Georgia Enacts Federal Income Tax Conformity Legislation

By Tim Clancy

The state of Georgia annually updates its conformity to the Internal Revenue Code (IRC) and specifically identifies provisions the state will not conform to.  With the recent Federal Tax Reform Act legislation that was enacted, the conformity bill in Georgia and other states has been of great interest to both corporate and individual taxpayers. On March 2, 2018 Governor Deal signed House Bill 918 that updates Georgia’s IRC conformity to February 8, 2018, with specified exceptions.  In addition, the state has increased the standard deduction and reduced the top personal and corporate tax bracket.  
    
Corporate and individual income tax rate reduction
 
For tax years beginning on or after January 1, 2019 and expiring on December 31, 2025 the top income tax rate for both corporations and individuals is reduced from 6% to 5.75%.  The income tax rate may be further reduced by the approval of the General Assembly and the governor in a future legislative session to 5.5% effective January 1, 2020 and expiring December 31, 2025.
 
Standard deduction for individuals doubled
 
For tax years beginning on or after January 1, 2018 and expiring December 31, 2025 the standard deduction for all Georgia taxpayers will be increased as follows:
 
  • Single taxpayers and head of household increased from $2,300 to $4,600;
  • Married filing separately increased from $1,500 to $3,000; and
  • Married filing jointly increased from $3,000 to $6,000
 
Losses
 
For losses incurred in taxable years ending on or after December 31, 2017, Georgia will conform to the new federal laws relating to:
 
  • No carryback of net operating losses;
  • Unlimited carryforward of net operating losses; 
  • 2-year carryback for farming losses; and
  • 2-year carryback and 20-year carryforward for certain insurance companies. 
 
Georgia will also follow the 80% limitation on the usage of NOLs for losses incurred in taxable years beginning on or after January 1, 2018.  The limitation will be based on Georgia taxable net income.  Like federal law, the state 80% limitation will not apply to certain insurance company NOLs.
 
Bonus Depreciation and §179 expensing deduction
 
The IRC now allows taxpayers 100% bonus depreciation in the year an asset is placed in service for property acquired and placed in service after September 27, 2017 and before January 1, 2023.  Georgia has continued to decouple from bonus depreciation under IRC §168(k) but has conformed to the increased IRC §179 deduction of $1 million as well as the $2.5 million phaseout that will be permitted for 2018.  Georgia has not, however, adopted the IRC §179 deduction for certainly real property (IRC §179(d)(1)(B)(ii) and IRC §179(f)).
 
Expanded limitation for deducting compensation
 
Georgia has conformed to the Federal Tax Reform Act expansion of the limitation of the deductibility of compensation paid to certain executive officers in excess of $1 million to also include additional types of employers and additional officers under IRC §162(m).  It also eliminates the exceptions for performance based compensation.

Certain foreign dividend income modification
 
Georgia taxpayers are currently permitted a subtraction modification from taxable income of foreign sourced dividends, such as Subpart F income, qualified electing fund income and income attributable to an increase in U.S. property by a CFC. 
 
The new Georgia legislation continues to allow a subtraction modification as stated above but specifically excludes global intangible low-taxed income (GILTI) under IRC §951A as an amount that can be deducted for Georgia income tax purposes. The conformity bill will, however, allow the deduction provided under IRC §250 to the extent the same income is included in Georgia taxable income.  IRC §250, in general, allows a deduction for 37.5% of foreign-derived intangible income (FDII) and 50% of GILTI.
 
Additionally, under the new federal law, deductions and/or subtractions are allowed under IRC §245A and IRC§965 for federal income tax purposes to arrive at federal taxable income (i.e. Federal 1120 line 30). However, since the state of Georgia already allows a subtraction modification for foreign source dividends and Subpart F income, the conformity bill will not allow an additional deduction from Georgia taxable income.  IRC §§ 245A and 965 both are related to deductions of foreign sourced dividends and Subpart F income.
  

Greater flexibility of use of Georgia corporate tax credits
 
Georgia previously allowed taxpayers to transfer credits to an affiliated company.  However, the recipient of the tax credits was limited to using the credits to offset their income tax liabilities.  Under the new law, the transferee will be eligible to use certain credits against withholding taxes or income taxes if the transferor was also eligible to utilize the credits to offset its withholding taxes.
 
IRC provisions not adopted by the state of Georgia
 
Georgia has not adopted the following IRC provisions:
  • Bonus depreciation rules, IRC §168(k)
  • 20% qualified business income deduction, IRC §199A.
  • 30% limitation on business interest (Georgia follows the provisions of IRC §163(j) that existed before enactment of federal Public Law 115-97).
  • Deferral of debt income from reacquisitions of business debt at a discount in 2009 and 2010 which is federally deferred for up to five years, then included ratably over five years, IRC §108(i).
  • Modified rules for high yield original issue discount obligations, IRC §163(e)(5)(F) and IRC §163(i)(1).
  • New York Liberty Zone Benefits, IRC §1400L.
  • 50% first year depreciation for post August 28, 2006 Gulf Opportunity Zone property, IRC §1400N(d)(1).
  • 50% bonus depreciation for most tangible property and computer software bought after May 4, 2007 and placed in service in the Kansas Disaster Area, IRC §1400N(d)(1).
  • 50% bonus depreciation for “qualified reuse and recycling property,” IRC §168(m).
  • 50% bonus depreciation in connection with disasters federally declared after 2007, IRC §168(n).
  • Increased ($8,000) first-year depreciation limit for passenger automobiles if the passenger automobile is “qualified property,” IRC §168(k).
  • For assets placed in service on or before December 31, 2017, 15 year straight-line cost recovery period for certain improvements to retail space, IRC §168(e)(3)(E)(ix), IRC §168(e)(8), and IRC §168(b)(3)(I).
  • For assets placed in service on or before December 31, 2017, modified rules relating to the 15 year straight-line cost recovery for qualified restaurant property (allowing buildings to now be included), IRC §168(e)(7).
  • Five-year depreciation life for most new farming machinery and equipment, IRC §168(e)(3)(B)(vii).
  • Special rules relating to Gulf Opportunity Zone public utility casualty losses, IRC §1400N(j).
  • Five-year carryback of NOLs attributable to Gulf Opportunity Zone losses, IRC §1400N(k).
  • Five-year carryback of NOLs incurred in the Kansas disaster area after May 3, 2007, IRC §1400N(k).
  • The election to deduct public utility property losses attributable to May 4, 2007 Kansas storms and tornadoes in the fifth tax year before the year of the loss, IRC §1400N(o).
  • Temporary tax relief provisions relating to the Midwestern disaster area, IRC §1400N(f) and IRC §1400N(k).
 
 
For more information on the Georgia legislation or any other state and local tax matter, please contact Tim Clancy at 678.510.2804.