Almost two months since the President signed the Tax Cuts and Jobs Act (TCJA) into law, state legislators across the country are still evaluating the federal tax law’s effects on state revenues and whether to amend state law in response.
Introduced on February 12, Georgia’s Internal Revenue Code conformity bill for the 2018 tax year, HB 918, is one example of how states may respond to federal tax reform. HB 918 conforms to many of the provisions in the TCJA, including the $10,000 state and local tax deduction limitation and the treatment of net operating losses. Like at the federal level, taxpayers can no longer carry back NOLs to prior tax years but can carry them forward indefinitely. NOLs that arise after 2017 are capped at 80% of taxable income.
However, HB 918 deviates from the TCJA in two important respects. First, the bill does not adopt the federal law’s foreign income transition provisions, at least in part. The bill provides a Georgia deduction for all Subpart F income, except global intangible low-taxed income (IRC § 951A), included in federal taxable income. However, HB 918 eliminates federal deductions for Subpart F income for Georgia purposes if the income was previously deducted from Georgia taxable income. This means that Georgia will provide a deduction for any income taxed under the deferred foreign income transition provision in IRC § 965 but will tax this income when it is returned to the United States. In other words, Georgia treatment of Section 965 income is the opposite of the federal treatment.
Second, the bill continues the federal limitation for interest expense deductions (up to 50% of adjusted taxable income) under pre-TCJA law, rather than adopting the new federal limitation (30% of adjusted taxable income), which is a business-friendly deviation.
The part of HB 918 that has made headlines is the change to individual taxes. For years, Georgia law has provided for a very low standard deduction (e.g., $3,000 for married couples filing jointly). The disparity between the higher standard deductions under the TCJA and Georgia’s low standard deduction is expected to generate the majority of the $3.6 billion in additional tax revenue Georgia would receive under the TCJA, and a tax windfall funded by individuals is proving unacceptable to Georgia legislators (especially in an election year). In response, HB 918 allows taxpayers to take the federal standard deduction while also itemizing their deductions for state purposes using federal itemization rules. This adjustment is expected to reduce—but not completely eliminate—Georgia’s windfall from the TCJA.
As of the date of this post, HB 918 remains under consideration by the Georgia House of Representatives.