Georgia Refund Opportunity for Business Owners

by: Smith and Howard

February 12, 2015

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In a recent decision, the Georgia Tax Tribunal held that a Georgia resident taxpayer was entitled to deduct pass-through income which was subject to the Revised Texas Franchise Tax (TFT) in computing his Georgia taxable income. This has the potential to create refunds and reduced tax liability for Georgia owners of partnerships, LLCs and S-Corporations with Texas operations.

In general, Georgia tax law provides for either a deduction or credit for income taxed in other states so that individuals do not pay double tax on the same income. In the past, Georgia law worked most of the time. One exception was for Georgia residents paying tax in Texas because that income was taxed in both Georgia and Texas due to Georgia’s position that the Texas tax was not an income tax. The Georgia Tax Tribunal ruled that the TFT is in fact an income tax and should not be subject to double tax.

A blog post by Zachary Atkins and Jonathan Feldman of Sutherland Law, summarizes the Tribunal’s reasoning and decision. It begins: “The Department asserted that the TFT is not a tax on or measured by income but instead is a privilege or gross receipts tax and, in the alternative, that an adjustment is permissible only if the tax in question is a tax on or measured by net income. The tribunal disagreed, concluding that the TFT is a tax “on or measured by income” under either a broad or restrictive definition of “income” or “gross income” and regardless of whether one’s TFT liability is computed as 70% of total revenue, total revenue less cost of goods sold, or total revenue less compensation, because the calculation always begins with total revenue. The tribunal found that this conclusion was consistent with the legislative purpose of avoiding double taxation of the same income for pass-through entities and their individual owners. The tribunal also rejected the Department’s attempt to limit the availability of the adjustment to taxes on or measured by net income, explaining that such an interpretation would violate even the most basic rules of statutory construction.” Read the entire blog post here.

What This May Mean to You

If you are a Georgia owner of an LLC, S Corporation or partnership that has Texas operations, you may be entitled to refunds for prior Georgia taxes paid for any years that are still open for amendments (generally three years). Further, taxpayers can take advantage of this change immediately for current year returns.

There is the possibility that Georgia will continue to challenge this favorable ruling, but in the meantime this presents an opportunity for many Georgia taxpayers. We will continue to monitor this issue and will provide you with clarification and guidance as it is made available. If you have any questions, please contact Debbie Torrance at 404-874-6244.

How can we help?

If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.