South Carolina has a rich mix of economic development incentives. These include income tax credits, sales tax exemptions, property tax exemptions and credits as well as withholding tax credits. Incentives also include cash grants, e.g., Department of Commerce Set Aside Funds, and the occasional county grant. The state or county may also directly pay for or contribute land or public infrastructure to benefit an economic development project. South Carolina TIF statutes may result in substantial funds benefiting private real estate developers. Can the receipt of these incentives trigger federal income tax liability to the fortunate recipient?

On May 23, 2008, the Internal Revenue Service issued Coordinated Issue Paper LMSB-04-0404-023 (CIP) addressing its position as to the federal tax treatment of certain state and local tax incentives. The state and local tax incentives covered are referred to as “location incentives.” These types of incentives include abatements, credits, tax rate reductions and exemptions which are used by state and local governments to induce companies to relocate, expand or maintain facilities in a particular area.