This article has been updated from its original version.

Georgia joins at least nine other states in passing a workaround to the $10,000 cap on state and local taxes for certain types of businesses. Enacted on May 4, 2021, House Bill 149 provides a way for pass-through entities to pay state tax at the entity level rather than through individual owners and partners, thus alleviating the $10,000 SALT cap put in place through the Tax Cuts and Jobs Act (TCJA).

SALT Cap Workaround in Georgia

House Bill 149, which was signed into law, creates a SALT cap workaround for Georgia partnerships and subchapter S corporations. The bill is designed to allow passthroughs to circumvent the TCJA’s $10,000 cap on the federal state and local tax deduction. The workaround applies for tax years beginning on or after January 1, 2022.

State income tax codes typically allocate business income from pass-through entities onto the owners’ individual income tax returns. Under the bill, the tax treatment of S corporation and partnership income would change to allow these entities to make an irrevocable election each year to pay the tax owed on the entity’s earned income at the entity level at a rate of 5.75%. An entity-level tax assesses a liability directly on the pass-through entity before the income passes to the owners much like a corporate income tax.

Owners of pass-through entities that make this election will not recognize their respective share of the portion of income on which tax was paid nor take any credit for taxes paid on their individual tax return. Therefore, the SALT cap workaround is not appropriate for every situation and business owners should discuss their intentions with a tax advisor prior to making an election.

Building on Previous Programs

The Department of the Treasury and the Internal Revenue Service (IRS) previously signaled their intention to bless this type of state workaround for the $10,000 SALT deduction cap as opposed to various state scholarship tax credits or other similar state tax credit programs, which did not pass muster. These programs offered taxpayers the opportunity to claim the donations as charitable deductions on their federal individual income tax return and receive a state tax credit on their state individual income tax return.

The Treasury and the IRS issued final regulations requiring taxpayers to reduce their charitable contribution deductions by the amount of any state or local tax credits they receive or expect to receive in return.

Georgia HB 149, which was widely endorsed by the CPA firms and the business community, passed the Senate on March 22, 2021, by a vote of 52 to 1; previously, it passed the House on February 23, 2021, by a vote of 167 to 0. Governor Kemp signed the bill into law on May 4, 2021.

Georgia joins several other states that have adopted a workaround to the cap. Similar workarounds have been adopted in Alabama, Arkansas, Connecticut, Idaho, Louisiana, Maryland, New Jersey, New York, Oklahoma, Rhode Island, Wisconsin. Other states are currently considering a workaround bill such as Arizona, California, Illinois, North Carolina and South Carolina.

Plan Ahead for SALT Strategies

For more information about Georgia’s potential new SALT cap workaround, please contact us.