Georgia enacts tax reform legislation

Contacts:

Mark Arrigo
Atlanta
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Veronica Caputo
Atlanta
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Affan Qureshi
Atlanta
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Tom Coley
Charlotte
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
Chicago
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Lori Stolly
Cincinnati
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Priya D. Nair
Washington, DC
T +1 202 521 1546 On March 2, 2018, Georgia Governor Nathan Deal signed into law Act 284 enacting several notable tax changes.¹ Act 284 lowers both the personal and corporate income tax rates for a seven-year period and doubles the standard deduction for an eight-year period. The legislation updates the Georgia conformity date to the Internal Revenue Code (IRC), with certain exceptions, in order to adopt portions of the recent Tax Cuts and Jobs Act (TCJA) enacted by the federal government late last year.² Finally, Act 284 revises provisions relating to assignment of corporate income tax credits. Shortly thereafter, on March 26, 2018, Governor Deal signed Act 292, further refining Georgia’s treatment of IRC Sec. 951A income and repealing certain credits.³

Income Tax Rate Reduction Act 284 temporarily reduces the top income tax rates from 6 percent to 5.75 percent for both individuals and corporations.⁴ The rate impacts Georgia taxable income for individuals with income over $7,000 for single filers, $5,000 for married filing separately filers, and $10,000 for head of household and married filing jointly filers.⁵ The 5.75 percent rate will be effective for tax years beginning on or after January 1, 2019, and expires on the last moment of December 31, 2025.⁶

The legislation also provides for the top rate to be further reduced to 5.5 percent if the General Assembly and the Governor provide further approval.⁷ If approved, the 5.5 percent rate will be effective for tax years beginning on or after January 1, 2020, and expire on the last moment of December 31, 2025.⁸

Standard Deduction In addition to the temporary rate reduction, Act 284 temporarily doubles the standard deduction for all personal income tax returns. The new standard deduction will be as follows: single and head of household filers, $4,600; married filing separately filers, $3,000; and married filing jointly filers, $6,000.⁹ The increased standard deduction begins for tax years beginning on or after January 1, 2018 and will revert back to the prior amounts on the last moment of December 31, 2025.¹⁰

IRC Conformity One of the main features of this legislation is general conformity to the IRC enacted as of February 9, 2018 for taxable years beginning on or after January 1, 2017.¹¹ As discussed below, while Georgia conforms to many of the new provisions of the TCJA, there are some notable exceptions, including the provisions under IRC Secs. 118, 163(j) and 382(k).¹² Georgia will continue to conform to the pre-TCJA version of these provisions.

     IRC Sec. 118 – Contributions of Capital Act 284 specifically decouples from the TCJA changes to the taxation of contributions of capital.¹³ Therefore, Georgia will not require a contribution by a governmental entity or civic group to be included in gross income.¹⁴

     IRC Sec. 162(m) – Executive Compensation Georgia conforms to the expanded limitations on the deductibility of executive compensation.¹⁵

     IRC Sec. 163(j) – Interest Expense Limitation Act 284 specifically conforms to IRC Sec. 163(j) prior to the changes incorporated by the TCJA. ¹⁶ Therefore, Georgia does not currently conform to the new interest expense limitation based upon 30 percent of adjusted taxable income. This represents a significant change from the language contained in H.B. 821, the first draft of the IRC conformity bill, in which Georgia had included conformity with the TCJA interest disallowance provisions.

     IRC Sec. 168(k) – Bonus Depreciation Consistent with prior iterations of IRC Sec. 168(k), Georgia has not conformed to the TCJA’s expanded expensing provisions permitting 100 percent expensing of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.¹⁷

     IRC Sec. 172 – Net Operating Losses Georgia will conform to the prospective net operating loss (NOL) limitations imposed by tax reform.¹⁸ On a prospective basis, Georgia will limit the deductibility of NOLs generated on or after January 1, 2018 to 80 percent of the Georgia taxable income.¹⁹ Additionally, as Georgia conforms to the federal carryback and carryforward periods, Georgia will conform to the elimination of the two-year carryback and unlimited carryforward provisions.²⁰

     IRC Sec. 179 – Building Improvement Deduction Georgia conforms to the expansion of IRC Sec. 179, which increases the maximum deduction to $1 million for property placed in service after December 31, 2017.²¹ Also, Georgia conforms to the increase in the phase-out threshold of the deduction to $2.5 million.²² However, Georgia does not conform to the TCJA changes concerning qualified real property.²³

     Foreign Income Provisions The TCJA modified and added a number of provisions to the IRC that impact multinational taxpayers, effectively changing the U.S. tax system from a worldwide territorial system to a quasi-territorial system. As part of this change, the TCJA created a 100 percent dividends received deduction (DRD) for foreign sourced dividends received from 10 percent-or-more owned foreign corporations.²⁴ Under IRC Sec. 965, the transition to the quasi-worldwide territorial system subjects repatriated foreign earnings to a one-time transition tax at 15.5 percent or 8 percent depending on the type of asset.²⁵ IRC Sec. 250 was added to provide a deduction equal to 37.5 percent of a domestic corporate taxpayer’s foreign derived intangible income (FDII) for tax years beginning after 2017.²⁶ As part of the TCJA’s effort to create a more territorial regime of taxation, it added IRC Sec. 951A that creates a new class of income, Global Intangible Low-Taxed Income (GILTI), recognized by U.S. shareholders of controlled foreign corporations for tax years beginning after 2017.²⁷

As Georgia taxable net income begins with taxable income as defined by the IRC, and the law did not specifically decouple from inclusion of the IRC Secs. 951A and 965 income amounts, the income from these provisions would be includible in the Georgia income tax base.²⁸ However, through Acts 284 and 292, Georgia modified the dividends received subtraction to provide:



The amounts subtracted include Subpart F income, including income specified in IRC Sec. 951A (GILTI).³⁰

     IRC Sec. 245A – Foreign Dividend Received Deduction As Georgia does not specifically decouple from IRC Sec. 245A, it conforms to the new DRD for foreign-sourced dividends. However, Act 284 clarifies that corporations do not receive a secondary DRD for this foreign dividend under the provisions of Ga. Code Ann. Sec. 48-7-21(b)(8)(A).

     IRC Sec. 965 – Repatriation Because Georgia does not specifically decouple from IRC Sec. 965, it conforms to the deemed repatriation inclusion amount. However, there is a full DRD for dividends arising from IRC Sec. 965. As a result, repatriated income under IRC Sec. 965 is not taxed in Georgia. However, Act 284 clarifies that corporations do not receive a secondary DRD for foreign income excluded under IRC Sec. 965(c) by precluding a duplicative deduction under Ga. Code Ann. Sec. 48-7-21(b)(8)(A).

     RC Sec. 250 – Foreign Derived Intangible Income (FDII) Pursuant to Act 284, a taxpayer will be allowed to take the FDII deduction to the extent that the related income is taken into account in determining Georgia taxable income.³¹

     IRC Sec. 951A – Global Intangible Low-Taxed Income (GILTI) Act 284 originally excluded GILTI from the dividends received subtraction. However, Act 292 deleted this provision and added a subtraction for GILTI.³²

Changes to the Assignment of Credits A Georgia statute affords a taxpayer the ability to assign corporate income tax credits to other affiliates in certain circumstances.³³ Under Act 284, recipients of these credits are now eligible to take any credit against payments due, subject to the same requirements as the assignor of the credit at the time of the assignment.³⁴ The sale, merger, acquisition, or bankruptcy of any taxpayer will not create a new eligibility for the succeeding transferee if any of these events takes place, and any unused credits can be transferred and used.³⁵

Repeal of Credits Act 292 also repeals the following tax credits on December 31, 2018:

• Income tax credits for federal qualified transportation fringe benefits;³⁶
• Income tax credits for private driver education courses;³⁷ and
• Income tax credits for diesel particulate emission reduction technology equipment.³⁸

Commentary Acts 284 and 292 bring many changes to Georgia tax law due to the major federal tax reform legislation enacted in late 2017. Georgia’s piecemeal approach to the changes is interesting and perhaps more favorable to corporate taxpayers than originally expected, particularly in the areas of foreign income and the new interest limitations, along with decreases in the corporate income tax rate and the top rate for individual income taxes. This measured approach continues to highlight the trend of each state considering these issues independently of one another, with some states simply updating their conformity dates to the IRC without additional modification, and other states making substantial modifications along with a conformity update with highly variable results for taxpayers.

At the same time, Acts 284 and 292 did not address certain issues that will likely need to be addressed in the future. For example, H.B. 821, the first draft of what eventually became Act 284, stated that each corporation’s taxable income would have to be calculated as if it “had filed a separate federal tax return.” Such language made it clear that the interest deduction, NOL deduction, and other deductions would be calculated on a separate entity basis. Since these deductions are likely to be calculated on a consolidated basis at the federal level in most instances, the state treatment of such items could be uncertain until addressed by the Georgia legislature.

In addition, the corporate tax rate changes will result in some immediate consequences from an ASC 740 perspective, requiring taxpayers to reflect the temporary 5.75 percent tax rate in their deferred tax calculations. To the extent that a further temporary reduction in the tax rate to 5.5 percent is adopted by Georgia in the future, additional ASC 740 modifications will need to be made.

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1 Act 284 (H.B. 918), Laws 2018. It should be noted that H.B. 821 was the original bill for tax changes in Georgia, but the bill was later substituted with H.B. 918.
2 H.R. 1, commonly referred to as the “Tax Cuts and Jobs Act” (P.L. 115-97)
3 Act 292 (S.B. 328), Laws 2018.
4 GA. CODE ANN. §§ 48-7-20(b)(1); 48-7-21(a).
5 GA. CODE ANN. § 48-7-20(b)(1).
6 GA. CODE ANN. §§ 48-7-20(b)(1); 48-7-21(a
7 Id.
8 Id.
9 GA. CODE ANN. § 48-7-27(a)(1).
10 Id.
11 GA. CODE ANN. § 48-1-2(14).
12 Id.
13 Id.
14 IRC § 118(b)(2)
15 GA. CODE ANN. § 48-1-2(14). Under IRC § 162(m), the TCJA expanded the definition of “covered employee” to include any individual who served as the CEO or CFO at any time during the taxable year rather than just as of the last day of the year. The next three highest-paid officers serving at the end of the taxable year continue to be covered employees. Any individual who is a covered employee in taxable years beginning after December 31, 2016, is a covered employee for all future years, including years after the employee terminates employment or dies. As a result, the $1 million limit applies to compensation paid to the covered employee or a beneficiary after termination of employment or death. In addition, the TCJA repealed the exclusion of commissions and qualified performance-based compensation from the $1 million deduction limit. As a result, the $1 million limit applies to all of a covered employee’s compensation (with limited exceptions) otherwise deductible by the corporation in a taxable year.
16 GA. CODE ANN. § 48-1-2(14).
17 Id.
18 IRC § 172(b)(1)(A)(i).
19 GA. CODE ANN. § 48-7-21(b)(10.1)(A).
20 GA. CODE ANN. § 48-7-21(b)(10.1)(B)
21 GA. CODE ANN. § 48-1-2(14)
22 For the 2017 tax year, the deduction is limited to $510,000 and the phase-out is $2,030,000 for both federal and Georgia purposes.
23 Georgia expressly decouples from IRC § 179(d)(1)(B)(ii), (f).
24 IRC § 245A. Domestic corporations must hold the foreign stock for 365 days to be eligible for the DRD. IRC § 246(c)(5).
25 IRC § 965. The transition tax is imposed by using the Subpart F rules to require applicable U.S. shareholders to include their pro rata share of post-1986 earnings and profits (E&P) in income to the extent such E&P has not been previously subject to U.S. tax. The income included in federal taxable income is reduced utilizing an exclusion provision in IRC § 965(c)
26 IRC § 250. FDII is broadly defined to include income received from the sale of property for foreign use or services rendered to persons outside the U.S. While GILTI is taxed at regular rates, IRC § 250 allows a deduction of 50 percent of the amount included in income (this amount drops to 37.5 percent for tax years beginning after 2025). IRC § 250(a)(1)(B).
27 IRC § 951A. GILTI is the excess of the aggregated “tested income” over a routine return on certain tangible assets.
28 GA. CODE ANN. § 48-7-21(a).
29 GA. CODE ANN. § 48-7-21(b)(8)(A).
30 Id.
31 GA. CODE ANN. § 48-7-21(b)(8)(A).
32 Id.
33 GA. CODE ANN. § 48-7-42(b).
34 GA. CODE ANN § 48-7-42(c).
35 GA. CODE ANN. § 48-7-42(g).
36 GA. CODE ANN. § 48-7-29.3(e).
37 GA. CODE ANN. § 48-7-29.5(f).
38 GA. CODE ANN. § 48-7-40.19(e).

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