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COMMITTEE REPORT
April 5, 2006
S. 1283
S. Printed 4/5/06--S.
Read the first time March 28, 2006.
To whom was referred a Bill (S. 1283) 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, etc., respectfully
That they have duly and carefully considered the same and recommend that the same do pass with amendment:
Amend the bill, as and if amended, by striking all after the enacting words and inserting:
/ 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, an a taxpayer may elect annually to have the income tax at the rate provided in item (2) of this subsection is 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 multiplied by a fraction, the numerator of which is the rate of tax imposed pursuant to subsection (B)(2) of this section, and the denominator of which is the highest income tax rate imposed pursuant to Section 12-6-510. The resulting amount 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)(e) of this section, if a taxpayer owns interests in one or more pass-through business 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."
SECTION 2. This act takes effect upon approval by the Governor and applies for taxable years beginning after 2005. /
Renumber sections to conform.
Amend title to conform.
HUGH K. LEATHERMAN, SR. for Committee.
REVENUE IMPACT 1/
This bill would have no impact on general fund revenue in FY 2006-07.
Explanation
This bill specifies that copyright, mineral, oil, and gas royalties treated as personal holding company income are not active trade or business income. Taxpayers may elect, not changeable for a five year period, to have active business income taxed at the current progressive tax rates. Any revenue impact from these two amendments to the legislation enacted last year were previously incorporated into the BEA revenue forecast and would have no additional impact on general fund revenue. Small taxpayers with less than $1,000,000 in gross income and taxable incomes less than $100,000 may elect to treat 50% of income as not related to personal services. Due to the anticipated complexity of the determination of personal service income, which taxpayers will have to determine only for state tax purposes, we expect that this election by taxpayers will increase some taxpayers' income tax liability and decrease others. We expect that the net result will be revenue neutral. For the bill as a whole, the BEA expects that this bill would have no impact on the current revenue forecast for individual income tax revenue, and therefore have no impact on general fund revenue in FY 2006-07.
Approved By:
William C. Gillespie
Board of Economic Advisors
1/ This statement meets the requirement of Section 2-7-71 for a state revenue impact by the BEA, or Section 2-7-76 for a local revenue impact or Section 6-1-85(B) for an estimate of the shift in local property tax incidence by the Office of Economic Research.
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 AT THE ELECTION OF THE TAXPAYER, TO PROVIDE A MINIMUM FIVE YEARS FOR THIS ELECTION, TO PROVIDE ADDITIONAL DEFINITIONS FOR THIS APPLICATION, AND TO PROVIDE A "SAFE HARBOR" AMOUNT IN DETERMINING THE NONPERSONAL SERVICE PORTION OF ACTIVE TRADE OR BUSINESS INCOME IN A PASS-THROUGH BUSINESS WITH GROSS INCOME OF LESS THAN ONE MILLION DOLLARS AND TAXABLE INCOME OF LESS THAN ONE HUNDRED THOUSAND DOLLARS.
Be it enacted by the General Assembly of the State of South Carolina:
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) copyright, mineral, oil, and gas royalties that are treated as personal holding company income pursuant to Section 543 of the Internal Revenue Code;
(c) capital gains and losses;
(c)(d) any payments for services referred to in Internal Revenue Code Section 707(c);
(d)(e) 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, an a taxpayer may elect to have the income tax at the rate provided in item (2) of this subsection is imposed annually on the active trade or business income received by the owner of a pass-through business. An election made pursuant to this section may not be changed for five years. 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 multiplied by a fraction, the numerator of which is the rate of tax imposed pursuant to subsection (B)(2) of this section, and the denominator of which is the highest income tax rate imposed pursuant to Section 12-6-510. The resulting amount 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)(e) of this section, if a taxpayer owns interests in one or more pass-through business 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."
SECTION 2. This act takes effect upon approval by the Governor and applies for taxable years beginning after 2005.
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