On January 26, the South Carolina Department of Revenue issued Revenue Ruling #21-2, which provides guidance regarding the state’s conformity to Internal Revenue Code (IRC) Section 163(j).
IRC Section 163(j) Background:
- For tax years beginning before January 1, 2018, IRC Section 163(j) limited business interest expense deductions for certain interest paid or accrued by corporations.
- The Tax Cuts and Jobs Act of 2017 (TCJA) significantly altered IRC Section 163(j), limiting a taxpayer’s deduction for business interest expense (BIE) to the sum of 30% of the taxpayer’s adjusted taxable income (ATI), the taxpayer’s current year business interest income and certain floor plan financing interest expense (FFI).
- The provision was further amended in 2020 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act for taxable years beginning in 2019 and 2020, to adjust the limitation 30% BIE limitation to 50% of a taxpayer’s ATI, BII and FFI.
- IRC Section 163(j) also contains interest expense carryforward provisions for disallowed expenses. These changes made by the TCJA were effective for tax years beginning on or after January 1, 2018.
South Carolina’s Tax Treatment
In October 2018, South Carolina enacted legislation decoupling the state from IRC Section 163(j) as amended by the TCJA.
Revenue Ruling #21-2 provides, that for tax years beginning after 2017, there is no South Carolina business interest tax limitation and no carryforward. As such, any interest expense that cannot be deducted against income in the year incurred may create a South Carolina net operating loss, and 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.
Reference: South Carolina Department of Revenue, SC Revenue Ruling #21-2 (Jan. 26, 2021).
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