Tax Law Insights

Update: As of June 16, 2016 all community development tax credits have been claimed.

South Carolina provides valuable tax incentives to people who support Community Development Corporations (CDCs) and Community Development Financial Institutions (CDFIs). A 33% credit is provided for each dollar invested in or donated to a certified CDC or CDFI. S.C. Code § 12-6-3530. This credit is commonly referred to as the community development tax credit.

The community development tax credit was enacted in 2000 and is scheduled to sunset on June 30, 2020. A total of $5 million in credits are available, and no more than $1 million in credits can be awarded in a single year. A large portion of the credits remain available. Current information on the available credits can be obtained from the South Carolina Association for Community Economic Development.

Contributions to a CDC or CDFI can be made as donations or investments and qualify for the community development tax credit, and may also qualify for the federal and state income tax deduction for donations to charitable organizations. The community development tax credit significantly reduces the effective cost of making a donation to a CDC or CDFI. The community development tax credit allows a donor to potentially earn an attractive rate of return on an investment in a CDC or CDFI. The following examples illustrate the differences between a donation to a charitable organization, a donation to a CDC or CDFI, and an investment in a CDC or CDFI.

Example 1. Donation to a charitable organization.

Steve donates $100 to a charitable organization. Donations to charitable organizations are generally deductible for federal income tax purposes. Since South Carolina generally follows federal income tax, a federal income tax deduction also has the effect of reducing South Carolina taxable income. Assuming Steve is in the 39.6% federal tax bracket and 7% South Carolina tax bracket, the donation to the charitable organization reduces income his taxes by $46.60. The effective cost of the donation to John is only $53.40.

Example 2. Donation to a CDC or CDFI.

Steve donates $100 to a certified CDC or CDFI. The donation should again qualify for the federal income tax deduction for donations to a charitable organization. If the donation is made to a CDC, Steve can also claim a deduction for South Carolina income tax purposes. If the donation is made to a CDFI, Steve cannot claim a deduction for South Carolina income tax purposes. In both cases, Steve can claim the 33% community development tax credit. Assuming Steve is in the 39.6% federal tax bracket and 7% South Carolina tax bracket, a donation to a CDC reduces his income taxes by $46.60 and he is able to claim a $33 community development tax credit, making the effective cost of his donation $20.40 ($100 donation minus $46.60 income tax savings minus $33 credit). A donation to a CDFI reduces his income taxes by $39.60 and he is able to claim a $33 community development tax credit, making the effective cost of his donation $27.40 ($100 donation minus $39.60 income tax savings minus $33 credit).

Example 3. Investment in a CDC or CDFI.

Steve agrees to loan a CDC or CDFI $100 for five years, with principal due in a single payment at loan maturity. The CDC or CDFI agrees to pay Steve 2% interest on the loaned funds. Steve cannot claim a federal or state income tax deduction because he has not made a qualifying donation. Steve can claim a $33 community development tax credit in the year the funds are loaned to the CDC or CDFI, reducing the effective cost of his investment to $67 ($100 loan minus $33 credit). Steve will receive $10 of interest ($2 per year for five years) and a return of his $100 loan after five years. The annualized return is greater than 10% ($67 net investment cost and $110 return over five years).