Georgia Enacts PTE Tax Election as Workaround to $10K SALT Cap

May 2021

BY

Tony Manners, Principal, State and Local Tax

Georgia enacted H.B. 149 on May 4, 2021, becoming another state to give pass-through entities (PTEs) the option to be taxed at the entity level, in an effort to help individual residents avoid the federal $10,000 SALT cap that was included in the 2017 Tax Cuts and Jobs Act. Georgia’s new PTE elective tax is applicable to tax years beginning on or after January 1, 2022.
 

Impact on PTEs Making the Election

S corporations and partnerships are eligible to make the election. However, only PTEs that are 100% directly owned by persons eligible to be shareholders of an S corporation under IRC Section 1361 are eligible to make the election—PTEs with corporate members are precluded from making the election.
 
The election to be taxed as a PTE is irrevocable, and it must be made annually by the due date for filing the corporate or partnership return, including any extensions (which is more taxpayer friendly than other states that usually require the election to made by the original due date for the return).
 
Electing S corporations will continue to calculate and apportion their net income using Georgia’s corporate income tax rules. Likewise, electing partnerships will continue to calculate and apportion their net income using Georgia’s partnership tax rules. However, electing PTEs are not allowed deductions for other net income or gross receipts taxes paid to other states, nor are they entitled to any credit for taxes paid to other states under Georgia’s reciprocity provision.
 
The tax rate for electing PTEs is 5.75%, which is Georgia’s current corporate income tax rate.
 
Under the new law, electing S corporations and electing partnerships are considered “corporations” for estimated income tax purposes. Georgia’s rules currently require estimated payments if the entity’s net income for the taxable year can reasonably be expected to exceed $25,000.
 
The new law also removes the withholding requirement on nonresident members by electing PTEs.
 

Impact on Individual Owners of PTEs Making the Election

Members of electing PTEs will not recognize their respective distributive share of income from the electing PTE. However, the new law restricts resident individuals from adjusting their adjusted gross income for taxes paid to other states that impose tax on PTEs, like Texas and Tennessee. Further, resident members of electing PTEs cannot take credits for other state income taxes paid at the entity level.