As you contemplate what math level your child should be learning in, pray. Pray for the wisdom to follow his cues, feelings, successes, failures, and effort in all academics, but especially math.
Since I don't know how long your third grader is taking to complete each MCP-Level C chapter test, I am going to make some assumptions. I assume that he is completing the cumulative test (review of prior concepts) on the flip side of the chapter test. I assume he is frustrated as he is taking the test. Each child is different, but if your son is taking more than forty-five minutes to complete two test pages, is expressing frustration, and isn't mastering the chapter's concepts, then I suggest starting in MCP-Level B. Don't wait to hold him back until next year. If, however, your third grade son is slow in completing the test, but does well, keep moving forward in MCP-Level C. There are several experienced math teachers who don't believe that children should have to complete every math concept quickly.
Since you have homeschooled for three years, your son may have already studied from MCP-B. If you decide to move back to second grade, try giving him the chapter tests (both sides) starting with the first chapter. If your third grader moves through the test quickly, and has mastered the concepts, jump to the following chapters, until he slows down, grows frustrated, and isn't mastering the concepts. Then, move backward and begin teaching that chapter's lessons.
A few thoughts about MCP Math. The teacher's manuals are fantastic. Forgive me if you are already doing so, but present the Mental Math and/or the Warm Up, which reviews prior concepts, every single lesson. Read through and present the Teaching part of the lesson thoroughly, and try to assess your child in more than one way. Use the suggested materials. The Common Errors part of each lesson is most valuable. If you prepare yourself for the errors before presenting the lesson, you will have a game plan. Finally, if all of these steps seem to make the lesson take "too long", than take more than a day to teach each lesson. You might also want to assign the even problems one day, and the odds the next day for reinforcement. Don't hurry.
Don't hurry, or worry for that matter, if you have to move back a grade in math, either. I, too, have a fifth grade child who struggles in math. She is not learning math at her age level, which is another beautiful reason for homeschooling. Your son, and my daughter, will either blossom and catch up by the time they hit the upper grades, or perhaps math will never be their strength. As my child hits the high school years, I may consider a tutor for her. Presently, I continue to explore a variety of math programs that my homeschooling friends recommend, and I read every teaching tip I can get my hands on. One important tip that I won't forget quickly is to practice math concepts over and over, until the child has mastered them. At the third grade level you should feel quite good about MCP. Now, you just need to decide the math level your child belongs in. And, be sure to pray about it.
Blessings to you and yours,