On May 4th, 2021, Georgia Governor Kemp signed into law HB 149, a bill that creates an election for partnerships and S-corporations to be taxed at the entity level. This is an annual irrevocable election, that has to be completed before the due date of the return, including any extensions. When elected, the entity is subjected to a 5.75% income tax rate on the Georgia sourced income. The election prevents the entity from claiming some deductions and credits, but offers new planning opportunities to flow-through entities in Georgia.
While this bill is newly passed, its history dates back to the passage of the Tax Cuts and Jobs Act bill of 2017.
The Beginning - TCJA
The TCJA introduced the SALT deduction cap, limiting the allowable deduction for state and local taxes to $10,000. This cap was designed to limit the federal deduction, and benefit, derived from paying state taxes in high-tax jurisdictions. The Republican Congress saw the SALT deduction as a federal subsidy of individuals in high-tax (primarily Democratic) states. Since its passage, states have been trying to create workarounds that would allow their taxpayers a way to offset their state tax expenditure with a federal deduction. Some proposals have included state-sponsored charities, new payroll taxes, or just challenging the constitutionality of the original bill.
The Evolution – IRS Notice 2020-75
In November of 2020, the IRS released Notice 2020-75 approving one such proposal. If a passthrough entity is taxed at the entity level. When the entity pays the state tax, it reduces the income flowing through to the owners, and consequently reduces the federal tax liability due to the reduced income. While the IRS notice was in response to a few states that had already enacted this plan, more and more states have enacted similar plans since it was issued.
The Result – GA Bill HB 149
The Georgia bill is a direct response to the IRS Notice 2020-75, becoming the latest state to provide pass-through entities the ability to elect into entity level taxation. While Georgia does not have the highest income tax rate, this bill does allow its taxpayers the ability to bypass the SALT cap. The new election should be considered another tool that can be utilized by taxpayers and their preparers.
If you have questions regarding this or other tax legislations, contact us today to set up a time to talk.