South Carolina General Assembly
116th Session, 2005-2006

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A282, R306, S1283

STATUS INFORMATION

General Bill
Sponsors: Senators Leatherman and Peeler
Document Path: l:\council\bills\bbm\9335htc06.doc

Introduced in the Senate on March 28, 2006
Introduced in the House on April 13, 2006
Last Amended on April 6, 2006
Passed by the General Assembly on May 12, 2006
Governor's Action: May 23, 2006, Signed

Summary: Small business income tax

HISTORY OF LEGISLATIVE ACTIONS

     Date      Body   Action Description with journal page number
-------------------------------------------------------------------------------
   3/28/2006  Senate  Introduced and read first time SJ-5
   3/28/2006  Senate  Referred to Committee on Finance SJ-5
   3/31/2006  Senate  Referred to Subcommittee: O'Dell (ch), Peeler, Reese, 
                        Short, Fair, Verdin
    4/5/2006  Senate  Committee report: Favorable with amendment Finance SJ-21
    4/6/2006  Senate  Amended SJ-28
    4/6/2006  Senate  Read second time SJ-28
   4/11/2006  Senate  Read third time and sent to House SJ-24
   4/13/2006  House   Introduced and read first time HJ-15
   4/13/2006  House   Referred to Committee on Ways and Means HJ-15
    5/4/2006  House   Recalled from Committee on Ways and Means HJ-112
   5/10/2006  House   Debate adjourned until Thursday, May 11, 2006 HJ-105
   5/11/2006  House   Read second time HJ-17
   5/11/2006  House   Unanimous consent for third reading on next legislative 
                        day HJ-18
   5/12/2006  House   Read third time and enrolled HJ-1
   5/18/2006          Ratified R 306
   5/23/2006          Signed By Governor
   5/25/2006          Copies available
   5/25/2006          Effective date See Act for Effective Date
    6/8/2006          Act No. 282

View the latest legislative information at the LPITS web site

VERSIONS OF THIS BILL

3/28/2006
4/5/2006
4/6/2006
5/4/2006


(Text matches printed bills. Document has been reformatted to meet World Wide Web specifications.)

(A282, R306, S1283)

AN ACT TO AMEND SECTION 12-6-545, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO THE APPLICATION OF THE REDUCED STATE MARGINAL INDIVIDUAL INCOME TAX RATE TO THE ACTIVE TRADE OR BUSINESS INCOME OF A PASS-THROUGH BUSINESS, SO AS TO MAKE THIS APPLICATION OPTIONAL AT THE ANNUAL ELECTION OF THE TAXPAYER, TO REVISE DEFINITIONS FOR THIS APPLICATION, TO REVISE THE METHOD OF DEDUCTING ACTIVE TRADE OR BUSINESS LOSS WHEN SUCH LOSS EXCEEDS ACTIVE TRADE OR BUSINESS INCOME; TO PROVIDE A "SAFE HARBOR" AMOUNT IN DETERMINING THE NONPERSONAL SERVICE PORTION OF ACTIVE TRADE OR BUSINESS INCOME OF A TAXPAYER IN ONE OR MORE PASS-THROUGH BUSINESSES WITH TOTAL GROSS INCOME OF LESS THAN ONE MILLION DOLLARS AND TAXABLE INCOME OF LESS THAN ONE HUNDRED THOUSAND DOLLARS, AND TO AUTHORIZE THE DEPARTMENT OF REVENUE TO PROVIDE OTHER METHODS OF DETERMINING INCOME DEEMED UNRELATED TO PERSONAL SERVICES.

Be it enacted by the General Assembly of the State of South Carolina:

Income tax on active trade or business income or loss

SECTION    1.    Section 12-6-545 of the 1976 Code, as added by Act 41 of 2005, is amended to read:

"Section 12-6-545.    (A)    As used in this section:

(1)    'Active trade or business income or loss' means income or loss of an individual, estate, trust, or any other entity except those taxed or exempted from tax pursuant to Sections 12-6-530 through 12-6-550 resulting from the ownership of an interest in a pass-through business. Active trade or business income or loss does not include:

(a)(i)    passive investment income as defined in Internal Revenue Code Section 1362(d) generated by a pass-through business and income of the same type regardless of the type of pass-through business generating it; and

(ii)    expenses related to passive investment;

(b)    capital gains and losses;

(c)    any payments for services referred to in Internal Revenue Code Section 707(c);

(d)    amounts reasonably related to personal services. All amounts paid as compensation and all guaranteed payments for services, but not for the use of capital as defined in Internal Revenue Code Section 707(c), are deemed to be reasonably related to personal services. In addition, if an owner of a pass-through entity who performs personal services for the entity is not paid a reasonable amount for those personal services as compensation or payments referred to in Internal Revenue Code Section 707(c), all of the owner's income from the entity is presumed to be amounts reasonably related to personal services.

For purposes of this section, amounts reasonably related to personal services include amounts reasonably related to the personal services of the owner, the owner's spouse, and any person claimed as a dependent on the owner's income tax return.

(2)    'Pass-through businesses' mean sole proprietorships, partnerships, and 'S' corporations, including limited liability companies taxed as sole proprietorships, partnerships, or 'S' corporations.

(B)(1)    Notwithstanding Section 12-6-510, a taxpayer may elect annually to have the income tax at the rate provided in item (2) of this subsection imposed annually on the active trade or business income received by the owner of a pass-through business. For joint returns, the election is effective for both spouses. The amount subject to tax pursuant to this section is not subject to tax pursuant to Section 12-6-510.

(2)    The rate of the income tax imposed pursuant to this subsection is:

Taxable Year Beginning in                                Rate of Tax

2006                                                            6.5 percent

2007                                                            6 percent

2008                                                            5.5 percent

after 2008                                                                5 percent

(C)    Notwithstanding any other provision of this chapter, active trade or business loss must first be deducted, dollar for dollar against active trade or business income. Any remaining active trade or business loss is deductible from income taxed under Section 12-6-510 if otherwise allowable.

(D)    The department may issue guidance as to what expenses reduce active trade or business income.

(E)(1)    Notwithstanding subsection (A)(1)(d) of this section, if a taxpayer owns interest in one or more pass-through businesses which have a total gross income of less than one million dollars and taxable income of less than one hundred thousand dollars, then the taxpayer may elect, in lieu of determining the actual amount of active trade or business income related to the taxpayer's personal services, to treat fifty percent of the taxpayer's active trade or business income as not related to the taxpayer's personal services. For purposes of this item, the term 'taxpayer' includes both taxpayers who file a joint return.

(2)    The department may provide other methods that may be used to determine an amount deemed to be unrelated to the owner's personal services if it determines that the benefits to the state of taxing income from personal services at a higher rate are insufficient to justify the burdens imposed on the taxpayer."

Time effective

SECTION    2.    This act takes effect upon approval by the Governor and applies for taxable years beginning after 2005.

Ratified the 18th day of May, 2006.

Approved the 23rd day of May, 2006.

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