Form I-335 - Active Trade Or Business Income Reduced Rate Computation

INSTRUCTIONS

(Rev. 6/19/15)

General purpose: An individual, estate or trust receiving income from one or more pass-through businesses can choose

to have active trade or business income taxed at a flat income tax rate instead of the graduated income tax rate that

applies to ordinary income. I-335 identifies active trade or business income and calculates the tax.

Whether or not to use the flat rate is a choice the taxpayer can make annually. The choice applies to both

spouses when filing a joint return.

Important: For tax year 2015, except for partners, S corporation shareholders, or LLC members who would otherwise pay

a flat 7% tax, a taxpayer with South Carolina taxable income less than or equal to $5,820 cannot benefit from the 3% rate

for active trade or business income because the highest graduated tax rate for income less than or equal to $5,820 is 3%.

Do not complete I-335 if your South Carolina taxable income is less than or equal to $5,820.

Summary of law: Section 12-6-510 imposes a graduated rate on the South Carolina taxable income of an individual,

estate or trust. The graduated rate begins at 0% and increases to as much as 7%. (For Tax Year 2006 and before, the

lowest rate was 2.5%.)

Section 12-6-545 allows an individual, estate or trust to choose instead to use a flat tax rate on active trade or business

income from pass-through businesses. The flat rate is 5% for tax years beginning in 2009 through 2011, 4.33% for tax

years beginning in 2012, 3.67% for tax years beginning in 2013, and 3% for tax years beginning after 2013. A

pass-through business is a sole proprietorship, partnership, S corporation, or LLC taxed as a sole proprietorship,

partnership or S corporation.

Active trade or business income or loss does not include passive investment income or expenses related to passive

investment, capital gains or losses, guaranteed payments for personal services, or amounts reasonably related to

personal services.

A Safe Harbor is available if your total South Carolina taxable income from pass-through entities for which you perform

personal services is $100,000 or less, excluding capital gains and losses. A taxpayer who qualifies for the Safe Harbor

can use the Safe Harbor amount as active trade or business income without having to determine the actual amount of

personal service income. See Rules for Using Safe Harbor below.

A composite return is filed by a pass-through business on behalf of nonresident individuals, trusts or estates who are

partners, shareholders, or members. A decision whether or not to use the Safe Harbor on a composite return is made by

the partner, shareholder or member – not by the pass-through business. The Safe Harbor cannot be used on a composite

return by any person who has South Carolina income from other sources. If the partner, shareholder or member does not

provide an I-338 affidavit stating he has no other South Carolina income, then the flat tax rate on active trade or business

income is available, but the federal standard or itemized deductions and personal exemptions cannot be taken into

account.

A shareholder, partner or member participating in a composite return can choose to report the same income on his

individual income tax return (where he may elect the Safe Harbor) and take a credit for any tax paid on his behalf on the

composite return. Attach the "Form 1099-MISC for SC purposes only" received from the pass-through business.

Tax credits that can be used against the graduated income tax normally imposed on individuals, trusts and estates also

can be used against the optional flat tax available for active trade or business income.

Form I-335 - Active Trade Or Business Income Reduced Rate Computation - 2015 Page 4