Download This Version in Microsoft Word format
Indicates Matter Stricken
Indicates New Matter
Indicates Matter Stricken
Indicates New Matter
COMMITTEE REPORT
February 23, 2011
S. 522
S. Printed 2/23/11--S.
Read the first time February 9, 2011.
To whom was referred a Bill (S. 522) to amend Section 12-6-40, as amended, Code of Laws of South Carolina, 1976, relating to the application of the Internal Revenue Code to State Income, etc., respectfully
That they have duly and carefully considered the same and recommend that the same do pass:
HUGH K. LEATHERMAN, SR. for Committee.
REVENUE IMPACT 1/
This bill would decrease general fund income tax revenue by $5,288,658 in FY 2010-11 and increase revenue by $6,312,069 in FY 2011-12.
Explanation
This bill updates the conformity of the South Carolina income tax statutes to the Internal Revenue Code as amended through December 31, 2010. Federal law changes were implemented in five separate tax bills enacted at the federal level in 2010. Specific federal tax modifications with significant South Carolina revenue impact include an increase in the maximum amount a taxpayer may expense under Section 179 to $500,000 and increases the phase-out threshold amount to $2,000,000 for tax years 2010 and 2011. The maximum deduction for Section 179 properties was $250,000 with a phase-out threshold of $800,000 in tax years 2008 and 2009. We expect this added incentive to expense properties in the year of purchase rather than depreciate them over many years will reduce general fund income tax revenue by $6,109,541 in FY 2010-11 and $1,897,818 in FY 2011-12. An increase in the amount small businesses may deduct in start-up expenses to $10,000 from the prior $5,000 in tax year 2010 is expected to reduce South Carolina income tax revenue by $828,278 in FY 2010-11 and increase revenue by $9,548 in FY 2011-12 due to fewer deductions in that tax year. Another federal change will allow retirees to rollover qualified distributions from 401(k), 403(b) and 457(b) plans to Roth designated accounts. These rollovers will be taxable at conversion, but tax free when the retirement savings are used in future years. We anticipate that this change will increase income tax revenue by $614,210 in FY 2010-11 and $1,437,687 in FY 2011-12. Health care reform legislation mandates that expenditures for over-the-counter medicines are no longer reimbursable from health savings accounts, Archer medical spending accounts, and health flexible spending arrangements. We anticipate that this change will increase income tax revenue by $1,087,098 in FY 2010-11 and $1,630,647 in FY 2011-12. The final significant revenue impact from the federal changes in 2010 is the reduction in Section 179 expensing maximum amounts to $125,000 from $500,000 and decreasing the phase-out threshold amount to $500,000 from $2,000,000 for tax year 2012. We expect that this additional modification to Section 179 expensing will increase general fund income tax revenue by $5,049,969 in FY 2011-12. Based on our analysis of these changes, we estimate that the net revenue impact of updating IRS conformity would decrease general fund income tax revenue by $5,288,658 in FY 2010-11 and increase revenue by $6,312,069 in FY 2011-12. The Board of Economic Advisors has not accounted for these projected revenue declines or increases in its forecasts of FY 2010-11 or FY 2011-12 general fund revenues. A table summarizing the South Carolina revenue impact from all the recent federal tax changes is below.
2010 Federal Acts Affecting South Carolina Tax Revenue
Line #
Effective FY 2010-11 FY 2011-12
1 Small Business Jobs Act of 2010
2 A. ProvidingAccess to Capital
3 1. Increase in exclusion for gain
from certain small business stock
acquired at original issue and held
for at least 5 years to 100%. The
revenue gain in FY 2011 is from
estimated taxes paid on gains that
exceed the greater of 10 times the
taxpayers' basis or $10 million.
(sunset 12/31/10) DOE 5,435 0
4 4. Reduction in recognition period
from 7 years to 5 for built-in gains
tax on the sale of appreciated
assets sold after conversion from
a C corporation to S corporation.
(sunset 12/31/11) tyba -62,759 -12,968
12/31/10
5 B. Encouraging Investment
6 1. Expand definition of eligible
section 179 property to include
certain real property and increase
maximum amount and phase-out
thresholds to $500,000 and
$2,000,000 respectively from
$250,000 maximum deduction
and $800,000 phase-out threshold
that existed in tax years 2008
and 2009. tyba -6,109,541 -1,897,818
12/31/09 &
before
1/1/12
7 C. Promoting Entrepreneurship
8 1. Increase in amount allowed
as a deduction for start-up
expenditures from $5,000 to
$10,000 and increase the deduction
phase-out threshold from $50,000
to $60,000. tyba -828,278 9,548
2/31/09
9 D. Promoting Small Business
Fairness
10 3. Remove cellular telephones
and similar telecommunications
equipment from listed property
which excludes the fair market
value of personal use of a cell
phone provided to an employee
from gross income. tyba -40,444 -34,866
12/31/09
11 Total of Small Business Relief -7,035,586 -1,936,104
13 II. Revenue Provisions
14 B. Promoting Retirement
Preparation
15 1.Allow participants in
governmental 457 plans to
contribute deferred amounts
beginning in 2011 to designated
Roth accounts. tyba 32,613 46,202
12/31/10
16 2.Allow rollovers of qualified
distributions from 401(k), 403(b)
and 457(b) plans to Roth designated
accounts . DOE 614,210 1,437,687
17 3.Permit partial annuitization
of a nonqualified annuity contract.
The annual benefits received as
an annuity payment will become
taxable as income. tyba 13,589 54,355
12/31/10
18 Total Revenue Provisions 660,412 1,538,244
19
20 Total of Small Business Act -6,375,174 -397,860
21
22 Effective FY 2010-11 FY 2011-12
23 Education/Jobs/Medicaid
Assistance Act of 2010
24 1. Special rule with respect to
certain redemptions by foreign
subsidiaries. The new law requires
the subsidiary's earnings to remain
subject to U.S. tax when repatriated
to the foreign parent as a dividend. DOE 26,596 26,596
25
26 Total of Education/Jobs
/Medicaid Assistance Act 26,596 26,596
27
28
29 Effective FY 2010-11 FY 2011-12
30 Patient Protection and
Affordable Care Act and
Health Care and Education
Reconciliation Acts of 2010
31 Revenue Provisions
32 1. Conform the definition of
medical expenses for health
savings accounts, Archer MSAs,
health flexible spending
arrangements, and health
reimbursement arrangements to
the definition of the itemized
deduction for medical expenses
Therefore, over-the-counter
medicines are not reimbursable
from these accounts unless
prescribed by a physician. tyba 1,087,098 1,630,647
12/31/10
33 2. Limit health flexible
spending arrangements in
cafeteria plans to $2,500;
indexed to CPI-U
after 2013 [1] [5] tyba 12/31/1 - -
34 4. Raise 7.5% AGI floor on
medical expenses deduction to
10%; AGI floor for individuals
age 65 and older (and their
spouses) remains at 7.5%
through 2016 tyba 12/31/12 - -
35 5. $500,000 deduction
limitation on taxable year
remuneration to officers,
employees, directors,
and service providers of
covered health insurance
provide. tyba 12/31/12 - -
36
37 Total Patient Protection Act 1,087,098 1,630,647
38
39
40 Effective FY 2010-11 FY 2011-12
41 The Tax Relief,
Unemployment Insurance
Reauthorization, and Job
Creation Act of 2010
42 Section 179 expensing
amounts and threshold limits
reduced to $125,000/$500,000
for tax year 2012 from the
$500,000 maximum deduction
and $2,000,000 phase-out
threshold that is law for tax
years 2010 and 2011. (sunset
12/31/12) This reduction in
Section 179 expensing amounts
reverses the increases in tax
years 2008 through 2011 as enacted
in earlier legislation including
the Small Business Jobs Act of
2010. The proposed $125,000
/$500,000 levels are identical to
the amounts that existed for tax
year 2007 as established by the
Small Business and Work
Opportunity Tax Act of 2007. tyba 0 5,049,969
12/31/11
43
44 Total Tax Relief, Unemployment
Insurance Reauthorization, and
Job Creation Act 0 5,049,969
45
46
47 Effective FY 2010-11 FY 2011-12
48 The Regulated Investment
Company Modernization
Act of 2010
49 I. Capital loss carryovers of
Regulated Investment Companies
(RIC) derived from long-term
capital losses will now be required
to use those losses to offset
long-term capital gains. This
will result in a greater distribution
of short-term capital gains to
shareholders that will be taxed as
ordinary income. As a partial
offset, the RIC will be permitted
to carryforward its net capital losses
without limit, rather than the 8 years
in previous law. DOE 8,153 59,790
50 III.3. A RIC may pass-thru exempt
interest dividends in fund of
fund structure without regard to
the requirement that at least 50%
of the value of its total assets
consist of tax-exempt State and
local bonds. Previous law allowed
exempt-interest dividends to be
passed through by a RIC only if at
least 50% of the value of the total
assets consist of tax-exempt
obligations. tyba DOE -5,435 -10,871
51 III.6. Allow distributions in
redemption of stock of a RIC to
be treated as an exchange if the
redemption is upon the demand
of the shareholder and the company
issues only stock which is
redeemable upon the demand of
the shareholder. Otherwise, the
redemption is treated as a
distribution of property. DOE -13,589 -24,460
52 Modification of sales load basis
deferred rule for RIC to allow
shareholders to take capital losses
for the amount of the load charges
paid on the acquisition of fund
shares after subsequent repurchase
of shares with reinvestment rights. tyba DOE -16,306 -21,742
53
54 Total Regulated Investment
Company Modernization Act -27,177 2,718
55
56
57 Total IRS Conformity Impact -5,288,658 6,312,069
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 12-6-40, AS AMENDED, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO THE APPLICATION OF THE INTERNAL REVENUE CODE TO STATE INCOME TAX LAWS, SO AS TO UPDATE THE REFERENCE TO THE INTERNAL REVENUE CODE TO THE YEAR 2010.
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. Section 12-6-40(A)(1)(a) of the 1976 Code, as last amended by Act 142 of 2010, is further amended to read:
"(a) Except as otherwise provided, 'Internal Revenue Code' means the Internal Revenue Code of 1986, as amended through December 31, 2009 2010, and includes the effective date provisions contained in it."
SECTION 2. This act takes effect upon approval by the Governor.
This web page was last updated on February 23, 2011 at 7:00 PM