Georgia enacts sweeping tax law changes

The 2021 Georgia legislative session produced sweeping changes to personal and business income taxes on a variety of fronts. In addition to Georgia’s annual effort to conform its income taxes to recent changes in the Internal Revenue Code (IRC), the state has created an elective pass-through entity (PTE) tax regime, adopted a policy directing courts and the Georgia Tax Tribunal to eschew deference to decisions and interpretations by the Georgia Department of Revenue, and enhanced, renewed and restated several credit programs.¹

IRC conformity

For tax years beginning on or after Jan. 1, 2020, House Bill 265 updates Georgia’s tax statute to conform to changes made to the IRC through Jan. 1, 2021.² This conformity update did not include any addition or removal of legacy decoupling provisions addressing federal tax provisions including bonus depreciation, interest expense limitation and net operating loss carrybacks.

Based on the update in conformity to the IRC, Georgia now conforms to both the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Consolidated Appropriations Act (CAA).³ As a result, cancellation of indebtedness income resulting from a loan forgiven under the Paycheck Protection Program (PPP) is exempt from the Georgia corporate income tax and the personal income tax to the same extent as for federal purposes. For businesses, both loans forgiven under the PPP and amounts used to pay qualifying expenses are excluded from the calculation of Georgia taxable income.

Georgia elective PTE tax regime

With the enactment of House Bill 149, Georgia joins many other states providing for an optional PTE tax for flow-through entities. For tax years beginning on or after Jan. 1, 2022, S corporations and partnerships may make an annual irrevocable election to be taxed at the entity level on or before the due date of the return, including extensions.⁴ The electing entity will pay a 5.75% tax on its Georgia taxable income under current rules, less any deduction for income and gross receipts taxes.⁵ The legislation provides that resident partners and shareholders of electing entities are not permitted a credit for taxes paid under the new PTE tax.⁶ Instead, the income that is taxed under the PTE tax is excluded from the calculation of taxable net income for the individuals.⁷

Administrative deference

Senate Bill 185 significantly alters state tax litigation matters by reducing the amount of deference afforded to decisions and interpretations by the Department. The legislation provides that “all questions of law decided by a court or the Georgia Tax Tribunal on matters arising from the state board of equalization and matters arising from refunds and appeals of state administration of Title 48 be decided without deference to determinations or interpretations of the Department of Revenue except without any effect on the judicial standard of deference.”⁸ The text specifically mentions deference regardless of whether the Department’s guidance is written or unwritten. Similar language was added to matters relating to refunds, appeals, payments, and bonds, as well as the conduct of trials, evidence, and recordings.⁹ The legislation was effective April 29, 2021, and applies only to proceedings commenced on or after such date.

Individual income tax considerations

House Bill 593, the Tax Relief Act of 2021, revises the standard deductions applicable to tax years beginning on or after Jan. 1, 2022.¹⁰ The legislation increases the standard deductions from $4,600 to $5,400 for single or head of household filers, from $3,000 to $3,550 for married taxpayers filing separately, and from $6,000 to $7,100 for married taxpayers filing jointly.¹¹

House Bill 114 revises the Georgia Code relating to the tax credit for adoption of foster children for the 2021 tax year and thereafter. The bill increases the amount from $2,000 to $6,000 per qualified foster child per year for the first five years beginning in the year in which the adoption becomes final.¹² An additional $2,000 credit per taxable year is available thereafter until the child reaches the age of 18.¹³

Property tax considerations

House Bill 451 provided a very brief, yet significant opportunity for taxpayers utilizing the freeport exemption to determine the amount based on the current or prior year fair market value. The bill allows for a freeport exemption for those who claimed an exemption to finished goods inventory in 2020 to apply for their 2021 exemption based on fair market value as of either Jan. 1, 2020, or Jan. 1, 2021.¹⁴ Taxpayers were required to file an Application For Freeport Inventory Exemption (PT50PF) to obtain the benefit, ranging from 50% to 100% depending upon the date on which the application was made. This opportunity expired on June 1, 2021, less than four weeks after House Bill 451 was signed.¹⁵

Credits and incentives

Tax Credit Return on Investment Act of 2021

As part of Senate Bill 6, the Tax Credit Return on Investment Act of 2021 allows for the chairperson of the Georgia House Ways and Means Committee and the Chairperson of the Georgia Senate Finance Committee to each annually request up to five economic analyses performed by independent auditors. The scope will be limited to a single provision of law, credit, rebate, abatement, or preferential tax rate to determine the effect on the current state budget and state economy.¹⁶

Georgia Economic Renewal Act of 2021

As part of Senate Bill 6, the Georgia Economic Renewal Act of 2021 allows for pharmaceutical and medicine manufacturers to claim an additional $1,250 per job tax credit effective July 1, 2021 for tax years beginning or after Jan. 1, 2021.¹⁷ Qualifying establishments must be classified under the North American Industry Classification System (NAICS) as either Industry Code 3391 (Medical Equipment and Supplies Manufacturing) or 3254 (Pharmaceutical and Medicine Manufacturing).¹⁸ Only jobs engaged in the qualifying activities are eligible for the enhanced credit.¹⁹

The credit is claimed separately from the jobs tax credit, and can be used to offset 100% of the taxpayer’s income tax liability.²⁰ If the business operates in an approved zone or county, any excess can be taken as a credit against a taxpayer’s employee withholding taxes.²¹ Any unused credit can be carried forward for 10 years.²² This enhanced credit specifically excludes qualifying establishments taking the enhanced credit for the manufacture of personal protective equipment.²³

Additionally, the Act created special credit opportunities for “high-impact aerospace defense projects” available to defense contractors with more than 40% of revenues from the U.S. government and certified by the Commissioner of Economic Development.²⁴ The entity can qualify for the credit with a minimum investment of $500 million in the state and continued employment of 1,000 full time employees. This is below the normal qualified project threshold of $800 million and 1,800 employees for projects certified on or after July 1, 2021.²⁵ The maximum amount of the credit for these types of projects is $100 million, versus $50 million for a normal qualified project.²⁶

Finally, the Act extends certain credits available to Class III railroads through Dec. 30, 2026, and extends the Class III railroad’s ability to assign unused credits until Jan. 1, 2027.²⁷

Georgia Economic Recovery Act of 2021

Senate Bill 6 also created the Georgia Economic Recovery Act of 2021. In part, this Act extends or reinstates a number of sales and use tax abatements, including:

• The sales and use tax abatements for competitive major construction projects of regional significance to June 30, 2023, as this provision was set to expire June 30, 2021.²⁸
• Sales of tickets, fees or charges for the admission to a fine arts performance/exhibition, through Dec. 31, 2022.²⁹
• Charges for maintenance and replacement of machinery and equipment associated with construction, except the motor fuel used by a concrete mixer truck, through June 30, 2026.³⁰

The Act also clarifies or amends the following additional credit opportunities, effective July 1, 2021:

• Sets a repeal date of Dec. 31, 2022, for the total amount of tax credits that can be generated for the rehabilitation of historic properties. Prior to Jan. 1, 2022, the limit is set at $25 million per year. In 2022, the limit is set at $5 million for projects earning $300,000 or less, and $25 million for projects earning more than $300,000, and on or after Jan. 1, 2023, no new credits will be issued.³¹
• Amends the definition of a “business enterprise” for purposes of the research and development (R&D) credit, to limit the exclusion for retail business for any business, including the headquarters of a business, to clarify that the retail activities of an affiliate do not cause a qualifying affiliate to be precluded from taking the R&D credit.³²
• Amends the definition of a high-tax technology company by reference of 2017 NAICS codes with changes to the qualifying NAICS codes.³³
• Adds reporting requirements, 90 days from the end of the calendar year, for companies that have been issued a certificate of exemption qualifying under the high-technology definition. This reporting is required to include a listing of the facilities for which the exemption was used as well as the amount of taxes exempted. A certificate of exemption for the succeeding calendar year will not be issued to any qualifying company that fails to comply with the reporting requirements.³⁴
• Repeals the high-technology company sales tax exemption as of June 30, 2023.³⁵

Atlanta Urban Enterprise Zone Act

House Bill 757 amends the Atlanta Urban Enterprise Zone Act of 1988 by offering special tax abatements allowed to the City of Atlanta within specially designated urban enterprise zones. Qualifying businesses and service enterprises within these zones are exempt from county and municipal ad valorem property taxes on the following schedule, as long as the enterprise upholds the agreed-upon minimum standards: 100% of the property tax for the first five years; 80% for years six and seven; 60% for year eight; 40% for year nine; and 20% for year ten.³⁶

Such zones are determined by special council, or delegated to the city to determine, on the basis of three of the five following criteria:

1. Pervasive poverty, as determined by United States Bureau of Census data
2. Unemployment is at least 10% higher than the state average as defined by the Georgia Department of Labor, or evidence of adverse economic conditions
3. General distress as generally defined by abandoned structures, higher crime, and population decline
4. Underdevelopment as defined by the lack of business licenses, building permits, and other developmental indicators
5. “General blight,” if any portion of the area is already an urban redevelopment area³⁷

Urban enterprise zones may be established for up to 10 years from the point of adoption by the city council and the city may enter into special agreements with businesses within such zones.³⁸

Commentary

While much of the enacted legislation discussed above provides welcome relief to taxpayers, some provisions require additional review and may result in traps for the unwary. The updated IRC conformity, providing assurance on Georgia’s conformity to federal PPP treatment, the increased individual standard deduction, and the codification of limitation administrative deference provided to the Department all are seen as beneficial to taxpayers.

The Georgia elective pass-through entity tax legislation allows taxpayers that own PTE interests an opportunity to circumvent the federal Tax Cuts and Jobs Act’s $10,000 cap on the state and local tax deduction for individuals. While PTE tax is imposed on apportioned income and the distributive share of income from the PTE is no longer subject to the Georgia income tax provisions, taxpayers should carefully model how this impacts the overall tax posture of the PTE’s owners.

Finally, there are extensive changes, enhancements and additions to the credits and incentives provided in the enacted legislation. Taxpayers currently taking the high-technology company sales tax exemption should quickly review the updated NAICS codes to ensure they continue to be designated as qualified, and watch closely for the updated reporting requirements that will need to be completed in early 2022. Taxpayers who previously did not take the Georgia R&D credit due to the limitation on retailers should review the new clarification for qualification where an affiliate is in retailing. The potential to convert the Georgia R&D credit to a payroll withholding tax offset (from a business income tax) provides opportunities for companies operating in a loss to monetize credits in the current period.

1 H.B. 114; H.B. 149; H.B. 265; H.B. 451; H.B. 593; H.B. 757; S.B. 6; S.B. 185, Laws 2021.
2 H.B. 265, § 1, amending GA. CODE ANN. § 48-1-2 (14).
3 P.L. 116-136 (2020); P.L. 116-260 (2020).
4 H.B. 149, §§ 1, 2, 7, adding GA. CODE ANN. §§ 48-7-21(b)(7)(C)(i); 48-7-23(b)(2).
5 H.B. 149, §§ 1, 2, 7, adding GA. CODE ANN. §§ 48-7-21(b)(7)(C)(ii), (v); 48-7-23(b)(3), (6).
6 H.B. 149, §§ 1, 2, 7, adding GA. CODE ANN. §§ 48-7-21(b)(7)(C)(iii); 48-7-23(b)(4).
7 H.B. 149, § 4, adding GA. CODE ANN. § 48-7-27(b)(16).
8 S.B. 185, § 1, amending GA. CODE ANN. § 48-2-18(c).
9 S.B. 185, §§ 2-4, amending GA. CODE ANN. §§ 48-2-35(7); 48-2-59(e); 50-13A-14(a).
10 H.B. 593, §§ 1-3, amending GA. CODE ANN. § 48-7-27(1)(A)-(C).
11 H.B. 593, § 2, amending GA. CODE ANN. § 48-7-27(1)(A)-(C).
12 H.B. 114, § 1, amending GA. CODE ANN. § 48-7-29.15(b).
13 H.B. 114, § 2.
14 H.B. 451, § 1, adding GA. CODE ANN. § 48-5-48.1(f).
15 See GA. CODE ANN. § 48-5-48.1(c)(2)(B).
16 S.B. 6, § 1-2, adding GA. CODE ANN. § 28-5-41.1.
17 S.B. 6, § 2-1, adding GA. CODE ANN. § 48-7-40.1B(b)(1).
18 S.B. 6, § 2-1, adding GA. CODE ANN. § 48-7-40.1B(a)(2), (3).
19 S.B. 6, § 2-1, adding GA. CODE ANN. § 48-7-40.1B(b)(1).
20 S.B. 6, § 2-1, adding GA. CODE ANN. § 48-7-40.1B(b)(2).
21 Id.
22 S.B. 6, § 2-1, adding GA. CODE ANN. § 48-7-40.1B(c)(1).
23 S.B. 6, § 2-2, adding GA. CODE ANN. § 48-7-40.1A.
24 S.B. 6, § 2-4, adding GA. CODE ANN. § 48-7-40.25(a)(4.1).
25 S.B. 6, § 2-4, adding GA. CODE ANN. § 48-7-40.25(a)(5), (6). Note that GA. CODE ANN. § 48-7-40.25(b)(1)(C) clarifies that the reduced threshold does not apply to businesses that have operated an existing manufacturing facility for the immediately preceding three years in Georgia.
26 S.B. 6, § 2-4, adding GA. CODE ANN. § 48-7-40.25(f)(2).
27 S.B. 6, § 4-1, amending GA. CODE ANN. § 48-7-40.34(c)(2), (e).
28 S.B. 6, § 5-1, amending GA. CODE ANN. § 48-8-3(93)(A), (B).
29 S.B. 6, § 5-2, amending GA. CODE ANN. § 48-8-3(100)(A)-(C).
30 S.B. 6, § 5-3, amending GA. CODE ANN. § 48-8-3.2(12)(e).
31 S.B. 6, § 6-1, amending GA. CODE ANN. § 48-7-29.8(c)(3)(A-C); adding GA. CODE ANN. § 48-7-29.8(n).
32 S.B. 6, § 6-1, amending GA. CODE ANN. § 48-7-40.12(a)(3).
33 S.B. 6, § 7-2, amending GA. CODE ANN. § 48-8-3(68)(A). Note that qualifying NAICS codes as of July 1, 2021 include 334413, 334614, 511210, 517311, 517312, 517410, 517911, 517919, 518210, 522320, 541330, 541511, 541512, 541513, 541519, 541713, 541715, or 541720.
34 S.B. 6, § 7-2, adding GA. CODE ANN. § 48-8-3(68)(E).
35 S.B. 6, § 7-2, adding GA. CODE ANN. § 48-8-3(68)(G).
36 H.B. 757, § 7.
37 H.B. 757, § 6.
38 H.B. 757, § 8.

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