption to apply.For example, the purchase of a forklift that is used substantially to movematerials from from one stage of the production process to another (anexempt purpose) and also used to load trucks (a non-exempt purpose) isallowed the machine exemption from sales and use tax. In addition,purchases of parts for the forklift are also exempt from tax.
    • MANUFACTURER’S SALES TAX EXEMPTIONS MACHINE EXEMPTION Machines Owned by Someone Other Than a ManufacturerOwnership of the machine by the manufacturer is not required toqualify for the machine exemption. The use of a machinedetermines whether it is exempt from sales and use tax.
    • MANUFACTURER’S SALES TAX EXAMPTIONS EXAMPLES OF NON-EXEMPT MACHINES OR PARTS material handling machinery and/or mechanical conveyors up to the point where the materials go into process chemicals used to clean non-exempt machines, such as storage tanks, or the manufacturing facility paint used on exempt manufacturing machines to prevent machine corrosion machines used for maintenance purposes storage racks used for warehouse purposes warehouse machines used for warehouse purposes power lines bringing electricity into the plantB.R. Maybank, III
    • POLLUTION ABATEMENT MACHINES Section 12-36-2120(17) exempts pollution control machines qualify for the machine exemption when installed and operated for compliance with an order of an agency of the United States or of this state to prevent or abate air, water, or noise pollution caused or threatened by the operation of other exempt machines used in the mining, quarrying, compounding, processing, and manufacturing of tangible personal property for sale.B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXAMPTIONS PACKAGING Section 12-36-120(4) exempts the sale of materials, containers, cores, labels, sacks, or bags that are used incident to the sale and delivery of tangible personal property are not subject to the tax. “Materials” include wrapping paper, twine, strapping, nails, staples, wire, lumber, cardboard, adhesives, tape, waxed paper, plastic materials, aluminum foils, and pallets used in packaging tangible personal property incident to its sales and delivery and used by manufacturers, processors, or compounders in shipping tangible personal property.B.R. Maybank, III
    • MANUFACTURER’S SALES TAX EXAMPTIONS PACKAGING “Containers” include paper, plastic or cloth sacks, bags, boxes, bottles, cans, cartons, drums, barrels, kegs, carboys, cylinders, and crates. “Cores” include spools, spindles, cylindrical tubes and the like on which tangible personal property is wound.B.R. Maybank, III