As you probably know, the Tax Cuts and Jobs Act of 2017 limited the itemized deduction for state and local taxes (SALT) to $10,000 per year. Numerous states (particularly those with high income and property taxes) have tried various workarounds to help business owners avoid the $10,000 cap. The IRS finally blessed one approach, allowing pass-through entities (PTEs) such as partnerships and S corporations to elect to pay state income tax at the entity level, effectively removing the limitation for the entity owners and (perhaps accidentally) enabling those deductions for nonitemizers.
Georgia Election to pay SALT at PTE level
On May 4, 2021, Governor Kemp signed into law House Bill 149, which allows PTE’s to elect to pay tax for their owners providing a business level deduction, effective January 1, 2022. The annual, irrevocable election is made on the entity’s tax return – generally due March 15, 2023 for the 2022 tax year unless extended. While you have another year to make the election, corporate-level estimated taxes (at 5.75%) are due this April 15 for the 2022 tax year, assuming your corporate income is expected to exceed $25,000.
Here’s a PTE taxation example
Let’s say you own an S corporation with $100,000 in net income for 2022. You paid $5,750 in Georgia estimated taxes during 2022, and elected to deduct those taxes at the entity level, thanks to this new law. You would now effectively report $94,250 Federal and Georgia taxable income.
Even if you already had more than $10,000 in other state and local taxes as an individual taxpayer or if you don’t itemize on your 1040, you receive the full tax deduction. If you are in the 30% Federal and Georgia tax bracket as an individual, you would save $1,725 by making this election and paying the tax at the entity level.
Shareholders and partners of electing PTE’s will need to exclude that portion ($94,250) of PTE income from their individual taxable Georgia income to avoid paying tax twice.
Contact a CPA to determine the best approach for you and your business
As with most tax regulations, this is much more complex than we can present in a brief update. There are a number of factors that could impact your decision to elect this PTE taxation approach, so it’s best to review your unique situation with an experienced tax professional.
The Georgia Department of Revenue will hopefully issue regulations, FAQ’s, forms, and instructions prior to the due date of the elections to clarify questions which will inevitably arise – such as whether the Georgia GOAL Scholarship Program credits will be still available at the shareholder level.