The Georgia legislature has enacted HB 412, which repeals a limitation on the types of partnerships that can elect to pay income taxes at the entity level to circumvent the federal state and local tax (SALT) deduction limitation. The legislation also provides that the election will have no impact on the accounting or tax treatment of the entity’s distributions. Governor Kemp signed the measure on May 2, 2023. It takes effect for the current tax year.
States Workaround SALT Limit
After Congress passed the $10,000 limit on the SALT deduction for individuals in late 2017, states implemented programs to preserve the deduction for owners of passthrough entities. Georgia enacted this type of provision in May 2021. It allows S Corporations, partnerships and LLCs taxed as partnerships to elect to pay the tax due on business income at the entity level instead of passing through the tax liability to the owners, beginning in 2022. The owners’ state taxable income is then reduced by the income included on the pass-through’s return.
More Georgia Entities Qualify
The new legislation removes the requirement that the election only applies to a partnership that is 100% directly owned and controlled by persons eligible to be shareholders of an S corporation. Effective in 2023, this provision allows more Georgia partnerships to qualify for the election such as those with partners that are corporations, other partnerships, nonresident aliens and certain trusts.
Making the Election
Partnerships make the annual election on Form 700, Georgia partnership return, to pay the 5.75% entity tax. The election must be made on or before the due date for filing the income tax return, including any extensions. Note that the election is irrevocable for that year but may be changed in subsequent years. The election is binding on all owners once the election is made but the state leaves it up to the entity to determine how best to obtain consent from the owners. Partners do not recognize their respective share of the portion of income on which tax was paid by the entity.
Despite attempts by bipartisan members of Congress to repeal or relax the SALT deduction limit, no federal legislation has made it through so far. For now, passthrough owners in Georgia and 29 other states can still get the benefit of the deduction by electing to pay an entity-level tax. The SALT limitation is set to expire after 2025 so more legislative changes at both the federal and state level are likely at that time. Your Frazier & Deeter tax advisors are monitoring legislative actions and will keep you informed.