State and Local Taxation

• Jurisdiction: Georgia,United States
• Publication year: 2021
• Citation: Vol. 73 No. 1

State and Local Taxation

Brian Sengson

Blake Joiner

Kenda Williams

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State and Local Taxation

Brian Sengson^*

Blake Joiner^**

Kenda Williams^***

I. Introduction

This Article surveys the most critical and comprehensive changes in Georgia law occurring between June 1, 2020 and May 31, 2021.¹ Most notably, this Article discusses Georgia's continued response to the Coronavirus (COVID-19); pass-through entity election for the state and local tax deduction cap workaround; amendments to deference accorded to determinations and interpretations issued by the Georgia Department of Revenue (Department); and other important topics impacting income tax, sales tax, and tax controversy.

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II. Georgia Income Taxation

A. Georgia Updates Federal Conformity

1. House Bill 846 Updates Conformity to March 2020

On June 30, 2020, Governor Brian Kemp signed House Bill 846.² The Bill revises Chapter 1 of Title 48 to incorporate certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and adopts the Internal Revenue Code (IRC) as of March 27, 2020.³ The amendment continues to exclude previously enumerated provisions of the IRC and adopts new provisions enacted through the CARES Act.⁴ Notably, H.B. 846 expressly decouples from the CARES Act amendments to IRC sections 172 and 461(l).⁵

H.B. 846 expressly rejects CARES Act amendments relating to modifications for net operating losses (NOL) under IRC § 172.⁶ There are two notable provisions relating to federal treatment of NoLs under the CARES Act that were not incorporated through H.B. 846.⁷ First, the CARES Act temporarily repealed the taxable income limitation under IRC § 172(a) and (b).⁸ For tax years beginning before January 1, 2021, the CARES Act amended IRC § 172(a) by striking the language "an amount equal to" and inserting expanded provisions applicable to each tax year.⁹ Second, the CARES Act amended the IRC to allow a temporary modification of rules relating to NOL carrybacks.¹⁰ Specifically, the CARES Act enacted a special rule for losses arising in 2018, 2019, and 2020:¹¹

In the case of any net operating loss arising in a taxable year beginning after December 31, 2017, and before January 1, 2021—such loss shall be a net operating loss carryback to each of the 5 taxable years preceding the taxable year of such loss, and subparagraphs (B) and (C)(i) shall not apply.¹²

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The CARES Act also amended IRC § 461(1) concerning modification of limitations on losses for taxpayers and other corporations.¹³ Notably, the CARES Act made temporary, substantive modifications to the IRC's limitation on excess business losses of noncorporate taxpayers.¹⁴ Like IRC § 172, H.B. 846 expressly decouples from the CARES Act amendments to IRC § 461(l).¹⁵ The statutory amendments to Official Code of Georgia Annotated § 48-1-2(14) apply to all taxable years beginning on or after January 1, 2019.¹⁶

2. House Bill 265 Updates Conformity to January 1, 2021

With the passage of the federal Consolidation Appropriations Act (CAA), effective December 21, 2020, Georgia updated House Bill 265 to conform to the IRC as of January 1, 2021.¹⁷ H.B. 265 does not provide new decoupling from existing Georgia law. However, Georgia's conformity to CAA confirms the deductibility of expenses paid with proceeds from forgiven loans under the Paycheck Protection Program.¹⁸

H.B. 265 does not address conformity to IRC amendments resulting from the passage of the American Rescue Plan Act of 2021 (ARPA), which was signed into law on March 11, 2021. Therefore, unemployment income remains taxable at the state level and is included in a taxpayer's income reported on a Georgia individual's income tax return.¹⁹

B. Georgia's Elective Pass-Through Entity Tax Regime

The Tax Cuts and Jobs Act of 2017 (TCJA)²⁰ limits an individual's deduction for state and local taxes paid during the calendar year.²¹ For tax years beginning after December 31, 2017, and before January 1, 2026, the deduction is limited to $10,000 (State and Local Taxes (SALT) Cap).²² The TCJA did not limit the SALT deduction for business entities but did put businesses structured as pass-through entities (PTEs) at a

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disadvantage. PTEs, such as partnerships and S-corporations, are therefore subject to the $10,000 SALT Cap for state and local income.²³

Initially, states attempted to mitigate the impact of the SALT Cap by engineering workarounds, such as state tax credits through charitable contributions. These workarounds were initially rejected by the U.S. Department of the Treasury and the IRS.²⁴ More recently, the IRS issued Notice 2020-75 in November 2020, announcing that the Treasury and IRS plan to issue proposed regulations to clarify that state and local income taxes imposed on and paid by partnerships and S-corporations are not subject to the $10,000 SALT Cap for their partners or shareholders.²⁵ Accordingly, states have begun passing legislation allowing PTE owners to elect to be taxed at the entity level.²⁶ Georgia is one of the latest states to join this trend with House Bill 149.²⁷

Effective May 4, 2021, H.B. 149 permits Georgia qualified Subchapter S-corporations and partnerships to elect to pay Georgia income tax at the entity level.²⁸ The new law allows individual Georgia residents to avoid the federal $10,000 SALT Cap. Electing PTEs will continue computing net income pursuant to the entities' relevant rules and will pay a 5.75% tax²⁹ on Georgia-source net income pursuant to the corporate allocation and apportionment rules.³⁰ Electing PTEs are not permitted any credits or deductions for other state income or gross receipts taxes paid pursuant to O.C.G.A. §§ 48-7-27(d) and 48-7-28.³¹ The election is available for tax years on or after January 1, 2022, and must be filed annually on or before

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the return filing due date, including extensions. PTEs with corporate members are not permitted to make the election.³²

Unlike most state SALT Cap workarounds, H.B. 149 bars a resident PTE member from taking credits for other state entity-level income taxes paid.³³ Instead, the income taxed under Georgia PTE tax is excluded from the PTE member's calculation of taxable net income.³⁴ Further, partners to the electing partnerships are subsequently excluded from the income tax filing requirements for resident partners to a nonresident partnership, or nonresident partners to a resident partnership pursuant to O.C.G.A. § 48-7-24.³⁵ Similarly, partners or shareholders of electing partnerships or S-corporations are excluded from the withholding tax on distributions to nonresident partners, shareholders, or members under O.C.G.A. § 48-7-129.³⁶ In effect, Georgia residents will not be subject to Georgia tax on income apportioned to other states. The Department has not yet issued any relevant regulations, instructions, or forms.

C. Updated Electronic Signature Requirements

On November 10, 2020, the Department issued Policy Bulletin ADMIN-2020-02 to clarify and update some of its requirements for electronic signatures.³⁷ One important update is that taxpayers are automatically accepted into the Georgia electronic filing program if they are accepted by the IRS and have provided a properly executed IRS Form 8879 for the federal return.³⁸ In the event a taxpayer has not been accepted into the IRS e-filing program or has not provided a properly executed IRS Form 8879, the general requirements for electronic signatures still apply for Georgia.³⁹ Specifically, the Department accepts electronic signatures that are on acceptable forms;⁴⁰ demonstrate an

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intent to sign; evidence an association or connection between the e-signature and the document; contain an authenticated signature; and preserve the document's integrity.⁴¹

D. Taxpayer-Favorable Changes to Jobs and Quality Jobs Tax Credits

1. Personal Protective Equipment Manufacturing Credit Increase

As part of Georgia's COVID-19 relief efforts, H.B. 846 provides an additional $1,250 job tax credit for personal protective equipment (PPE) manufacturers.⁴² The credit is effective from January 1, 2020 through December 31, 2024.⁴³ Taxpayers must qualify for the original Jobs Tax credit and must engage in PPE manufacturing activities in Georgia during the tax year that the taxpayer claims the additional credit.⁴⁴ Upon claiming the credit, taxpayers are required to attach a schedule to the respective Georgia income tax return providing specific information, including but not limited to, the number of jobs claimed pursuant to this credit provision and verification that the taxpayer is a PPE manufacturer.⁴⁵ The credit can be used to offset a taxpayer's entire Georgia income tax liability or to offset against Georgia payroll withholding tax liability.⁴⁶ Unused credits may be carried forward for up to ten years.⁴⁷

2. Election to Carry-Over 2019 Credit for 2020 and 2021 Tax Years

H.B. 846 also amends the Georgia Jobs and Quality Jobs Tax credit to permit taxpayers that claimed either credit during the 2019 tax year to utilize the same number of jobs claimed in that year for the 2020 and 2021 tax years.⁴⁸

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III. Georgia Sales and Use Taxation

A. Sales Tax and Direct Pay Permits

1. Payments of Refunds by Political Subdivisions

H.B. 846 amended Chapter 2 of Title 48, concerning the payment of final refund amounts resulting from an audit by the Department.⁴⁹ Political subdivisions are now afforded the option to repay a taxpayer over time when a refund is owed from an overpayment of taxes pursuant to a direct pay permit issued in accordance with O.C.G.A. § 48-8-49.1.⁵⁰ The political subdivision may elect to repay a taxpayer the final refund...