Georgia Tax Refunds Available to Owners of Entities with Texas Operations
[UPDATE: A RECENT RULING HAS AFFECTED THIS INFORMATION. A NEW ARTICLE WILL BE POSTED SOON.]
Double Taxation. In Georgia, those are what we like to call “fightin’ words.” Unfortunately, for years Georgia taxpayers have been taking a beating if they had a pass-through company paying tax in Texas. Income that was taxed in Texas was also taxed in Georgia. On November 25th, 2014, the Georgia Tax Tribunal ruled in Rosenberg v. MacGinnitie that the state’s case for doing so was invalid. As a result there may be refunds available to Georgia owners of S-corporations, LLCs, or partnership with Texas operations.
The Georgia Tax Tribunal, headed by chief judge Chuck Beaudrot, has handed down several decisions since its creation in January, 2013, but perhaps none with as much significance as Rosenberg V. MacGinnitie. The court was given the task of determining if the Texas Franchise Tax is a tax “on or measured by income.” They considered many pieces of Georgia law and history, as well as similar court cases in Indiana, Missouri, Kansas, and California, all of which found in favor of the taxpayer. Ultimately, the decision came down to one word; the standard is not “net income” but rather “income.” Since the Texas Franchise Tax base calculation starts with all items of federal income, the court could find no difference between federal income and state income and ruled that the tax is “on or measured by income.”
What does this mean for Georgia entities with Texas operations? If your operations are through a C-Corporation, there is no new interpretation of law. However, if your S-corporation, LLC, or partnership has Texas operations, you now can decrease your Georgia income by the amount of income taxed in Texas. For example, let’s say you are a Georgia resident with $1,000,000 of GA taxable income before this adjustment, and your wholly owned S-corporation paid Texas tax on $400,000. That means your new GA taxable income is $600,000 and your tax bill has been decreased by $24,000 ($400,000*6%=$24,000).
Texas taxable income can be, in many cases, higher than Georgia taxable income because the Texas Franchise tax allows much fewer deductions. This interpretation change has the potential therefore, to eliminate your entire Georgia tax bill and create a net operating loss. The case acknowledges the anomaly mentioned here saying this adjustment “does not yield any ‘unreasonable results'” and cites another case by quoting “ambiguities in remedial statutes should be resolved in favor of a liberal interpretation…” In short, even the judge realizes that this is a real win for the taxpayer.
This new interpretation takes effect immediately. It can be applied to 2014 tax returns and can amend up to three previous years’ tax returns, if it makes sense to do so. https://wblcpa.com/years-of-double-taxation-in-georgia-ruled-invalid/We expect the state to provide additional guidance on this topic, so the fight isn’t over yet. But this round has gone to the taxpayer.
How do you get your refunds? Get in touch with your Williams, Benator & Libby LLP tax professional today for a consultation to determine if your situation warrants amending prior tax returns or if your best course of action is to implement the new interpretation prospectively.