The Georgia Legislature has introduced its annual Internal Revenue Code (IRC) conformity bill—HB 821. Georgia conformity is typically updated annually to apply for the most recent tax year. In light of the recently enacted federal tax reform (the Federal Tax Reform Act), this year’s conformity bill will receive particular attention because of what tax reform provisions Georgia chooses to adopt and not to adopt. HB 821 would conform to several key federal tax reform changes, including the interest deduction limitation, NOL limitations, GILTI and FDII income treatment, and the expanded limitation of executive compensation deductions. On the other hand, HB 821 would not conform to the federal changes that make some state tax incentives taxable, expand bonus depreciation and cost-recovery provisions, and impose tax on the one-time deemed repatriation of certain foreign income.
One of the Federal Tax Reform Act’s major benefits is the change to federal bonus depreciation under IRC § 168(k), which allows for 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 traditionally decoupled from federal bonus depreciation and HB 821 would continue to decouple from IRC § 168(k), including the new 100% bonus depreciation.
Interest deduction limitation
The Federal Tax Reform Act limits interest deductions under IRC § 163(j). Generally, Georgia adopts the IRC, while enumerating specific exceptions to which it will not conform. HB 821 does not address the IRC § 163(j) interest deductions and therefore adopts the changes in the Federal Tax Reform Act.
The Federal Tax Reform Act limits the allowed deduction of interest paid or accrued to the net interest income plus 30% of the adjustable taxable income. Disallowed interest may be carried forward indefinitely. HB 821 would similarly restrict the deductibility of interest expenses from Georgia income. However, Georgia taxpayers will also have an unlimited interest expense carryover.
Eversheds Sutherland Observation: The federal limitation on interest expense should be viewed in conjunction with the 100% expensing provisions of the Federal Tax Reform Act, as the limit on interest expense deduction prevents taxpayers from benefitting by borrowing funds to purchase equipment and deducting both the full value of the equipment under § 168(k) and the interest expense under § 163(j). By continuing to decouple from bonus depreciation under § 168(k) but also conforming to the new interest expense limitations under § 163(j), HB 821 creates inconsistency.
Consolidated filers should take note of the provision in HB 821 that states that each corporation’s taxable income “shall be based upon the taxable income as if the corporation had filed a separate federal tax return,” making it appear that the interest deduction limitation will be based on separate company amounts for Georgia purposes.
The Federal Tax Reform Act imposes limitations on the use of net operating losses (NOLs) and eliminates NOL carrybacks. HB 821 clarifies Georgia’s conformity to these federal changes.
The Federal Tax Reform Act amended IRC § 172, which limits the federal NOL deduction such that losses generated in taxable years beginning after December 31, 2017, may only offset a maximum 80% of a taxpayer’s pre-NOL taxable income. HB 821 provides that the 80% limitation would be calculated with respect to Georgia taxable income. Combined with HB 821’s clarification that each corporation’s taxable income “shall be based upon the taxable income as if the corporation had filed a separate federal tax return,” this NOL limitation appears to be based on separate company amounts for Georgia purposes, regardless of whether a consolidated return is filed for federal purposes.
Expanded limitation of deductible compensation
The Federal Tax Reform Act expanded IRC § 162(m)’s prohibition on deducting compensation paid to certain executive officers in excess of $1 million to additional types of corporate employers and additional officers and eliminates exceptions for performance-based compensation. HB 821 would conform to the Tax Reform Act’s expanded limitation of deductible compensation.
Taxation of contributions to capital
HB 821 decouples from the Federal Tax Reform Act’s change to IRC § 118. Under that federal change, “any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such)” is no longer treated as “contributions to capital,” which are excluded from gross income. Since HB 821 does not follow these federal changes, taxpayers may be able to exclude such contributions when computing Georgia income tax.
The Federal Tax Reform Act provides for a one-time tax on the deemed repatriation of certain foreign income at preferential rates, and provides for a 100% dividend received deduction (DRD) for dividends from certain foreign businesses in future years. HB 821 would prevent Georgia taxpayers from taking the deductions resulting from IRC §§ 965 and 245A.
For federal purposes, the Federal Tax Reform Act amends IRC § 965 to create a transition tax to place a one-time tax on the deemed repatriation of certain deferred income of US-owned foreign companies. The tax is imposed at preferential rates via a two-part mechanism: Subpart F income under IRC § 951 increases, coupled with a deduction allowed under IRC § 965(c) to achieve the prescribed effective rate. For tax years beginning after December 31, 2017, new IRC § 245A allows for a 100% DRD for foreign-sourced dividends received from certain foreign companies. Georgia generally allows for a deduction of all Subpart F income. HB 821 would modify Georgia law to provide that IRC § 965 would not apply to the extent the related income has been subtracted from Georgia taxable income.
Eversheds Sutherland Observation: Because Georgia excludes Subpart F income, the deemed repatriation transition tax under § 965 should not affect taxpayers’ Georgia taxable income even without passage of a conformity bill. However, without a conformity bill, the subtraction that is allowed under IRC § 965(c) might also have been allowed. HB 821 also excludes the 100% foreign DRD in § 245A to the extent the related income has been subtracted from Georgia taxable income. For both §§ 965 and 245A, HB 821 would prevent a taxpayer from taking a deduction twice—first under Georgia’s state-specific calculation and then again under the federal conformity.
Other international aspects: GILTI and FDII
The Federal Tax Reform Act contains other provisions related to taxation of certain foreign intangible income referred to as global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII). Georgia would adopt the new federal GILTI and FDII provisions under HB 821.
In addition to the transition tax under IRC § 965, the Federal Tax Reform Act also created new provisions related to taxation of certain foreign intangible income under IRC § 951A and IRC § 250. New IRC § 951A imposes a tax on certain GILTI, and new IRC § 250 allows for a deduction related to GILTI as well as certain FDII. HB 821 would modify Georgia law to carve out IRC § 951A from the deduction for dividends received from sources outside the United States and to provide that the IRC § 250 deduction shall apply to the extent that the related income is included in Georgia taxable income, effectively conforming to the federal provisions.
Eversheds Sutherland Observation: In absence of HB 821’s passage, the GILTI under § 951A would likely be subtracted from Georgia taxable income under O.C.G.A. § 48-7-21(b)(8)(A), depending on whether or not the income is considered Subpart F income for Georgia purposes. However, the corresponding deduction under IRC § 250 would likely apply to a taxpayer’s Georgia taxable income absent the passage of HB 821, since Georgia taxable income generally begins with federal taxable income.
HB 821 does not address a major change of the Federal Tax Reform Act—the addition of the base erosion and anti-abuse tax (BEAT)—a form of a minimum tax that seeks to discourage US corporate parents from eroding the tax base through deductible or amortizable payments to foreign subsidiaries. The BEAT is a separate tax that does not go toward the calculation of federal taxable income for state purposes. Thus, absent amended or additional legislation to address the BEAT, Georgia taxpayers appear to only be affected by the BEAT on the federal level.