The Georgia Department of Revenue (DOR) has released new regulations implementing law changes made during the most recent State legislative session. The new rules address state and local tax (SALT) deductions by passthrough entities and Georgia’s federal tax conformity—the extent to which the state adopts tax changes at the federal level. Set forth below is an explanation of the new regulations.
Paying SALT Tax at Entity Level
Since Congress passed the $10,000 limit and on state and local tax (SALT) deductions in late 2017, states have scrambled to create state programs that would allow taxpayers to circumvent this limit. These “SALT workarounds” are designed to allow passthrough entities to take SALT deductions that would be disallowed at the individual owner level. Georgia enacted this type of provision in May 2021. HB 149 allows S Corporations, Partnerships and LLCs taxed as Partnerships, to make an election to pay the tax due on business income at the entity level instead of passing through the tax liability to the owners, effective in 2022. This change effectively restores the benefit of the SALT deduction at the entity level for state taxpayers who own interests in passthroughs.
New DOR regulations implement this law, detailing which entities are eligible to make the election, how the election is made, requirements for making estimated payments and computation of income taxed at the entity level.
Some key points include:
- Only a pass-through entity that is 100% directly owned and controlled by persons eligible to be shareholders of an “S” Corporation is eligible for the election by S Corporations.
- A disregarded single-member limited liability company, qualified Subchapter “S” subsidiary, and any other disregarded entity cannot by itself make the election, but the regarded owner of those entities may make the election.
- The election is made on Form 600S if the entity is a Subchapter “S” Corporation or on Form 700 if the entity is a partnership.
- The election is an annual election, irrevocable for the year, and is binding on all owners. Entities may decide themselves how to obtain consent to the election from their owners.
- Entities must make estimated tax payments like C Corporations.
- The tax rate will be 5.75%.
Other provisions discuss elections by investment pass-through entities and exempt owners, withholding requirements and special rules for S Corporations with nonresident owners.
Making the entity tax election can be a good choice, but it comes with some complications for claiming other tax benefits, such as some tax credits. It is best to consult your tax advisor before deciding to take advantage of the Georgia SALT workaround.
Georgia’s Yearly Federal Tax Conformity
On an annual basis, the Georgia General Assembly updates state tax law in response to federal changes to the Internal Revenue Code (IRC). This year, there were two Georgia IRC update bills, House Bill 7EX and House Bill 265. These bills, for the most part, adopt the provisions of the federal COVID relief acts, with some exceptions. For example, unemployment income remains taxable at the state level and must be included in a taxpayer’s income on his or her Georgia return. Here are some highlights of the most recent conformity rules.
Georgia has adopted the PPP loan forgiveness and the deductibility of the related PPP deductions for all years. Georgia also allows corporations to subtract for Georgia purposes the wages that are disallowed federally if the taxpayer claims the federal employee retention credit.
For 2021, Georgia has adopted the increased Sec. 179 expensing deduction of $1,050,000 as well as the $2,620,000 phaseout amount. Georgia has not, however, adopted the Sec. 179 deduction for some real property.
Georgia has adopted all of the CARES Act for taxable years beginning on or after January 1, 2019, but did not adopt the revised net operating loss (NOLs) provisions that allowed carrybacks and 100% usage of NOLs.
For taxable years beginning on or after January 1, 2019, Georgia has adopted the CAREs Act correction for qualified improvement property as it relates to the 15-year life, but Georgia has not adopted bonus depreciation.
Georgia also has not adopted the following federal provisions:
- 30%, 50%, and 100% bonus depreciation rules
- Federal deduction for income attributable to domestic production activities
- 20% qualified business income deduction
- 30% limitation on business interest deduction
- Increased ($8,000) first-year depreciation limit for passenger automobiles
- 15-year straight-line cost recovery period for certain improvements to retail space
- Rules relating to the 15-year straight-line cost recovery for qualified restaurant property
Depreciation Differences
Depreciation must be computed one way for federal purposes and another way for Georgia purposes. Federal depreciation should be added back to Georgia’s income. Depreciation must then be computed for Georgia purposes on Georgia Form 4562.
Decoupling from federal provisions may have other effects on the calculation of Georgia taxable income. The yearly exercise in sorting out conforming and nonconforming provisions complicates the tax filing season and requires careful return preparation.