For the first time in a decade, the South Carolina Department of Revenue (“the Department”) has issued guidance in the form of a revenue ruling interpreting provisions of the South Carolina Textile Communities Revitalization Act (the “Act”), and it stands to open up novel and expanded opportunities for real estate developers. The Department has also opened a limited window for amendment of filings to align with the new ruling, creating an urgent need for review and analysis of related projects underway.

Background

The Act was passed in 2015 with the purpose of addressing problems caused by the existence of abandoned textile mills across the state, such as with safety, crime, eroding tax bases, and costs to local governments, by providing a powerful incentive for their rehabilitation, renovation and redevelopment. For qualified sites, a tax credit of up to 25% of rehabilitation costs is allowed against either income or property taxes, making such projects much more likely to become economically feasible.

Recently the Department issued Revenue Ruling #25-1, its first on the Act since 2015, to answer many questions that arise, and many of the Ruling’s new interpretations are considered favorable to developers. Accordingly, for projects not yet placed in service, the Department has granted until June 10, 2025 for taxpayers to review the new guidance and, if needed, amend previously filed Notices of Intent to Rehabilitate (“Notices”).

Demolished Textile Mills

Possibly one of the most impactful aspects of the new ruling related to sites where the textile mill structure or structures has been previously demolished. Under previous guidance, unless there was something still existing beyond a concrete pad, the site was disqualified.

That has changed. Sites may now qualify even though the textile mill building was demolished if the taxpayer can prove (1) that at least one textile mill (“a facility or facilities that were used initially for textile manufacturing, dying, or finishing operations and for ancillary uses to those operations”) existed on the site, and (2) the location and boundaries of the absent facilities.

Abandonment

For a site to further qualify, the existing or former textile mill on the site must have been abandoned, which the Act defines as having been initially used for textile operations and, for one year prior to filing the Notice, at least 80% has been “closed continuously to business or otherwise nonoperational as a textile mill”. Until now, there was a question of whether the textile mill could qualify though it was used for non-textile, yet income-producing, operations during the year prior to filing the Notice of Intent.

The Department answered in the affirmative – a textile mill is “abandoned” under the Act as long as 80% of the building was not used for textile operations, though it was still generating cash flow from non-textile activities during the year prior to filing the Notice.

The following example is provided:

… a facility that was originally used for textile finishing was subsequently modified and wholly used as a shopping mall for five years immediately prior to filing the Notice of Intent. It is still considered abandoned because at least 80% of the facility was nonoperational as a textile mill for more than one year despite its income producing purpose prior to rehabilitation. However, if the taxpayer who remodeled it into a shopping mall claimed the credit, the new rehabilitation is not eligible for the credit.

Qualifying geographic area

Under Section 12-65-10(4)(a) of the Act, the geographic area of a textile mill site is limited to the boundaries of the textile mill structure or buildings, or areas devoted to ancillary uses. However, there is an exception for certain sites (referred to in the Ruling as “4(b) sites” in reference to the applicable statutory provision) that (a) were acquired by a taxpayer before January 1, 2008; (b) are located on the Catawba River near Interstate 77; or (c) are located in a distressed area of a county in South Carolina (as designated by the applicable council of government) on the date of filing of the Notice. 4(b) sites include (i) all land and improvements used directly for the textile manufacturing operations, or (ii) were located on the same parcel or a contiguous parcel within 1,000 feet of any textile mill structure or ancillary uses (commonly referred to as the “1,000 foot rule”).

The Department provided helpful clarifications regarding the 1,000 foot rule. First, we now know how to measure the area: The taxpayer can measure the farthest point of the outside of any textile mill structure to the closest point of the outside wall of any building on the contiguous site. If the building on the contiguous site touches, its rehabilitation costs qualify for calculation of the credit. Additionally, any land that falls within the 1,000 foot rule radius is qualified.

The Department has also made clear that, though a contiguous parcel under the 1,000 foot rule is considered part of the textile mill site, parcels contiguous to the contiguous parcels do not qualify.

Square footage limitation

For purposes of calculating the credit for 4(b) sites, rehabilitation expenses that would increase the amount of square footage of buildings existing on the contiguous parcel, as of the date of abandonment of the textile mill, by 200% do not qualify. The Department now advises that the limitation should be viewed as triple the existing square footage, rather than double, and calculated based on cumulative square footage of all buildings on the contiguous parcel.

The Department provided the following hypothetical:

Consider a taxpayer that purchases a 4(b) Site with a contiguous parcel on January 1, 2024. At that time, the 4(b) Site and the contiguous parcel had no buildings. The pre-existing textile mill was abandoned on January 1, 2021. Immediately preceding that date, the contiguous parcel had a 10,000 square foot building used to bottle beverages and a 20,000 square foot building used to recycle aluminum, but the 20,000 square foot building is more than 1,000 feet away from the preexisting textile mill. All buildings on the contiguous parcel are included in the calculation of the square foot limitation, even those that are more than 1,000 square feet from the textile mill and those that are unrelated to textiles. Accordingly, in this case, a taxpayer could claim the credit based on expenses to rehabilitate the building used to bottle beverages or build new buildings which total 90,000 square feet or less.

Furthermore the rule applies where multiple buildings are demolished or constructed. For instance, if a taxpayer tears down one building and builds two new buildings, where the combined square footage of the new buildings is less than or equal to 300% of all qualifying buildings that existed, regardless of the individual square footage of the buildings, the rehabilitation expenses would not be limited.

Solar Panels

The Act governs which expenses related to rehabilitation of the site qualify for calculation of the credit, and which do not. Personal property costs are expressly excluded. However, in some cases it may be unclear as to whether such property is truly personal, or is affixed to the real property in such a manner as to qualify it as a fixture, in which case the associated costs would qualify. The question was asked whether solar panels qualify as fixtures, and, thus, whether the costs associated with solar panels would qualify.

As the Department made clear, no South Carolina court has addressed whether solar panels are fixtures or personal property and, therefore, there remains an open question. It did, however, state its view that if the panels would be considered personal property if they are (a) easily removable without damage to the building and (b) of an income-producing character rather than for providing power to the rehabilitated or new building. The determination as to personal property versus fixtures may be different for other tax purposes including IRS analysis.

Movement of a textile mill from its original location

At least one creative developer may have sought to qualify a site which did not include a textile mill by moving it to another site. In response to the question, the Department made clear that this would defeat the purpose of the Act, which is to incentivize the rehabilitation of existing textile mill sites, and that moving the textile mill to another site to qualify it does not work. However, the site where the textile mill originally existed may qualify if the building is moved from the site as an alternative to demolition.

Amendment of Notices

The Department has reiterated that previously-submitted Notices cannot be amended. Therefore, its crucial that the taxpayer give careful consideration to its estimated expenses amount included in the Notice of Intent. However, give the publication of the new ruling, a taxpayer who previously filed a Notice of Intent and whose project has not yet been placed in service may amend their Notice until June 10, 2025.

Revising the type of credit

The Act provides that a taxpayer may obtain an income tax credit or a property tax credit, but not both, and its election must be included in the Notice of Intent. The Department has now given taxpayers the option to revise their original election by notifying the government agency to which it has submitted a Notice of Intent of its withdrawal and refiling with a new election to the appropriate government agency. However, rehabilitation expenses incurred prior to filing the original Notice of Intent may not qualify.

Procedural points

The Act requires that the transferor of all or a portion of the credit allocated notify the Department in writing within 60 days of the transfer. The new ruling provides new requirements for information to be included in the transfer notice, as well as instructions for delivery. Further, Notices of Intent for pursuit of the income tax credit should now be filed with the Department via email at [email protected].

Conclusion

The above represents some of the highlights of Revenue Ruling #25-1. The ruling itself contains much more information and examples. Therefore, owners and developers considering projects involving abandoned textile mills should assure they are working with experienced professionals, current on the latest changes.