By Kenneth H. Bridges, CPA, PFS August 2018
Georgia, like most states, offers a bounty of credits against its income tax; some of which fall into the almost too good to be true category. Some (e.g. the jobs credit, research credit and retraining credit) must be generated by a business entity, some can essentially be purchased (e.g. the low-income housing credit and the film credit), and others are based on taking some sort of action which the government is encouraging (e.g. the Georgia credit for donations to student scholarship organizations, public schools innovation fund, or rural hospitals). No matter your situation (and whether a business entity or an individual), the odds are that at least one of these credits is available to you; and with individuals’ Schedule A itemized deduction for state and local taxes limited to a maximum of $10,000 per year for 2018 and forward, these credits can be more valuable than ever.
Qualified education expense credit – Individuals and businesses can receive a credit against their Georgia tax for contributions to qualified student scholarship organizations (SSOs). An SSO is a 501(c)(3) organization which allocates at least 90% of its annual revenue for scholarships to enable students in grades K through 12 to attend a Georgia school of their parents’ choice. Married couples can claim a credit of up to $2,500, singles a credit of up to $1,000, and corporations a credit up to 75% of the amount of their Georgia tax liability. For individuals with income from a flow-through entity (e.g. S-corp, LLC or partnership) the amount is $10,000; with the limitation that the amount of the credit cannot exceed 6% of the income (including compensation) from the flow-through entity. For a married couple, the amount can be up to $20,000, if each has sufficient flow-through entity income. There is a $58,000,000 cap each year on the amount of credits that the Georgia Department of Revenue can award. You must pre-qualify your credit by sending a form to the DOR for approval. For all recent years, the cap was reached on January 1, the first day that GA DOR would accept applications, and DOR has allocated to those who applied on that day a prorated amount (about 50% of the otherwise limit). Accordingly, if you want to participate, you need to apply with an SSO prior to the year for which you wish to contribute in order that the SSO can submit your application to GA DOR on January 1.
Qualified education donation credit – Georgia has a fairly new credit that works just like the qualified education expense credit (aka SSO or Georgia GOAL) described above, except that it benefits innovation in public schools and the statewide cap is only $5,000,000 per year. In order to receive this credit, you have to first apply with the GA DOR, and then (once approved) make a donation to the Innovation Fund Foundation.
Rural hospitals donation credit – Very similar to the two education-related credits described above, Georgia offers a credit of up to $5,000 for singles and $10,000 for married couples for amounts donated to one of Georgia’s approved rural hospitals. There is a statewide cap of $60,000,000 per year. To the extent the cap is not reached by July 1 of a year, individuals can apply for an amount in excess of the $5,000 or $10,000 limit (but very little remained available on July 1 of this year).
Low-income housing tax credit – In order to encourage the development of affordable apartments for lower income persons, Georgia offers a tax credit for investment in such projects. Often, the credit cannot be fully utilized by the owner of the apartment project, so it is sold at a discount (e.g. 88 cents per dollar of credit) to others who can utilize it. Technically, the credit is not “transferable”, but Georgia law generously permits the credit to be allocated to any partner in a partnership or any member of an LLC, such that the credit can essentially be purchased.
Film tax credit – In order to encourage the production of films in Georgia, the state permits film production companies a credit of up to 30% of their qualified expenditures in Georgia. To the extent the credit exceeds a company’s Georgia income tax, it can be claimed as a credit against its withholding tax, and then further can also be sold to another taxpayer. Typically, the credit is sold to taxpayers who can use it for approximately 87 – 92 cents per dollar of tax credit.
R&D tax credit – Businesses can claim a Georgia credit for 10% of the amount by which their qualifying Georgia research expenses exceed a base amount; with the base amount generally determined by multiplying the company’s ratio of R&D to revenue for the preceding 3 years by current year revenue. The credit can only offset 50% of current year tax liability, with any excess carrying forward for up to 10 years. Owners of S-corps and LLCs can claim the credit on their personal returns. Alternatively, the entity may make a special election to claim the credit as an offset against its Georgia withholding tax.
Jobs tax credits – Employers can receive tax credits of up to $4,000 per year for 5 years for each new job created in Georgia. The amount of the credit, the number of new jobs which must be created in order to be eligible for the credit, and the types of businesses eligible for the credit all depend on the geographic location of the employer (with more generous terms for new jobs created in less prosperous areas) and the type of new job created. The credit can be used to offset income tax or the employer’s withholding tax obligation.
Employee training programs – Employers can receive a credit of up to $1,250 per employee for approved retraining programs, and a credit of up to $150 per employee for approved basic skills education.
Taxes paid to other states – Georgia residents are subject to Georgia tax on their worldwide income. However, Georgia permits a credit for taxes paid to other states, so long as the effective rate paid to the other state(s) does not exceed the Georgia rate on the same income.
Other tax credits – Additional tax credits available include those for angel investments, seed capital research fund investments, conservation easements, child care, caregiver’s expenses, adoption of a foster child, diesel particulate emission reduction equipment, disaster assistance, driver’s education expenses, employer-provided daycare, rehabilitation of historic homes and other structures, increasing port traffic, investment in manufacturing equipment and facilities, life insurance for national guard members on active duty, low-income persons, enterprise transportation vehicles (for transporting employees in less-developed counties to and from work), high-deductible health insurance, purchasing or retrofitting a home with accessibility features, rural physicians, and water resource conservation and development.
Federal tax rules – Historically, the IRS had not challenged the deductibility of a charitable contribution solely because a state provided a tax credit for such. However, with the states which were most negatively impacted by the new $10,000 per year limitation on itemized deduction for state and local taxes (e.g. California, New Jersey and New York) coming up with work-around solutions (e.g. “charitable” donations which would replace the payment of state income tax), the IRS issued proposed regulations on August 23 requiring that for donations made after August 27, 2018 you reduce the amount of your Federal charitable deduction by the benefit of any related state tax credit (but not by the benefit of a state deduction). Additionally, with respect to tax credits which can essentially be purchased (e.g. film credit or LIHTC), consideration must be given to whether you have a taxable gain equal to the spread between amount paid and face value of the credit.
Careful planning required – The knee-jerk reaction can be to assume that if you are a Georgia resident you should purchase GA film credit or LIHTC in amount up to 6% of your income. However, that is not necessarily the case. For example, if you have potentially significant exposure to the taxes of other states (e.g. the owner of a multi-state flow-through entity) and you offset all of your GA tax with film credit or LIHTC, you may essentially be wasting your “other states tax credit”. Similarly, if you have a significant amount of GA R&D credit, you will generally not want to utilize purchased credits to reduce your GA tax below twice the amount of your GA R&D credit, because GA R&D credit can only offset 50% of your GA tax as reduced by all other credits. In all cases, careful planning and analysis should be undertaken before making a buying decision.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.