Georgia Pass-Through Entities Now Allowed to Deduct State Income Tax at the Entity Level
Contributors
This article was originally published in the Fall 2022 issue of GACS Today, a publication of the Georgia Association of Convenience Stores.
On May 4, 2021, Governor Brian Kemp signed into law H.B. 149, which would allow pass-through entities in Georgia to pay state income taxes at the entity level and claim a full deduction (without regard to the $10,000 limit) on their federal tax return.
State and Local Tax Deductions
In 2017, Congress enacted the Tax Cuts and Jobs Act, limiting individual taxpayers to a maximum of $10,000 of state and local taxes as an itemized deduction (including state income and real property taxes) on their federal return. For many C-Store owners whose businesses are structured as pass-through entities, their state and local taxes exceed this $10,000 limit.
Pass-Through Entity Taxes
With the passage of H.B. 149, pass-through entities may elect to pay Georgia state income tax at the entity level at a rate of 5.75%. Eligible pass-through entities include S Corporations and most partnerships, including LLCs taxed as partnerships. This election will be available to pass-through entities beginning with the 2022 tax year and applies only to income apportioned to Georgia. For many C-store owners, this will reduce the taxable income passed through to their individual return and, therefore, their federal income tax liability. The election is not permanent, and entities may choose whether they would like to pay tax at the entity level each year. Once entities make the election, they cannot change it for that tax year.
Taxpayers who choose to make this election and pay Georgia income taxes at the entity level will not include their share of Georgia apportioned income from the pass-through entity on their personal state income tax return. The individual taxpayer’s personal Georgia income tax return will start with their federal adjusted gross income and deduct their respective share of the income apportioned to Georgia and taxed at the entity level.
For example, assume a pass-through entity which owns C-stores located in Georgia had $500,000 of taxable income in 2022. If the owner is an individual whose filing status is married filing jointly, the owner would owe approximately $150,000 in federal taxes and $28,750 in Georgia income taxes (total of $178,750) for the 2022 tax year as shown below:
| Federal Tax Liability: | |
| Pass-through Income Allocated to Owner | $500,000 |
| Federal Taxable Income | $500,000 |
| 30% | |
| Federal Tax Liability Paid Personally | $150,000 |
| Georgia Tax Liability: | |
| Georgia Taxable Income | $500,000 |
| 5.75% | |
| Georgia Tax Liability Paid Personally | $28,750 |
| Total Personal Tax Liability | $178,750 |
In this example, the individual has already met the $10,000 limitation on state taxes so none of the $28,750 in state income taxes is deductible.
Now assume that the individual makes the election to pay the state income taxes at the pass-through entity level. There would be no limitation on the state tax deduction at the business level. Therefore, the pass-through income that would be taxable to the owner at the federal level would be reduced by the state income taxes paid. The federal taxes due would now be $141,375 and the state taxes stay the same at $28,750 (total of $170,125). By making the election, the taxpayer saves $8,625.
| Federal Tax Liability: | |
| Pass-through Income Allocated to Owner | $471,250 |
| Federal Taxable Income | $471,250 |
| 30% | |
| Federal Tax Liability Paid Personally | $141,375 |
| Georgia Taxable Income | $500,000 |
| 5.75% | |
| Georgia Tax Liability Paid by Pass-through entity | $28,750 |
| Total Tax | $170,125 |
| Overall Tax Savings | $8,625 |
Many other states have also adopted similar regulations. If you are a C-store owner who operates in Georgia or across multiple states it is recommended that you consult a tax professional about how these new regulations could benefit you.
