SALT ALERT: Should Your Company Make the Georgia Pass-Through Entity Election for 2022?

Last year, the Georgia Governor signed House Bill 149 into law (resulting in Rule 560-7-3-.03 being adopted). The law and subsequent regulation allow electing S-corporations and partnerships to pay Georgia state business income taxes at the entity level rather than passing-through income to their shareholders and partners to pay tax at the individual level. Georgia’s law is like other states that have enacted pass-through entity (PTE) elections to circumvent the federal $10,000 state and local tax (SALT) deduction limitation (i.e., “SALT CAP WORKAROUND”).  However, Georgia’s law has enough unique factors to cause complexity and require analysis before a company (and its shareholders/partners) should decide to make the election.

Key Considerations for Georgia Resident Shareholders / Partners

• Weigh the benefits of shifting tax to PTE against any loss of deductions for the PTE’s income taxed in another state, and loss of credits for income tax paid to other states.
• Certain personal income tax credits may not be utilized (i.e., R&D, Jobs Tax Credits, etc.).
• Timing of deductibility of state tax paid by PTE (IRS Notice 2020-75).

8 Key Takeaways Regarding Georgia’s Pass-Through Entity (PTE) Election

1. PTE with corporate owners can’t make election.
2. PTE election is an annual election due by extended due date.
3. There is penalty relief for estimated payments, if payments made by Owners and not PTE, when PTE election is made.
4. Owners can’t transfer estimated payments to PTE. PTE can’t transfer estimated payments to Owners, but PTE can transfer estimated payments to composite/NRWH accounts if PTE election ends up NOT being made.
5. PTE can’t deduct any income taxes paid by PTE to other states.
6. Owners don’t get credit for taxes paid by PTE to GA or other states.
7. Credits can’t be transferred by the owners to the PTE.
8. Credits CAN be transferred from the PTE to the owners.

Georgia PTE Election Bullet-Point Detailed Summary

• The Election
  • Election may only be made by PTE owned 100% by shareholders eligible to be shareholders of a S corporation.
  • A SMLLC or Q-sub cannot make the election itself; the regarded owner of such entities may make the election.
  • Each PTE in a tiered partnership arrangement must make its own election.
  • The election is an annual irrevocable election for the tax year the election is made.
  • The election must be made by the due date of the return including any extensions.
  • The PTE decides how to obtain consent from its owners.
  • The election is binding on ALL owners once made.
  • The election is an annual election which must be made each year. If the election is not made in a later year, no notice is required to be filed with the Department.
• Estimated Payments
  • An electing PTE is required to make estimated payments in the same manner as a C corporation and using the same form. Same due dates as a C corporation.
  • Estimated payments made by owners are NOT eligible to be transferred to the PTE. However, if owners have made payments or have credits/attributes that would reduce their liability, the entity may check the “UET Annualization Exception Attached” box on Form 600S or Form 700 and compute the penalty on Form 600 UET as if the entity had made such payments or applied such credits/attributes.
  • Owners who make estimated payments for the income attributable to an election PTE, may NOT transfer the estimated payments to the electing PTE, but must instead claim a refund of the overpayment by filing the income tax form the owner would normally file.
  • A PTE that makes estimated payments, but then does not make the PTE election, may NOT transfer the payment to its owners, but must instead claim a refund of the overpayment. The PTE may contact Department to transfer its payments to its composite or nonresident withholding account.
• Tax Base
  • If the PTE election is made, the PTE will NOT be allowed to deduct any income taxes to arrive at Georgia taxable income. There are other items that partnerships who make the PTE election will not be able to deduct or take into consideration as well.
• Tax Rate
  • The tax rate is 5.75% on PTEs that make the election.
• Tax Attributes (Credits)
  • Tax attributes for an electing PTE will be generated, claimed, and utilized similar to a C corporation.
  • Tax attributes such as credits and NOLs from tax years when an election was NOT made remain with the owners and are NOT eligible to be transferred to the PTE.
  • Tax attributes that are generated by the PTE in a year when the election was made do NOT pass through to the owners if the entity does not make the PTE election in a later year.
  • An electing PTE may make an irrevocable election to pass through ALL or PART of any credit that is generated by the PTE to its owners for the tax year the credit is generated.
    • Election is made by completed the “credit allocation to owners” schedule on an original or amended Form 600S or Form 700 for the tax year the credit is generated.
    • Such election must be made within the owner’s SOL period.
• Owner Subtraction
  • Owners of an electing PTE will not recognize their share of the income or loss apportioned or allocated to Georgia by the PTE. The owner will start with Federal AGI and then subtract on their Georgia return their respective share of the income (or add their share of any loss)  that was apportioned or allocated to Georgia by the PTE.
• Nonresidents
  • If a nonresident owner’s only source of GA income is the income taxed at the PTE level, then the owner isn’t required to file a return.
• PTE with Exempt Owners
  • A PTE that makes the election and has exempt owners should exclude the income that is exempt in arriving at GA taxable income.