Georgia enacts legislation responding to federal tax reform

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March 2018

Overview

The Georgia General Assembly has enacted H.B. 918 (the Bill) updating conformity to the Internal Revenue Code (IRC), providing a reduction in corporate and individual income tax rates, and allowing greater flexibility in the transfer of Georgia tax credits.  The Bill substantially conforms to major provisions of Public Law 115-97, the 2017 tax reform reconciliation act, with the notable exception of IRC Section 163(j).  The Bill also explicitly provides that no deduction is allowed for global intangible low taxed income (GILTI), and prohibits taxpayers from potentially taking a second deduction for amounts deducted pursuant to IRC Sections 250, 245A, and 965(c).

The takeaway

While it may have some taxpayer-unfriendly aspects, the new Georgia legislation, on the whole, appears well thought out and taxpayer-favorable.  For example, the decision not to adopt the changes to IRC Section 163(j) was based, we understand, in large part on the State’s non-conformity to full expensing, and a recognition that the two provisions serve complementary purposes from a tax policy perspective.  Of course, many corporate taxpayers would have preferred the State allow a deduction for GILTI, or that it not conform to the federal limitations on NOL deductions.  At the same time, the fact that the Bill includes taxpayer-favorable measures, such as rate reductions and enhanced credit utilization provisions indicates that Georgia wanted to follow the federal government’s lead of enacting tax reform for purposes of overall tax reduction and economic growth, and not as a tax increase.

Readers of the legislation may at first glance believe Georgia is not conforming to IRC Sections 965, 245A, and 250.  However, a closer reading of the language indicates an intent to prevent a double deduction – once in the determination of the federal starting point, and again as a Georgia subtraction modification.

Taxpayers should be aware that Georgia requires an attribution of expenses directly related to foreign dividends that are deducted pursuant to Georgia’s subtraction modification.  Georgia auditors typically use 5% to 10% of the dividend income as a proxy for associated expenses.  This will be relevant to the portion of the IRC Section 965 income inclusion (i.e., the amount that is net of the IRC Section 965(c) deduction) that is deducted pursuant to the Georgia modification.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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