South Carolina General Assembly
116th Session, 2005-2006
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
DateBodyAction Description with journal page number
3/28/2006SenateIntroduced and read first time SJ5
3/28/2006SenateReferred to Committee on FinanceSJ5
3/31/2006SenateReferred to Subcommittee: O'Dell (ch), Peeler, Reese, Short, Fair, Verdin
4/5/2006SenateCommittee report: Favorable with amendment FinanceSJ21
4/6/2006SenateAmended SJ28
4/6/2006SenateRead second time SJ28
4/11/2006SenateRead third time and sent to House SJ24
4/13/2006HouseIntroduced and read first time HJ15
4/13/2006HouseReferred to Committee on Ways and MeansHJ15
5/4/2006HouseRecalled from Committee on Ways and MeansHJ112
5/10/2006HouseDebate adjourned until Thursday, May 11, 2006 HJ105
5/11/2006HouseRead second time HJ17
5/11/2006HouseUnanimous consent for third reading on next legislative day HJ18
5/12/2006HouseRead third time and enrolled HJ1
5/18/2006Ratified R 306
5/23/2006Signed By Governor
5/25/2006Copies available
5/25/2006Effective date See Act for Effective Date
6/8/2006Act No.282
VERSIONS OF THIS BILL
3/28/2006
4/5/2006
4/6/2006
5/4/2006
(A282, R306, S1283)
AN ACT TO AMEND SECTION 126545, 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 PASSTHROUGH 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 PASSTHROUGH 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
SECTION1.Section 126545 of the 1976 Code, as added by Act 41 of 2005, is amended to read:
“Section 126545.(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 126530 through 126550 resulting from the ownership of an interest in a passthrough 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 passthrough business and income of the same type regardless of the type of passthrough 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 passthrough 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)‘Passthrough businesses’ mean sole proprietorships, partnerships, and ‘S’ corporations, including limited liability companies taxed as sole proprietorships, partnerships, or ‘S’ corporations.
(B)(1)Notwithstanding Section 126510, 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 passthrough 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 126510.
(2)The rate of the income tax imposed pursuant to this subsection is:
Taxable Year Beginning in Rate of Tax
20066.5 percent
2007 6 percent
20085.5 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 126510 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 passthrough 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
SECTION2.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.
______
1