Tax Planning for the South Carolina Business Owner

We talk with prospective clients every week, and I wanted to share some of the questions they are asking, our response to those questions and more importantly, the questions they are not asking.

Let’s get into it!

Should I create an LLC for tax advantages?

You do not need an LLC or corporation to start a business.  You can simply start a sole proprietorship, collect revenue and deduct expenses in exactly the same way as if you had an LLC.  There are absolutely reasons to create an LLC but the creation of the LLC itself does not generate an opportunity for unlocking hidden tax advantages.  My attorney friends would like to join in this conversation and say that entity selection is important for protection from liabilities – and we agree with them.  However, there is no magic LLC wand that allows you to expense things that aren’t otherwise deductible.

Should I go ahead and make an S election?

Before answering this, I should explain that an S Corporation is not a legal organization.  It is a tax election that can be made by a corporation or an LLC.  That election, once accepted by the IRS, will require that Form 1120 S is filed to report the income and expense of your business.  Owners of shares in an S corporation will then receive a K1 reporting their share of income from the company.  This income is then reported on the shareholders personal tax return. 

What are the advantages of making the S election?

Here are a few advantages:

1.      Generally avoids corporate level tax and the double taxation associated with C corporations.

2.      Can provide opportunities for reducing self-employment tax liabilities, but one must ensure that reasonable compensation is paid to the shareholders.  Reasonable compensation generally means paying yourself similarly to what you would pay someone else to perform the same work.  The remaining income from the company flows through to the owners without being subject to self-employment tax.

3.      It lends credibility to the organization.  While there might not be any real difference in how a sole proprietorship is run compared with an S Corporation, the presence of a separate tax return can be nice to have when dealing with banks, vendors or dealing in M&A activities.

 However, there are a some things that might not be so great that should be considered before making the plunge.

What are the disadvantages of making the S election?

1.      Your cost of compliance goes up with having to file another tax return.  It is best to make sure any potential tax savings will more than cover the additional administrative costs.

2.      Since you have to pay yourself reasonable compensation, you will have to file payroll returns and comply with everything that entails.  It is easy to mess this up. 

3.      The pro rata distribution rules.  Distributions have to be made in proportion to your ownership in the entity.  If you violate this, your S corporation can be terminated.

4.      Limited to 100 shareholders.  If you have grand ambitions of going public, it will not be with an S Corporation.  Furthermore, there are restrictions on who can own S corporation shares.  It is generally limited to US individuals although certain trusts and estates may qualify.

5.      In order to take losses, you have to have enough basis (capital investment or retained profits) in the company.  There is potentially more flexibility in one’s ability to deduct losses with other forms of businesses.  This is a complex topic beyond the scope of this article, but you should be aware that it is a potential landmine.

Most of our small business clients are S Corporations.  However, we do not believe that the election should be made without assessing the sustainable profitability of the company along with the potential tax impact.  Taxes are one of the largest expenses for a small business owner and we would encourage you to speak with a professional that can analyze the impacts before making the switch.  This is something that we do with our clients on a routine basis.  We take the emotion out of it and use real numbers to quantify the savings.  Knowing that the majority of our clients are filing as S corporations, that leads into our next common question.

I did not take any money out in distributions this year, why am I getting taxed on it?

An S corporation is considered a flow through entity.  That means there is not a tax upon the S corporation itself, rather it flows through to the owners.  Not taking profits out of the company does not change the fact that the income flows to the owners.  Whatever the calculated profit is determines what flows through.

This is a question that we almost never get asked but is important.

What are the specific issues I need to be aware of for a business owner in South Carolina?

South Carolina has some specific things to be aware of for business owners here.

1.      South Carolina does not follow the federal tax code completely.  One major difference is that South Carolina does not allow bonus depreciation.  That asset that you wrote off 100% for federal tax using bonus depreciation requires an addback to state income.  While you eventually recover the costs over the useful life of the asset, not getting the deduction in a particular year could be painful.  Section 179 expense deduction for assets is allowed in South Carolina and we work with our clients to come up with the most cost effective combination of deprecation methods.

2.      South Carolina has a lower tax rate for Active Trade or Business income.  In our experience, this is not well known amongst small business owners.  As of 2025, the top individual tax rate in South Carolina was 6%.  The rate on Active Trade or Business income is 3%.  This can be a massive opportunity for lowering the owner’s effective state tax rate.  The Keller Group, PA understands how this works and capture these savings for our clients.

3.      Remember how we said flow through entities don’t pay taxes.  Well, there is an exception in South Carolina for paying the Active Trade or Business income tax at the entity level.  This was enacted to counteract the limitations on deducting state and local taxes as itemized deductions on the federal level.  Each year, a company can elect to pay the tax on behalf of its shareholders.  The state tax you pay isn’t any different than if you paid it with your personal return.  However, it can lower your federal tax liability as the payment of the state tax amounts are deductible from federal taxable income.  Boom.  We help our clients maximize the savings here.

4.      Business Personal Property Tax.  Honestly, this is one of the most annoying things we have to deal with as tax practitioners.  South Carolina has a separate reporting system for owners where they are required to report the depreciated value of their personal property.  Those values are then sent to the county and the county bills and collects this tax.  So, it is important to have up to date asset records and report the figures accurately.  The depreciated values are based on state tax law.  That bonus depreciation mentioned earlier will not be taken at the state level and will result in a higher assessed value for property taxes.  Plan accordingly!

There are a number of other unique elements to taxation in South Carolina.  We are experienced in dealing with these issues for business owners filing here. 

This article is for informational purposes only and should not be considered tax or legal advice. Tax laws change frequently, and business owners should consult with a qualified professional regarding their specific circumstances.

If you are a South Carolina business owner, we hope that you found this information helpful.  If you are starting a business, a new business owner or an existing business owner that is looking for a change, please schedule a discovery call.  We look forward to hearing from you.