H*3007(Rat #0044, Act #0041 of 2005)  General Bill, By Wilkins, W.D. Smith, 
Harrell, Cato, Chellis, Harrison, Townsend, Witherspoon, G.R. Smith, Vaughn, 
Sandifer, Coates, Barfield, Young, Kirsh, Leach, E.H. Pitts, Battle, Viers, 
Clyburn, Littlejohn, Taylor, Rice, Hinson, Clark, Walker, Bales, Simrill, 
Mahaffey, Toole, Talley, Umphlett, Brady, Bailey, Hagood, Edge, Clemmons, 
Huggins, Neilson, Vick and Delleney
 AN ACT TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION
 12-6-545 SO AS TO PHASE IN OVER FOUR TAXABLE YEARS BEGINNING IN 2006 A FIVE
 PERCENT STATE INDIVIDUAL INCOME TAX ON SOUTH CAROLINA TAXABLE INCOME
 ATTRIBUTABLE TO THE ACTIVE TRADE OR BUSINESS INCOME OF A PASS-THROUGH
 BUSINESS, TO DEFINE PASS-THROUGH BUSINESSES AS SOLE PROPRIETORSHIPS,
 PARTNERSHIPS, "S" CORPORATIONS, AND LIMITED LIABILITY COMPANIES WHEN SUCH
 COMPANIES ARE TAXED AS SOLE PROPRIETORSHIPS, PARTNERSHIPS, AND "S"
 CORPORATIONS AND TO DEFINE ACTIVE TRADE OR BUSINESS INCOME OR LOSS. - ratified
 title

   12/08/04  House  Prefiled
   12/08/04  House  Referred to Committee on Ways and Means
   01/11/05  House  Introduced and read first time HJ-41
   01/11/05  House  Referred to Committee on Ways and Means HJ-42
   01/12/05  House  Member(s) request name added as sponsor: Talley
   01/13/05  House  Member(s) request name added as sponsor: Umphlett
   01/18/05  House  Member(s) request name added as sponsor: Brady
   01/19/05  House  Committee report: Favorable with amendment Ways
                     and Means HJ-11
   01/25/05  House  Member(s) request name added as sponsor: Bailey, Hagood
   01/26/05  House  Member(s) request name added as sponsor: Edge,
                     Clemmons, Huggins
   01/26/05  House  Requests for debate-Rep(s). Harrell, Scott,
                     Weeks, Miller, McLeod, Ott, JE Smith, Jennings,
                     Hayes, Battle, Littlejohn, Leach, Anderson, GR
                     Smith, Davenport, Anthony, Phillips, Mack,
                     Breeland, Young and Clyburn HJ-34
   01/26/05  House  Debate adjourned until Thursday, January 27, 
                     2005 HJ-42
   02/01/05  House  Member(s) request name added as sponsor: Neilson, Vick
   02/01/05  House  Debate adjourned until Wednesday, February 2,
                     2005 HJ-27
   02/02/05  House  Member(s) request name added as sponsor: Delleney
   02/02/05  House  Amended HJ-22
   02/02/05  House  Read second time HJ-55
   02/02/05  House  Roll call Yeas-73  Nays-39 HJ-55
   02/03/05  House  Read third time and sent to Senate HJ-32
   02/03/05  Senate Introduced and read first time SJ-8
   02/03/05  Senate Referred to Committee on Finance SJ-8
   03/30/05  Senate Committee report: Favorable with amendment
                     Finance SJ-20
   03/31/05         Scrivener's error corrected
   04/05/05  Senate Special order, set for 04/05/05 SJ-18
   04/06/05  Senate Amended SJ-26
   04/06/05  Senate Read second time SJ-26
   04/06/05  Senate Unanimous consent for third reading on next
                     legislative day SJ-26
   04/07/05  Senate Read third time and returned to House with
                     amendments SJ-20
   04/07/05         Scrivener's error corrected
   04/12/05  House  Concurred in Senate amendment and enrolled HJ-15
   04/12/05         Ratified R 44
   04/14/05         Signed By Governor
   04/20/05         Scrivener's error corrected
   04/22/05         Copies available
   04/22/05         Effective date 04/14/05
   04/25/05         Act No. 41

(A41, R44, H3007)

AN ACT TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 12-6-545 SO AS TO PHASE IN OVER FOUR TAXABLE YEARS BEGINNING IN 2006 A FIVE PERCENT STATE INDIVIDUAL INCOME TAX ON SOUTH CAROLINA TAXABLE INCOME ATTRIBUTABLE TO THE ACTIVE TRADE OR BUSINESS INCOME OF A PASS-THROUGH BUSINESS, TO DEFINE PASS-THROUGH BUSINESSES AS SOLE PROPRIETORSHIPS, PARTNERSHIPS, "S" CORPORATIONS, AND LIMITED LIABILITY COMPANIES WHEN SUCH COMPANIES ARE TAXED AS SOLE PROPRIETORSHIPS, PARTNERSHIPS, AND "S" CORPORATIONS AND TO DEFINE ACTIVE TRADE OR BUSINESS INCOME OR LOSS.

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

Separate income tax rate

SECTION    1.    Article 5, Chapter 6, Title 12 of the 1976 Code is amended by adding:

"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 Internal Revenue Code Section 707(c);

(d)    amounts reasonably related to personal services. All amounts paid as compensation 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.

(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 income tax at the rate provided in item (2) of this subsection is imposed annually on active trade or business income received by the owner of a pass-through business. 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."

Time effective

SECTION    2.    This act takes effect upon approval by the Governor.

Ratified the 12th day of April, 2005.

Approved the 14th day of April, 2005.