UPDATE: Georgia Tax Tribunal Issues Consent Order on Pass-Through Tax Adjustment Computation Method

An outstanding issue from the Georgia Tax Tribunal’s ruling on the Texas Franchise Tax was how the adjustment should be calculated.

In our May issue of the SALT Newsletter, we discussed the Georgia Tax Tribunal’s ruling confirming that the Texas Franchise Tax was indeed a tax “on or measured by income” for purposes of the adjustments available to Georgia resident taxpayers under OCGA §§47-8-27(d)(1)(B) and 47-8-27(d)(1)(C). [1] This adjustment helps to prevent double taxation of Georgia residents by allowing a subtraction from federal adjusted gross income for the partner/shareholder’s distributive share of income taxed by another state at the partnership/S-corporation level.

An outstanding issue from the ruling was how the adjustment should be calculated. Texas Franchise Tax is based on a computation of “Texas margin” rather than modified federal taxable income, so there is no comparable measure to Texas in Georgia tax law.

As part of the final consent order to this ruling issued on July 13, the Georgia Department of Revenue agreed to determine the adjustment by applying the Texas apportionment factor to the pass-through entity’s un-apportioned Georgia taxable net income. [2] Specifically, the adjustment amount is calculated as follows:

  1. Determine the pass-through entity’s Georgia taxable income before apportionment;
  2. Multiply the amount in (1) by the pass-through entity’s apportionment ratio in the state where it paid entity level tax; and
  3. Multiply the amount in (2) by the Georgia resident’s distributive share percentage from his or her ownership interest in the pass-through entity.

The order is instructive for computation of the adjustment for Texas Franchise Tax paid, as well as potential adjustments for other taxes that are based on other measures of income such as total revenue. Resident individual taxpayers should review current and prior year tax returns that are still open under the three-year statute of limitations period and determine if they are eligible for refunds.

Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] See Rosenberg v. Commissioner, No. 1414626 (GA Tax Tribunal, Nov. 25, 2014). To access our article about that case, click here.

[2] For a copy of that final consent order, click here. It is worth noting that although the original ruling only addressed the Texas Franchise Tax, the adjustment computation in the final consent order takes into account both the Texas Franchise Tax and the District of Columbia Franchise Tax.

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 this matter.