Georgia’s Response to Federal Tax Reform: Governor Deal Signs Tax Cut and IRC Conformity Bill
Governor Deal signs Tax Cut and IRC Conformity Bill, providing tax cuts to Georgians to counter the effect of the Tax Cuts and Jobs Act
By Jess Johannesen, SALT manager
As a result of comprehensive Federal tax reform under the Tax Cuts and Jobs Act of 2017 (TCJA) signed by President Trump on Dec. 22, 2017, many states anticipate an increase in tax revenues due to the nature of how states incorporate the Internal Revenue Code (IRC) into their state income tax laws. Accordingly, since the TCJA generally expands the Federal income tax base, Georgia taxpayers were likely to see a higher state income tax bill.
In response, Governor Deal signed House Bill (HB) 918 on March 2, 2018, which accomplishes three objectives. First, it provides tax cuts to Georgians to counter the effect of the TCJA. Second, it updates the state’s IRC conformity date, clarifying how the state will incorporate Federal tax changes under TCJA. Finally, it expands the use of certain tax credits that are assigned to affiliates.
Tax Cut Provisions
Given that the individual tax cut provisions under the TCJA generally expire for tax years after Dec. 31, 2025, Georgia’s tax cut provisions have the same expiration rules (even the corporate rate cut).
- Applicable to tax years beginning on or after Jan. 1, 2018, Georgia’s standard deduction doubles to $4,600 for single taxpayers or head of household, $6,000 for married couples filing a joint return and $3,000 for married couples filing a separate return.
- Applicable to tax years beginning on or after Jan. 1, 2019, Georgia’s corporate income tax rate as well as the highest marginal income tax rate for individuals with drop from 6 percent to 5.75 percent.
- Dependent upon a joint resolution by the Georgia General Assembly to be signed by the state’s new Governor after his or her inauguration on Jan. 13, 2020, the corporate income tax rate as well as the highest marginal income tax rate for individuals is proposed to drop from 5.75 percent to 5.50 percent for tax years beginning on or after Jan. 1, 2020.
Applicable to tax years beginning on or after Jan. 1, 2017, Georgia conforms to the IRC as enacted on Feb. 9, 2018. This conformity date means that Georgia adopts the Federal tax extenders, retroactive to Jan. 1, 2017, resulting from the Federal Budget Bipartisan Act of 2018 that was signed into law on Feb. 9, 2018. This includes the extension/modification of (1) mortgage insurance premiums treated as qualified residence interest, (2) above-the-line deductions for qualified tuition and related expenses, and (3) exclusion from gross income of discharge of qualified principal residence indebtedness.
In addition, Georgia has generally adopted the provisions of the TCJA, including the following:
- Increased Federal expensing of depreciable business assets (IRC §179) – Georgia adopts the Federal deduction limit of $510,000 and the related phase out beginning at $2,030,000 for the 2017 tax year. Georgia will also adopt the TCJA’s increased Federal deduction limit of $1,000,000 and the related phase out beginning at $2,500,000 for the 2018 tax year. However, Georgia has not adopted the §179 deduction for certain real property (§§179(d)(1)(B)(ii) and 179(f)).
- Global intangible low-taxed income (IRC §951A also referred to as GILTI) – Georgia’s subtraction modification for foreign-source dividends (including deemed dividends) is amended to specifically exclude GILTI. Therefore, GILTI will be included in Georgia income. However, the bill does provide the deduction for GILTI under IRC §250.
- Net operating loss (NOL) – Georgia computes its own NOL based on Georgia net taxable income (i.e., after allocation and apportionment). However, Georgia does conform to the Federal carryback and carryforward periods under IRC §172. Therefore, for Georgia NOLs generated in tax years beginning on or after Jan. 1, 2018, there will be no carryback period and an indefinite carryforward period (except for certain taxpayers). In addition, the bill adopts the TCJA’s NOL deduction limitation, meaning that Georgia’s NOL deduction is limited to 80 percent of Georgia net taxable income.
Georgia has not adopted the following provisions of the TCJA:
- Pass-through deduction (i.e., 20 percent qualified business income deduction under IRC §199A) – For individual taxpayer’s, Georgia incorporates Federal adjusted gross income and then allows taxpayers to take itemized deductions or a standard deduction, depending on how they filed for Federal purposes. Since the pass-through deduction is computed after adjusted gross income, Georgia does not incorporate this provision.
- “Bonus depreciation” (IRC §168(k)) – Georgia continues not to conform to certain Federal bonus/accelerated depreciation as in prior years, including additional bonus depreciation provisions added by the TCJA.
- Contributions to the capital of a corporation (IRC §118) – Georgia adopts the provisions of IRC §118 as they existed before the enactment of the TCJA. Under the TCJA, a corporation’s Federal gross income now includes certain contributions to capital, such as when a governmental unit or civic group contributes land or other property to induce the corporation to locate its business in a particular location. Georgia continues to exclude such contributions from gross income and treats such transactions as a tax-free contribution to capital as in prior years.
- Business interest expense deduction limitation (IRC §163(j)) – Georgia adopts the provisions of IRC §163(j) as they existed before the enactment of the TCJA. Federal tax reform now limits deductible business interest expense to 30 percent of the taxpayer’s adjusted taxable income. Georgia does not adopt this limitation nor does Georgia adopt related provisions for the carryover of such disallowed business interest expense following corporate acquisitions. Accordingly, business interest expense remains fully deductible for Georgia income tax purposes.
The provisions described above represent certain significant provisions of the TCJA that Georgia has or has not adopted. However, since Georgia incorporates Federal adjusted gross income (for individuals) and Federal taxable income (for corporations) as the starting point for the computation of Georgia income, the state will conform to other provisions of the TCJA. In addition, there are many provisions of the IRC that were unaffected by the TCJA and Georgia continues to conform with or decouple from those provisions as in prior years. For more detail, please refer to the recent update for Federal tax changes released by the Department of Revenue on March 6, 2018.
Expanded Tax Credit Usage
H.B. 918 amended O.C.G.A. § 48-7-42, the statute that permits taxpayers to assign income tax credits to affiliated entities. Prior to the amendment, taxpayers were permitted to assign income tax credits to other members of the taxpayer affiliate group for use against the assignee’s income tax liability. Under the new law, if a taxpayer that originates an income tax credit and is approved to claim that benefit against its withholding tax liability assigns that credit to an affiliate, then the assignee may also claim that credit against its withholding tax liability. This will allow greater use of tax credits by members of the affiliate group. Unfortunately, however, this provision does not apply to film/gaming tax credits, post-production tax credits, conservation easement tax credits or historic rehabilitation tax credits.
Most state legislatures are currently in session, and since each state varies in how it incorporates the IRC, state legislative responses to the TCJA will not be uniform. Aprio’s SALT team is monitoring state legislative activity regarding IRC conformity and other bills in response to the TCJA so that we can assist businesses plan for these changes.
This article was featured in the March 2018 SALT Newsletter.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.