What you need to know about the SC Gas Tax Credit

What you need to know about the SC Gas Tax Credit
(Source: WIS)

COLUMBIA, SC (WIS) - Are you eligible for the new South Carolina gas tax credit and, if so, how much is it worth to you?

Here’s a look at some quick facts from SC Department of Revenue to help calculate your credit and explain how to claim it.

Quick overview

In July 2017, the SC motor fuel user fee increased from 16 cents a gallon to 18 cents a gallon. It will increase by two cents a gallon each year for the next five years.

The money raised by the increase is supposed to be used for repairs, maintenance, and improvements to South Carolina’s existing transportation system.

To help offset the motor fuel user fee increase paid, SC law generally allows a resident taxpayer a refundable motor fuel income tax credit for up to two private passenger motor vehicles or motorcycles registered in South Carolina during the year.

QUESTIONS AND ANSWERS

1. When can a taxpayer first claim the credit?

The credit may first be claimed for tax years beginning in 2018 for expenses incurred during the tax year.

Note: For tax years beginning in 2023, the credit is repealed unless reauthorized by the General Assembly.

2. How is the credit claimed?

The credit is claimed on the resident taxpayer’s income tax return. The credit is calculated on South Carolina Form I-385, “Motor Fuel Income Tax Credit.” This form must be included with the taxpayer’s income tax return.

3. What is the credit?

A resident taxpayer may claim a credit for up to two private passenger motor vehicles or motorcycles registered in South Carolina. The credit may not exceed the lesser of the resident taxpayer’s:

(a) actual motor fuel user fee increase incurred on purchases of motor fuel in South Carolina subject to the motor fuel user fee in Code Section 12-28-310(D) for an eligible vehicle or

(b) actual expenditures incurred in South Carolina on preventative maintenance for an eligible vehicle (e.g., new tires, oil changes, and regular vehicle maintenance).

4. Is there a maximum total credit amount available each year for all taxpayers?

The statute sets a maximum dollar amount of total credit that may not be exceeded for all taxpayers. The maximum credit amount for each tax year is:

Tax Year. Total Credit

2018 $40 million

2019 $65 million

2020 $85 million

2021 $110 million

2022 and thereafter $114 million

5. What is the credit “adjustment factor”?

To account for the maximum credit amount, the Revenue and Fiscal Affairs Office will provide the Department a credit “adjustment factor” each year in the event necessary. This method of determining the maximum credit allows all qualifying taxpayers an opportunity to receive a motor fuel income tax credit. The credit “adjustment factor” applicable to a tax year, if necessary, will be provided each year on the motor fuel income tax credit form.

6. Is the credit refundable?

Yes. A refundable credit reduces a taxpayer’s South Carolina income tax owed. It provides a refund to a taxpayer who owes no tax or a partial refund to a taxpayer who owes less tax than the full credit amount. A refundable credit is not related to a taxpayer’s adjusted gross income or tax liability.

Example. If a taxpayer earns a $20 motor fuel income tax credit, but has only a $5 South Carolina income tax liability for the tax year, then he will offset his $5 tax liability by $5 of his refundable credit, and would receive a refund for the remaining $15 motor fuel income tax credit. Assume instead that the taxpayer has a $0 South Carolina income tax liability for the tax year; if so, he would be refunded the entire $20 motor fuel income tax credit.

7. Who is the “taxpayer” that qualifies for the credit?

A “taxpayer” must be a South Carolina resident taxpayer to qualify for the credit. A resident taxpayer may be an individual, partnership, corporation, trust, estate or any other entity subject to South Carolina income tax or required to file an income tax return. A nonresident taxpayer does not qualify for the credit.

A “resident individual” is an individual domiciled in South Carolina. A resident individual includes a “part-year resident” (a resident individual for only a portion of the tax year).

8. Who is the “taxpayer” that qualifies for the credit when a married couple files a joint return?

Each individual filing a joint return is a “taxpayer.” In other words, there are two taxpayers on a joint return and each resident individual is eligible for a credit. Each spouse may claim a credit for up to two private passenger motor vehicles or motorcycles registered in his or her name in South Carolina during the year. They may not both claim a credit on the same vehicle.

9. Is a resident who is not required to file a South Carolina income tax return eligible for the credit?

Yes, but a qualifying taxpayer must file a South Carolina income tax return to claim the credit. For example, a retired individual or student who does not meet South Carolina’s minimum filing requirement or a nonprofit organization that has no filing requirement (i.e., no unrelated business income) would have to file a South Carolina income tax return to claim the credit.

10. What types of vehicles qualify for the credit?

Only private passenger motor vehicles of a resident taxpayer registered in South Carolina qualify for the credit.

A private passenger motor vehicle is defined in Code Section 56-3-630 as a:

(a) motor vehicle designed, used, and maintained for the transportation of 10 or fewer persons and

(b) truck having an empty weight of 9,000 pounds or less and a gross weight of 11,000 pounds or less.

Based on the above, vehicles that qualify include cars, minivans, sport utility vehicles, and pickup trucks of a certain weight.

11. Does a leased vehicle qualify for the credit?

Yes, if the leased vehicle is registered in South Carolina in the resident taxpayer’s name.

12. Do motorcycles and other two-wheeled or three-wheeled cycles qualify for the credit?

Yes, a motorcycle, motorcycle three-wheel vehicle, or moped3 registered in South Carolina in the name of the resident taxpayer qualifies for the credit.

13. Is the credit available only for “new” vehicles?

No. The credit is not limited to new vehicles or those vehicles first registered in South Carolina in 2018. Regardless of the age of the vehicle, a vehicle registered in South Carolina to a resident taxpayer during the qualifying tax year is eligible for the credit.

14. What are examples of items that do not qualify for the credit?

Examples of motorized items that are not eligible for the credit include the following: a truck having an empty weight over 9,000 pounds and a gross weight over 11,000 pounds, travel trailer, boat, golf cart, tractor, or all-terrain vehicle. In addition, an all-electric vehicle does not qualify for the credit.

15. What type of “motor fuel” qualifies for the credit?

A user fee per gallon is imposed on all gasoline and gasohol used for any purpose in South Carolina and all diesel fuel or alternative fuel (e.g., compressed natural gas, liquefied petroleum gas, and liquefied natural gas) purchased in South Carolina and consumed in generating power for propelling motor vehicles. Motor fuel purchases eligible for the credit must be in South Carolina and must be subject to the motor fuel user fee. The fuel must be used in the resident taxpayer’s vehicle.

Note: The motor fuel income tax credit is not available for aviation fuel, dyed diesel, liquefied natural gas used in large trucks, or gasoline, diesel or other fuels used in a lawn mower, generator, boat, airplane, farm machinery, machinery designed for off-road use, etc. See Code Sections 12-28-310 and 12-28-320.

16. What qualifies as a “preventative maintenance” cost eligible for the credit?

Preventative maintenance costs eligible for the credit include new tires, oil changes, regular vehicle maintenance, and the like. These costs must be incurred in South Carolina for a vehicle registered in South Carolina to qualify.

Note: General costs associated with owning, operating, and registering a vehicle are not eligible for the credit. Ineligible costs include, but are not limited to, infrastructure maintenance fees paid upon registering a vehicle in South Carolina, license plate fees, insurance, property taxes, interest expense on vehicle loans, costs reimbursed by insurance, or body and paintwork expenses.

17. How many vehicles may each taxpayer use in computing the credit?

A taxpayer may claim a credit for up to two private passenger motor vehicles or motorcycles, providing the vehicle or motorcycle is registered in South Carolina in the name of the resident taxpayer.

If a taxpayer owns or leases more than two vehicles or motorcycles in the tax year, then the taxpayer may choose a combination of any two to use in computing the credit. For example, a taxpayer may be eligible to claim a credit for two private passenger motor vehicles, or a credit for one private passenger motor vehicle and one motorcycle, or a credit for two motorcycles.

A taxpayer may not, however, claim a credit for two private passenger motor vehicles and two motorcycles. The choice of qualifying vehicles is made each tax year by each taxpayer.

18. If a taxpayer trades in a vehicle (Vehicle A) during the tax year and purchases another vehicle (Vehicle B), or totals a vehicle (Vehicle A) and replaces the wrecked vehicle with another vehicle (Vehicle B), are both the “old” and the “new” vehicles eligible for the credit?

Both Vehicle A and Vehicle B are eligible for the credit. The vehicle traded in or totaled (Vehicle A) and the replacement vehicle (Vehicle B) count as “one vehicle equivalent” when determining the number of vehicles a taxpayer may use in computing the credit. The taxpayer will combine the motor fuel expenses of the “old” vehicle (Vehicle A) and the “new” vehicle (Vehicle B) and will combine the preventative maintenance expenses of the “old” vehicle (Vehicle A) and the “new” vehicle (Vehicle B) for purposes of computing the credit. Note: The result is different if Vehicle A is sold after the purchase of Vehicle B.

Example. A resident taxpayer trades in his small pickup truck in June and purchases a Volvo. He also owns a BMW the entire year. On the motor fuel income tax credit form, I-385, the taxpayer will list as “Vehicle 1” the vehicle make, model, tag number and other information of the vehicle owned and registered in South Carolina (i.e., the Volvo).

He will combine his motor fuel expenses and preventative maintenance expenses paid during the year for the pickup truck and the Volvo and report the total combined expenses as “Vehicle 1” on the credit form. His BMW is eligible for the credit as “Vehicle 2.”

Note: A taxpayer is not eligible to claim the credit on three vehicles; he may choose a combination of any two vehicles or “vehicle equivalents” to use in computing the credit.

19. Is a vehicle used for both personal and business use eligible for the credit?

A vehicle used for both personal and business use by a taxpayer (e.g., a realtor, a home health nurse, a food delivery person) is eligible for the credit, providing the vehicle is a private passenger motor vehicle or motorcycle and the vehicle is registered in South Carolina in the name of the resident taxpayer.

20. Is a vehicle used exclusively in a business eligible for the credit?

A vehicle used exclusively in a business (e.g., a fleet of security trucks, a fleet of house cleaning cars, or an auto dealer’s courtesy minivan) is eligible for the credit, providing the vehicle is registered in South Carolina in the name of the resident taxpayer. Further, the business vehicle must be a private passenger motor vehicle designed, used, and maintained for the transportation of ten or fewer persons, a truck having an empty weight of 9,000 pounds or less and a gross weight of 11,000 pounds or less, or a motorcycle.

21. Does the vehicle have to be owned by the taxpayer the entire tax year to be eligible for the credit?

No. A vehicle is eligible for the credit during the time it is registered in South Carolina by a resident taxpayer. Eligible expenses, however, are those incurred only in South Carolina.

For example, a vehicle that is totaled in a wreck and not replaced in the tax year qualifies for the credit during the period the vehicle is registered in South Carolina.

Likewise, if a resident individual purchases his first vehicle in the spring after graduation from school, then the vehicle qualifies for the credit for the portion of the year the vehicle is registered in South Carolina.

22. How is the credit calculated and claimed by a resident taxpayer?

The credit is claimed on the resident taxpayer’s income tax return. The credit is calculated on South Carolina Form I-385, “Motor Fuel Income Tax Credit.” This form must be included with the resident taxpayer’s income tax return. The credit is available for up to two private passenger motor vehicles or motorcycles per taxpayer. The credit is computed separately for each vehicle or motorcycle.

Full Year or Part-Year Individual Resident. A resident individual claims the credit on Form SC 1040. He completes Form I-385, “Motor Fuel Income Tax Credit,” for up to two private passenger motor vehicles or motorcycles (see above rules for vehicles owned by a sole proprietorship or disregarded limited liability company and vehicles owned by dependents) and attaches the credit form to his income tax return. The credit may be used to reduce his tax liability, applied to estimated payments, donated to a check-off fund, or refunded.

For a couple filing a joint return, each spouse generally must complete a separate Form I-385. Each spouse may claim a credit for up to two private passenger motor vehicles or motorcycles. If the couple owns only one vehicle or owns two vehicles that are registered in both names, then only one Form I-385 must be completed. The credit, if requested to be refunded, will be issued as a joint refund.

23. May a parent claim the credit on behalf of a dependent?

A parent is not eligible to claim credit for a vehicle that is registered in the name of a dependent. The dependent must file a resident South Carolina income tax return to claim the credit.

24. If a taxpayer fails to claim the credit on an original return, can an amended South Carolina income tax return be filed to claim the credit?

Yes. An amended South Carolina income tax return can be filed if the time limitation period for filing a refund claim is open. The taxpayer must attach a completed motor fuel income tax credit form, Form I-385, to the amended return. See Code Section 12-54-85 and SC Revenue Procedure #13-1.

25. Are vehicle expenses incurred by a taxpayer from July 1, 2017 through December 31, 2017 eligible for the credit?

No. The income tax credit is first effective for tax years beginning in 2018. Motor fuel expenses and preventative maintenance expenses incurred before January 1, 2018, are not eligible for the credit.

Calendar Year Taxpayer. For a calendar year 2018 taxpayer, motor fuel expenses and preventative maintenance expenses incurred January 1, 2018 – December 31, 2018, are used to compute the credit.

Fiscal Year Taxpayer. For a fiscal year taxpayer, motor fuel expenses and preventative maintenance expenses incurred during its tax year beginning in 2018 are first used to compute the credit.

For example, for a fiscal year taxpayer with a September year end, motor fuel expenses and preventative maintenance expense incurred October 1, 2018 – September 30, 2019, for its tax year beginning in 2018 are used to compute the credit. Expenses incurred during October 1, 2017 – September 30, 2018, the taxpayer’s fiscal year that began in 2017, are not eligible for the credit.

26. How are expenses determined for a taxpayer who is reimbursed mileage or deducts travel or maintenance expenses for income tax purposes?

The expenses are determined based on actual expenses. The computation of the credit is determined without regard to:

(1) the taxpayer deducting the South Carolina fuel and maintenance expenses as an ordinary and necessary business expense,

(2) the taxpayer (employee) deducting the employee business expense as a miscellaneous itemized deduction, or (3) the taxpayer (employee) receiving of any mileage reimbursement provided by an employer. See Internal Revenue Code Sections 162 and 212.

27. How does a part-year resident compute expenses used in determining the credit?

Eligible expenses for a part-year resident begin on the date the vehicle is registered in South Carolina and only include the motor fuel user fee increases on motor fuel purchased in South Carolina and preventative maintenance expenses incurred in South Carolina while the individual is a South Carolina resident. The computation of the credit is determined without regard to any proration of deductions used by a part-year resident in determining South Carolina taxable income.

28. How are motor fuel expenses and preventative maintenance expenses substantiated?

A taxpayer must maintain documentary evidence to substantiate expenses incurred in South Carolina and reported on SC Form I-385, “Motor Fuel Income Tax Credit,” such as gas receipts and paid maintenance invoices. Receipts or other documentation should not be included with the taxpayer’s South Carolina income tax return when filed but must be readily available in the event of a Department audit. Since fuel receipts can become illegible over time, a taxpayer may choose to scan or photocopy the receipts to have for future substantiation.

Fuel receipts or credit card statements must show the number of gallons purchased in South Carolina during the tax year.

The maintenance invoices must show the car model, amount, and type of preventative maintenance work performed in South Carolina.

Note: Fuel purchased outside of South Carolina and preventative maintenance performed outside of South Carolina may not be used in determining the credit.

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