Georgia House Bill 149 (“H.B. 149”) of May 4, 2021 and allows pass-through entities to avoid the $10,000 federal deduction limit for state and local taxes (SALT) put in place by the Tax Cuts and Jobs Acts. The SALT cap workaround goes into effect for tax years beginning on or after January 1, 2022.
In November of 2020 IRS publishing Notice 2020-75, there is confirmation of state and local taxes specific to pass-through entities, including S-corporations or partnerships, being deductible. We provide details below regarding the SALT cap workaround; however, it is important to consult with your tax advisor prior to making any tax elections.
Under H.B. 149, the tax treatment for S corporation and partnership income allows businesses to make an irrevocable election each year to pay Georgia income tax at the entity level for that taxable period. Eligible businesses will pay income tax at the 5.75% rate on their Georgia-sourced net income. The 5.75% rate is the current corporate income tax rate for the state of Georgia. However, electing pass-through entities are not allowed deductions for other net income or gross receipts taxes paid to other states, and are not entitled to take any credit for taxes paid to other states.
Shareholders and partners will not recognize their respective share of income from the electing pass-through entity. However, the new law restricts resident individuals from adjusting their adjusted gross income for taxes paid to other states that impose tax on pass-through entities. For example, see states such as Texas and Tennessee. Resident members of electing businesses cannot take credits for other income taxes paid at the entity level.
Taking the SALT cap workaround requires careful thought and consideration. If you have any questions on if the SALT cap workaround is appropriate for your business, consult with a tax advisor prior to making elections.
Georgia recently issued proposed regulations and they are expected to become finalized soon. These regulations address eligibility, how to make the election, rules regarding estimated tax payments, and more. As soon as the final regulations issue, we will provide an update.
Several other states have passed a similar workaround for pass-through entities; some of which are in effect for tax years beginning in 2021.
Have more questions about the SALT cap workaround in Georgia or other states? Contact your Smith and Howard advisors here or by calling 404-874-6244 or contact us online.
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