Georgia Income Tax: Computation of Taxable Income and Adjustments

Summary

In H. Alan Rosenberg v. Douglas J. Macginnittie, Commissioner, Georgia Department of Revenue, No.1414626 (GA Nov. 25, 2014), the Georgia Tax Tribunal held that a Georgia resident who owned an interest in a LLC can reduce his Georgia adjustable gross income by income that was subject to Texas franchise taxes when computing his Georgia individual taxable income. The court did not address whether the add back of income tax found in O.C.G.A. Sec.48-7-27(b)(3) applied in this case but noted that even if it did, it would not be as material as the deduction to Georgia adjusted gross income.

Discussion

Mr. Rosenberg is a Georgia resident and an owner/member of an LLC doing business in Texas and the LLC filed a Texas franchise tax return. Mr. Rosenberg argued that he should be allowed to reduce his Georgia taxable income to account for the fact that a portion of the LLC’s income was subject to the Texas franchise tax under O.C.G.A.Sec.48-7-27(d)(1)(c).

The Georgia DOR disagreed and stated that an adjustment is permissible only if the tax in question is a tax on or measured by “net” income. However according to O.C.G.A. 48-7-27(d)(1)(c) individual Georgia residents can only take a deduction from their federal AGI as an adjustment if “taxed in another state which imposes a tax on or measured by income.” Net income is not mentioned in the statute. The Georgia DOR believed that the Texas tax was not an “income tax” by their interpretation of the term.

The Georgia Tax Tribunal took the position that the controlling fact in this case was the Texas franchise tax liability calculation begins with the determination of total revenue, which in effect makes it consistent with the main legislative purpose of avoiding double taxation of a taxpayer’s same income for both pass-through entities and their individual owners. The Tribunal took the position that the petitioner can be allowed to reduce his Georgia taxable income.

How does this affect businesses?

Although this decision is not final and may be appealed, Georgia residents with similar facts should consider refund opportunities that may be available by filing amended returns before the statute expires. In addition, you should consider whether this case will have a similar impact on other state entity-level taxes that may not be solely based on traditional income tax calculations. Note that states such as Massachusetts, Virginia, and Minnesota continue to claim that the Texas franchise tax is not a tax on net income and therefore there are no adjustments to net income for their respective income tax calculations.

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