In 2021, Georgia joined several other states to introduce legislation known as the “SALT deduction work-around”. The SALT deduction refers to the $10,000 cap on personal State and Local Tax deduction limitation applied at the individual level. This deduction was introduced in the Tax Cuts and Jobs Act and limited the deductibility of state taxes, real estate taxes and other local taxes as an itemized deduction to a total of $10,000 annually.
New Pass-Through Entity Tax
The Georgia legislation introduces an optional Pass-Through Entity (PTE) tax for flow-through entities including S-Corporations, Partnerships and LLCs (treated as S-corporations or Partnerships for tax purposes). The PTE tax is applicable for tax years beginning on or after January 1, 2022 and is calculated at a flat rate of 5.75% on Georgia net income.
For a PTE to be eligible to make the election, it must be 100% directly owned or controlled by persons eligible to be a shareholder under IRC Sec. 1361 (ineligible owners include corporations or non-U.S. individuals).
The PTE tax is calculated in the same manner as corporations and estimated tax payments are required to be paid quarterly if electing entities expect net income to exceed $25,000 for the year.
Impact to Personal Tax Return
The Georgia net income taxed at the entity level is NOT double-taxed at the personal level. However, this could render personal Georgia tax credits unusable if there is no non-PTE Georgia taxable income. This includes the Education tax credit, R&D tax credit among others. There is no state tax credit available to other states for non-resident pass-through owners.
New Federal Legislation
New legislation at the Federal level could render the PTE tax election unadvisable. If the SALT deduction cap is removed at the Federal level, the choice to pay a PTE tax to Georgia may be moot. An evaluation will need to be made annually to determine the best course of action.
Calculation
The tax benefit of participating in the Pass-Through Tax at the entity level is based on each entity and individual’s specific tax situation. A detailed analysis will be required to determine the best outcome at a holistic level annually to determine the best of course of action for your pass-through entity.
