On May 4, 2021, Georgia Gov. Brian Kemp signed House Bill 149, making Georgia the latest state to adopt an elective pass-through entity tax as a workaround to the $10,000 limitation on the federal state and local tax (SALT) deduction. The election is effective for tax years beginning on or after Jan. 1, 2022.
Beginning in 2022, S corporations and partnerships may elect to be taxed at the entity level. The tax is imposed at 5.75% of the entity’s net income and allocated and apportioned for the period. The shareholders or partners of the entity would not recognize their respective share of the income that is subject to the entity-level tax on their individual returns. Noteworthy, the Georgia law prohibits the subject entity or its members from the credit for taxes paid in another jurisdiction. However, the law provides that the subject entity is considered an ‘other entity’ for purposes of the qualified education tax credit, certain tax contributions to rural hospital organizations and tax credits for qualified education donations. The election will not impact the determination of the basis of the shareholders or partners of an electing entity, except that the distributive share of the tax paid or accrued by the member will be taken into account when determining basis.
The election must be made annually on or before the due date for filing the applicable income tax return, including any granted extensions.
The Georgia entity-level tax is imposed at the highest individual tax rate for the state. Like many of the other state SALT deduction limitation workarounds, no negative impact on state revenues is anticipated.
Georgia joins a growing number of states to adopt a similar workaround: Alabama, Arkansas, Connecticut, Idaho, Louisiana, Maryland, New Jersey, New York, Oklahoma, Rhode Island and Wisconsin. California is also considering a workaround proposal. Importantly, not all pass-through entity members may benefit from the election. Taxpayers are cautioned that the workaround is not a panacea to the SALT deduction limitation and any federal savings may be offset by increased state liabilities. Taxpayers should also consider that changes in the SALT deduction or other state and federal tax provisions may further impact whether the election is beneficial. Taxpayers are encouraged to contact their state and local adviser to discuss the Georgia SALT deduction limitation workaround.