The Tax Cuts and Jobs Act of 2017 imposed a cap of $10,000 on state and local taxes of individuals. For many small business owners of pass-through entities, state and local taxes can easily exceed the tax limit, holding them liable for steep tax responsibility. But, with the newly implemented H.B. 149 law implemented in Georgia in 2021, this may now be bypassed.
The H.B. 149, permits pass-through entities (PTE), such as partnerships and S corporations, to elect that their individual partners or shareholders be liable for tax payments, or that the entity is considered tax liable in itself. As such, Pass-through entities are now permitted to deduct state income tax in the capacity of the entity, which frees individuals tied to this entity of some of the tax liability, and in some cases offers partners or members some tax relief.
Understanding the pass-through entity tax election
Pass-through entity tax election is effective for businesses who want to explore this means of tax duty and is applicable from January 1, 2022. The entity will be liable for a 5.75% tax rate on its Georgia-apportioned income. It is important that businesses operating in more than one state understand that this tax lift for its members or partners, can only be considered for their liability in Georgia. This means that partners or members of PTEs that have elected to pay their own taxes will not need to recognize their Georgia income on their individual tax returns.
It is also important for partners and members of such entities to note that a business’s tax election status is not permanent. The entity may change and elect its tax status preference annually, but once an entity has chosen to be tax liable in its entity capacity, then it cannot change its tax status again for that year.
Qualifying criteria for pass-through entity tax election:
- The business must be either a partnership or S corporation
- The business must be 100% directly owned and controlled by persons eligible to be shareholders of an “S” corporation
- The business must not have a non-resident as a partner or member
There are a number of factors to consider when making a PTE tax election. Partners and members need to work with tax experts to ensure accurate and corresponding tax declarations to the IRS. Tax changes like these can be complex as there are a number of factors to consider which include apportionment calculations, accurate dates of expenses, and more. It is always advisable to consult with a tax expert when making changes to your tax profile.
At Fusion, our CPAs can help you navigate this change, and support you through the business and individual tax filing process.
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.