March 6, 2018
Georgia enacts corporate and individual income tax changes
On March 2, 2018, Georgia Governor signed into law HB 918, a tax bill containing corporate and individual income tax changes (hereafter, "the law"). Notably the law temporarily reduces both the corporate and individual income tax rates, updates the state's date of conformity to the Internal Revenue Code (IRC) while decoupling from certain changes made by the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA), and addresses Georgia's conformity to certain international tax law changes under the TCJA.
Below is a summary of the changes.
Temporary corporate and individual income tax rate reductions
The law temporarily reduces both the corporate and the highest individual income tax rates. Applicable to tax years beginning on or after January 1, 2019, the corporate income tax rate and the highest individual income tax rate, both currently 6%, decrease to 5.75%. Applicable to tax years beginning on or after January 1, 2020, the corporate and the highest individual income tax rates further decrease to 5.5%, if the legislature approves, and the governor signs, a joint resolution ratifying this additional rate reduction.
These reductions are temporary and will sunset on December 31, 2025. On January 1, 2026, the corporate and the highest individual income tax rates will revert back to the 6% rate — the rate in effect on the day before the law was enacted.
Effective for taxpayer years beginning on or after January 1, 2017, the law updates Georgia's IRC conformity date to February 9, 2018, with some very important exceptions. Thus, Georgia generally conforms to the changes to the IRC made by the TCJA and the Bipartisan Budget Act of 2018 (P.L. 115-123) (BBA), unless otherwise noted. Georgia tax law, however, will continue to decouple from bonus depreciation and will decouple from the increased expensing under IRC Section 179. It also has not adopted the new 30% business interest expense limitations under IRC Section 163(j) as amended by the TCJA by, interestingly, conforming to that subsection of the IRC as it existed on December 21, 2017 (the day before enactment of the TCJA). Consistent with the state's determination to decouple from the IRC Section 163(j) provisions, the law expressly decouples the Georgia tax laws from the new TCJA provisions adding IRC Section 381(c)(20), 382(d)(3) and 382(k)(1), which are related to the carryover of disallowed interest under the new IRC Section 163(j), as well as the imposition of an annual valuation limitation upon a change of ownership of the entity holding such a carryover. Likewise, IRC Section 118, which deals with capital contributions and relates to changes in the way taxpayers account for governmental credits and incentives in their bases, is treated as it was in effect before the 2017 enactment of the TCJA (in other words, for Georgia purposes, taxpayers continue to get the full benefit of credits and incentives as under prior federal law).
Further, federal changes that were enacted as of February 9, 2018, but were not yet effective, will take effect for Georgia tax purposes on the same date they take effect for federal tax purposes.
GILTI, FDII, foreign dividend received deduction, IRC Section 965 deemed repatriation and restructuring of NOLs carryovers and utilizations
Applicable to tax years beginning on or after January 1, 2017, Ga. Code Section 48-7-21(8)(A) is amended to provide that, when subtracting dividends received from taxable income, dividends received form sources outside the US will not include income specified in IRC Section 951A (i.e., global intangible low-taxed income (or GILTI)). The associated deduction provided for GILTI-includable amounts in federal taxable income, as well as the special deduction for "foreign derived intangible income" (FDII) contained in IRC Section 250, applies to the extent the same income was included in Georgia taxable net income. In effect, income included under IRC Section 951A is subject to tax. Further, deductions, exclusions or subtractions provided by IRC Section 245A (the new 100% federal dividend received deduction for dividends from foreign subsidiaries), 965 (the so-called one-time federal transition tax on the accumulated earnings of foreign subsidiaries), or any other section of the IRC do not apply to the extent the related income has been subtracted under Ga. Code Section 48-7-21(8)(A). These changes apply to all tax years beginning on or after January 1, 2017.
Also applicable to tax years beginning on or after January 1, 2017, Ga. Code Section 48-7-21(10.1)(A) is amended to allow a Georgia net operation loss (NOL) carryback to a year in which such carryback is allowed by the IRC. Any federal limit on NOL carryforwards, including the new 80% limitation under the TCJA, will apply equally for Georgia income tax purposes. (Note, these changes to the NOL provisions will also apply for Georgia individual income tax purposes.)
The law makes other income tax changes, including the following:
— Temporarily doubles the Georgia standard deduction for individuals to $4,600 for single and head of household filers; $3,000 for married filers filing separately; and $6,000 for married filers filing jointly (applies to tax years beginning on and after January 1, 2018, and expires on December 31, 2025)
— Provides that the recipient of certain assigned tax credits is eligible to take the credit against monthly and quarterly payments due under Ga. Code Section 48-7-103 (applicable to credits assigned in tax years beginning on or after January 1, 2018)
— Provides that the sale, merger, acquisition or bankruptcy of a taxpayers does not create a new eligibility for the succeeding transferee, but unused credits eligible to be applied against income tax liability may be transferred to the transferee, who can then apply the credits against its income tax liability (applies to such events occurring in tax years beginning on and after January 1, 2018)
Georgia adopts changes to the IRC made by the TCJA and the BBA but with many important exceptions that essentially decouple Georgia from the federal treatment as previously described. Thus, taxpayers should understand these federal/Georgia differences, review these changes and determine how they affect their Georgia taxable income. Further, taxpayers should keep in mind that certain changes (e.g., IRC conformity, decoupling, GILTI, FDII, dividends, NOLs) are permanent, while the rate changes still require further future legislative action and, unless expressly extended, are temporary (consistent with many of the aspects of the TCJA).