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COMMITTEE REPORT
May 5, 2021
H. 4017
S. Printed 5/5/21--S.
Read the first time April 8, 2021.
To whom was referred a Bill (H. 4017) 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 with amendment:
Amend the bill, as and if amended, by striking SECTION 3 and inserting:
/ SECTION 3. For tax year 2020, the amendment in the American Rescue Plan of 2021, P.L. 117-2 (March 11, 2021) relating to the exclusion from taxable income for tax year 2020 of $10,200 of unemployment compensation for a taxpayer with less than $150,000 in federal adjusted gross income is specifically adopted by South Carolina. The Department of Administration's Director of the Executive Budget Office is authorized to allocate sixty-one million three hundred thousand dollars in the appropriate fiscal years from the American Rescue Plan Act of 2021 to the general fund to account for the provisions of this SECTION. /
Renumber sections to conform.
Amend title to conform.
HUGH K. LEATHERMAN, SR. for Committee.
Explanation of Fiscal Impact
State Expenditure
This bill updates South Carolina's conformity to the IRC through December 31, 2020. DOR will administer the changes to income tax provisions with existing staff and resources. Therefore, the bill is not expected to impact expenditures for the agency.
State Revenue
This bill updates South Carolina's conformity to the IRC through December 31, 2020. In addition, this bill proactively adopts any expired provisions of the federal code that are extended, but not otherwise amended, by congressional enactment during 2021.
Research by DOR identified four federal tax laws enacted by Congress that impact South Carolina's conformity through December 31, 2020.
• Families First Coronavirus Response Act (Families First Act) (PL 116-127) enacted on March 18, 2020
• Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (PL 116-136) enacted on March 27, 2020
• Paycheck Protection Program Flexibility Act of 2020 (PPPF Act) (PL 116-142) enacted on June 5, 2020
• Consolidated Appropriations Act of 2021 (CAA of 2021) (PL 116-260) enacted on December 27, 2020
Further, the bill adds additional language in Section 1 (B) to specify that South Carolina adopts the federal tax treatment for any exclusion from federal taxable income or allowance of expenses as provided in the CAA of 2021. As these provisions are not codified in the IRC, these additional sections of the bill allow for administration of the provisions. S.C. Act 147 of 2020, which adopted IRC conformity through December 31, 2019, specifically provides that for tax year 2020 paycheck protection program (PPP) loans that were forgiven and excluded from gross income under the CARES Act are excluded for South Carolina income tax purposes and to the extent the federal government allows the deduction for expenses associated with the forgiven PPP loans, these expenses will be allowed as a deduction for South Carolina income tax purposes. The bill adopts this federal tax treatment for 2021 as allowed by the CAA. As the provisions were adopted in Act 147 for 2020 and these special provisions are a unique event not typically in the revenue stream, extending this treatment to 2021 will not affect the current revenue forecast. These provisions are noted in Section B of Table 1 and have no effect on revenue.
Section 2 of the amended bill lists specific provisions that are not adopted. Section 3 adopts the amendment in the American Rescue Plan of 2021 that exempts up to $10,200 of unemployment compensation from income taxes. Under state law, unemployment compensation is taxable for state individual income taxes, and the bill would exempt the first $10,200 for tax year 2020 only.
To estimate the impact of conforming to IRC changes, Revenue and Fiscal Affairs (RFA) utilizes U.S. estimates by the Joint Committee on Taxation and adjusts those estimates to project the impact of adopting these federal provisions on South Carolina. Further, based upon research by RFA and discussions with the Department of Revenue (DOR) and the South Carolina Association of CPAs (SCACPA), RFA made additional adjustments to refine these estimates with respect to South Carolina. Additionally, the S.C. Department of Employment and Workforce (DEW) provided data on unemployment compensation paid in 2020.
The provisions affecting South Carolina in these federal law changes are listed separately in Tables 1, 2, and 3 based upon their effect on revenues. Provisions that would affect revenue if adopted are listed in Table 1. The amended bill specifically does not adopt most of these provisions. However, adopting the unemployment compensation exemption for tax year 2020 would reduce income tax revenue. Based upon data provided by DEW and estimates by the Joint Committee on Taxation, the estimated reduction in general fund income tax revenue is approximately $61,300,000. Because this provision only applies to tax year 2020, the impact is a one-time, non-recurring reduction. In order to claim the exemption, taxpayers who have already filed their tax return will need to file an amended return. Therefore, this impact may occur in FY 2020-21 or be extended to FY 2021-22 if taxpayers file for an extension or have already filed their state income taxes and do not file an amended return until after June 30, 2021. The Internal Revenue Service and DOR have extended filing for tax year 2020 until May 17, 2021. If this bill is enacted prior to May 17, more of the impact may occur in FY 2020-21. At this time, we would estimate that approximately 50 percent of the impact will occur in FY 2020-21, and the remaining 50 percent will occur in FY 2021-22 due to extended or amended returns. Therefore, we estimate that the bill will reduce general fund individual income tax revenue by $30,650,000 in FY 2020-21 and $30,650,000 in FY 2021-22. This split may be affected by the timing of enactment.
The CAA also extended certain provisions that have been regularly extended by Congress. The extended provisions are listed in Table 2. These provisions are included in the current forecast by the Board of Economic Advisors, as the forecast expectation was that these provisions would be extended. Therefore, there is no revenue impact as a result of adopting these extended provisions. If South Carolina does not adopt the provisions, however, revenue would increase as the reductions are already in the forecast.
Table 3 provides information on those provisions that DOR advises us they believe are already affecting South Carolina regardless of conformity to the IRC because federal law determines how these provisions are implemented, and they cannot be avoided. Essentially, the change in revenue resulting from these provisions will occur regardless of whether South Carolina adopts this bill to extend conformity to 2020. Many of these provisions are already affecting revenues and will be accounted for by the Board of Economic Advisors in the revenue forecast.
Notably, Congress passed the American Rescue Plan Act of 2021 (PL 117-2) on March 11, 2021, which includes additional federal stimulus programs and other provisions. Because the Act passed after December 2020, this bill does not address these provisions with the exception of the unemployment exemption specifically adopted in Section 3. Of particular interest, the Act included a provision that prohibits using any of the State and Local Fiscal Recovery Funds to reduce taxes. The Act specifically states:
(A) In general.-A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.
Since our previous impact statement, the U.S. Treasury has issued guidance that conforming to federal tax law changes does not constitute a tax reduction that would impact the use of federal recovery funds.
Impact statements for prior versions of the bill are available here:
http://rfa.sc.gov/impacts
Table 1. Provisions Affecting Revenue - Bill as Amended
Line Provision IRC Section Individual FY 2021-22 FY 2022-23
or Corporate
1 $300 charitable deduction allowed 62 I ($3,808,000) $0 Not Adopted
without itemizing deductions in
2020 (See also Line 2)
2 Certain charitable contributions 170 I ($7,035,000) $0 Not Adopted
deductible by non-itemizers in 2021
($300/$600 married joint) (See also
Line 1)
3 Modification of limits on charitable 170 I/C ($10,498,000) $5,225,000 Not Adopted
contributions for 2020 (See also Line 4)
4 Temporary modification of 170 I/C ($7,000,000) $3,481,000 Not Adopted
limitations on charitable
contributions for 2021
(See also Line 3)
5 Modifications to income limitations 172 I * ($38,577,000) $1,363,000 Not Adopted
fornet operating losses for 2018,
2019, and 2020 (Carrybacks not
allowed by SC)
6 Modification of limitation on 461(1) I * ($172,070,000) $729,000 Not Adopted
losses for non-corporate taxpayers
in 2018, 2019, and 2020
7 Personal protective equipment 62(a) I ($5,000) ($5,000) Not Adopted
expenses included in educator (2)(D)
expense deduction (DOR
recommends adopting)
8 Temporary allowance of full 274(n) I ($5,483,000) ($6,176,000) Not Adopted
deduction for business meals
through 2022
9 Special rules for qualified disaster 170 I ($195,000) $68,000 Not Adopted
relief charitable contributions
10 Special rules for qualified disaster- 165 I ($3,312,000) ($1,019,000) Not Adopted
related personal casualty loses
Section 1(B) of H. 4017- Additional Changes to Section 12-6-40(A)(1)
11 Small Business Association loan $0 $0
forgiveness
12 Emergency financial aid grants to I $0 $0
students not included in gross income
13 Clarification of loan forgiveness and $0 $0
other business financial assistance
Section 3 of H. 4017- Adopt American Rescue Plan of 2020 Amendment
14 Exempt $10,200 of unemployment I ($61,300,000)
compensation for tax year 2020 See impact for timing
Individual Income Tax ($61,300,000) $0
Corporate Income Tax ($0) $0
Total Provisions Affecting Revenue ($61,300,000) $0
* Applies to tax years 2018, 2019, and 2020
Table 2. Provisions Extended - Currently in Revenue Forecast
Line Provision IRC Section Individual FY 2021-22 FY 2022-23
or
Corporate
14 Energy efficient commercial 179D I ($174,000) ($174,000)
buildings deduction modified and
made permanent
15 Benefits provided to volunteer 139B I ($174,000) ($177,000)
firefighters and emergency
medical responders made
permanent
16 Permanent extension of medical 213(f) I ($2,425,000) ($2,422,000)
expense deduction for expenses
in excess of 7.5% of AGI
17 Modification and Extension of 108 I ($1,316,000) ($1,355,000)
exclusion from gross income for
discharge of qualified principal
residence indebtedness
18 Extension of 7-year recovery 168(i) I ($86,000) ($98,000)
period for Motorsports (15)(D)
Entertainment Complexes
through 2025
19 Extension of expensing rules for 181 I ($2,018,000) ($1,002,000)
certain film, television, and live
theatrical productions
20 Extension of certain 1391, I ($638,000) ($660,000)
empowerment zone tax 1397A; 1397B
incentives
21 Extension of exclusion from 127 I ($1,571,000) ($1,660,000)
income certain employer
payments of student loans
22 Extension of mortgage insurance 163(h)(3) I ($432,000) $0
premiums treated as qualified
residence interest through 2021
23 Extension of classification of 168(e) I $0 $0
certain racehorses as 3-year (3)(A)
property for depreciation purposes
24 Extension of accelerated 168(j) I ($34,000) ($22,000)
depreciation for business
property on Indian Reservations
Total of Extended Provisions Currently in Revenue Forecast ($8,868,000) ($7,570,000)
Table 3. Other Provisions for Information Only - Largely Already Affecting Revenue
Line Provision IRC Section Individual FY 2021-22 FY 2022-23
or
Corporate
25 Employee income exclusion for 127 I ($1,129,000) $0
certain employer payments of
student loans
26 Special Rules for 72(t), I ($239,644) ($40,882)
Retirement Plans 401, 402,
403, 408,
457
27 Temporary waiver of required 401, I ($28,786,702) $2,266,302
minimum distribution rules for 402, 403,
certain retirement plans and 408, 457
accounts for 2020
28 Technical amendments to TCJA 168 I $0 $0
regarding qualified
improvements to property
29 Single-employer delay in 430(j), I $13,047,811 ($1,018,977)
minimum contribution funding 436
for defined benefit plans
30 New pension plan rules applied 414(y) I ($2,455) ($2,455)
to certain charitable employers
31 Health Saving Account (HAS) 223 I $0 ($159,599)
exemption for telehealth services
32 Inclusion of certain over-the- 106, I ($137,500) ($1,227,683)
counter medical products as 220,
qualified medical expenses 223
33 Application of special rules to no I ($174,331) ($36,830)
money purchase pension plans section
34 2020 election to terminate 420(f) I/C $130,470 $102,201
transfer period for qualified
transfers from pension plans
35 Beer, wine and distilled spirits - 239A I ($37,000) ($32,000)
exempt aging process from (f)(4)
certain inventory capitalization
rules.
36 Repeal of deduction for higher 222 I ($3,167,421) ($3,075,345)
education qualified tuition and
related expenses for tax years
beginning after 2020
37 Minimum age for distribution 401(a) I $0 $0
during working retirement (36)
38 Temporary rule preventing 411(d)(3) I $0 $0
partial plan termination
39 Temporary rules for health and 125 I $93,000 $39,000
dependent care flexible
suspending arrangements
40 Disaster related rules for use of 72(t), I ($67,523) ($15,960)
retirement funds 401, 402, 403, 408, 457
Total Provisions for Information Only ($20,470,296) ($3,202,227)
Frank A. Rainwater, Executive Director
Revenue and Fiscal Affairs Office
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 2020, TO PROVIDE THAT IF THE INTERNAL REVENUE CODE SECTIONS ADOPTED BY THIS STATE ARE EXTENDED, THEN THESE SECTIONS ALSO ARE EXTENDED FOR SOUTH CAROLINA INCOME TAX PURPOSES, AND TO PROVIDE FOR THE TAX TREATMENT OF THE PAYCHECK PROTECTION PROGRAM AND CERTAIN EXPENSES AS PROVIDED FOR IN THE FEDERAL CONSOLIDATED APPROPRIATIONS ACT OF 2021.
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. A. Section 12-6-40(A)(1)(a) and (c) of the 1976 Code, as last amended by Act 147 of 2020, 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, 2019 2020, and includes the effective date provisions contained in it.
(c) If Internal Revenue Code sections adopted by this State which expired or portions thereof expired on December 31, 2019 2020, are extended, but otherwise not amended, by congressional enactment during 2020 2021, these sections or portions thereof also are extended for South Carolina income tax purposes in the same manner that they are extended for federal income tax purposes."
B. Section 12-6-40(A)(1) of the 1976 Code, as last amended by Act 147 of 2020, is further amended by adding appropriately lettered subitems to read:
"( ) To the extent loans are forgiven and excluded from gross income for federal income tax purposes under the paycheck protection program in Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (Public Law 116-136), or from any extension of the paycheck protection program, those loans are excluded for South Carolina income tax purposes. Further, to the extent the federal government allows the deduction of expenses associated with the forgiven paycheck protection program loans, these expenses will be allowed as a deduction for South Carolina income tax purposes.
( ) South Carolina adopts the federal tax treatment for any exclusion from federal taxable income or allowance of expenses as provided in the federal Consolidated Appropriations Act of 2021 in Sections 276 (Clarification of Tax Treatment of Forgiveness of Covered Loans), 277 (Emergency Financial Aid Grants), and 278 (Clarification of Tax Treatment of Certain Loan Forgiveness and Other Business Financial Assistance)."
SECTION 2. (A) The following amendments in the Coronavirus Aid, Relief, and Economic Security Act (CARES) of 2020, P.L. 116-136 (March 27, 2020) are specifically not adopted by this State:
(1) Internal Revenue Code (IRC) Section 62(a)(22) relating to the $300 charitable deduction allowed in 2020 for persons who claim the standard deduction;
(2) Section 2205(a), (b), and (c) of the CARES Act relating to the modification of limitations on individual and corporate cash charitable contributions for 2020 and relating to the increase in limits on charitable contributions of food inventory for 2020;
(3) IRC Section 172(a) relating to the modification of the income limitations allowed for the use of net operating losses in tax years 2018, 2019, and 2020;
(4) IRC Section 461(l) relating to the modification of the limitation on losses allowed for non-corporate taxpayers in tax years 2018, 2019, and 2020.
(B) The following amendments in the Consolidated Appropriations Act of 2021, P.L. 116-260 (December 27, 2020) are specifically not adopted by this State:
(1) Amendment to Division N Section 275 relating to the allowance of personal protective equipment expenses for the educator expense deduction under IRC Section 62(a)(2)(D)(ii);
(2) IRC Section 274(n) relating to the temporary allowance of the full business deduction for business meals that are paid or incurred after December 30, 2020, and before January 1, 2023;
(3) IRC Section 170(p) relating to the $300 or $600 charitable deduction allowed in 2021 for persons taking the standard deduction;
(4) Amendment to CARES Act Section 2205 relating to the temporary extension of the modification of limitations on individual and corporate cash charitable contributions and the increase in limits on charitable contributions of food inventory to tax year 2021;
(5) Amendments to the Taxpayer Certainty and Disaster Tax Relief Act of 2020, P.L. 116-260 Division EE Section 304 relating to the special rules for qualified disaster relief for charitable contributions and special rules for qualified disaster related personal casualty losses.
SECTION 3. For tax year 2020, the amendment in the American Rescue Plan of 2021, P.L. 117-2 (March 11, 2021) relating to the exclusion from taxable income for tax year 2020 of $10,200 of unemployment compensation for a taxpayer with less than $150,000 in federal adjusted gross income is specifically adopted by South Carolina.
SECTION 4. This act takes effect upon approval by the Governor.
This web page was last updated on May 5, 2021 at 7:42 PM