Beginning January 1, 2022, Georgia’s new law establishing a workaround for the federal income tax limitation on deductions for state and local taxes became effective. Owners of pass-through entities including Partnerships, some Limited Liability Companies and S-Corporations may qualify for federal income tax savings. Review the guidelines and planning tips below to see if this benefit is available to your business.
Background
The Tax Cuts and Jobs Act of 2017 changed many aspects of the tax code impacting both small businesses and individuals. A notable change for the individual tax landscape was the first-time limit of the state and local tax (SALT) deduction of $10,000. Previously, individual taxpayers could deduct an unlimited amount of SALT including state income taxes, property taxes and ad valorem taxes as a personal itemized tax deduction. The SALT limitation capped at $10,000 significantly reduced the deductibility of state income taxes.
Pass-through entities include Partnerships, Limited Liability Companies and S-Corporations. Pass-through entities are named as such since they typically do not pay income tax on the profits of the business but instead “pass-through” taxation to their respective Partners, Members or Shareholders.
Pass-Through Entity Tax
In response to the TCJA limitation on state tax deductions for individual taxpayers and pass-through entities, many states passed legislation to allow entities to pay their respective state taxes at the company level instead of passing through to the owners on their personal returns. Pass-through entities are not subject to the $10,000 limitation on SALT deductions. By electing to pay taxes at the company level, the company gets the deduction for state taxes and the owner is taxed on the net taxable income after consideration for the state taxes paid.
Georgia Pass-Through Entity Tax
Georgia joins 28 other states as of the date of this article that have enacted pass-through entity tax legislation since the Tax Cuts & Jobs Act that took effect beginning in 2018. Georgia’s Pass-Through Entity tax assesses an entity-level tax at a rate of 5.75% on the entity’s earned income.
An election to be taxed as a PTE is irrevocable and must be made annually by the due of the return, including extensions. However, no election can be made if the PTE has corporate members.
Planning Tips
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- Careful tax planning should be considered based on the facts and circumstances of the Pass-through entity
- Pass-through entity owners should review their operating or shareholder agreement to determine their authority for making an election
- A full evaluation of multi-state PTEs should be completed before making a PTE election as the loss of State Tax credits could negate the tax benefits of state PTEs
Let us know how we can help you evaluate the new pass-through entity tax for your business and the impact on your specific tax situation.
Call us at LittleOwl CPA, Inc. to discuss your state tax strategy!
About Tabitha Regan
Tabitha Regan is the Founder and CEO of LittleOwl CPA. Tabitha is a Certified Public Accountant, Certified Financial Planner™ and Personal Financial Specialist. In her 16+ year career span, she has developed an expertise in the specific needs of small businesses and busy professionals with accounting, tax and advisory services.
