Georgia Decouples From IRC Section 174, Enacts PTE Tax Changes, and Imposes Sales Tax on Digital Goods and Services

On May 2, Gov. Brian Kemp signed S.B. 56 and H.B. 412 to update Georgia’s fixed-dated conformity to the Internal Revenue Code; decouple from IRC Section 174, which addresses the amortization of research and experimental (R&E) expenditures; expand the pass-through entity (PTE) election; and apply sales and use tax to digital goods and products.

Updating IRC Conformity and Decoupling From Section 174

Georgia enacted S.B. 56 to update its conformity to the IRC “as amended, provided for in federal law enacted on or before January 1, 2023,” for tax years beginning on or after January 1, 2022.

Despite updating Georgia’s IRC conformity date, S.B. 56 decouples the state from the federal treatment of R&E expenditures that became effective under IRC Section 174 beginning with tax year 2022. Accordingly, it provides that for Georgia income tax purposes, Section 174 must be applied as it was in effect immediately before the Tax Cuts and Jobs Act (TCJA) was enacted. Under Section 174 as amended by the 2017 TCJA, for federal tax purposes, taxpayers may no longer fully expense or capitalize and amortize R&E expenditures for R&E costs paid or incurred in tax years beginning after December 31, 2021. Instead, taxpayers must capitalize R&E expenditures paid or incurred in tax years beginning after December 31, 2021, and amortize those costs over five years (or 15 years for R&E expenditures attributable to foreign research). With the passage of S.B. 56, Georgia now allows R&E expenditures to be fully deducted in the tax year they were paid or incurred, effective for tax years beginning on or after January 1, 2022.  

Expanding PTE Election Eligibility for Partnerships

H.B. 412 expands the eligibility of partnerships, including limited liability companies taxed as partnerships for federal purposes, to elect to make the PTE election beginning on or after January 1, 2023. It does so by removing the limitation that only a “partnership that is 100 percent directly owned and controlled by persons eligible to be shareholders of an ‘S’ corporation” for federal purposes were allowed to make the PTE election. As a result, partnerships with partners that are corporations, other partnerships, nonresident aliens, and trusts that are not eligible to be shareholders of an S corporation may now make the election.  

Taxing Digital Goods and Products

Effective January 1, 2024, S.B. 56 will impose sales tax on the retail purchase or sale of specified digital products, other digital goods, or digital codes sent to end users in Georgia. The sales tax rate on digital goods and products will be the same as for other retail purchases or the consumption of tangible personal property.  

Insights

• As a result of Georgia decoupling from the federal treatment of IRC section 174 R&E expenditures that became effective for tax years beginning after December 31, 2021, Georgia taxpayers should be able to avail themselves of a greater tax benefit in the state.
• Taxpayers that have already filed their Georgia income tax returns for tax years beginning on or after January 1, 2022 and capitalized their R&E expenditures should consider filing amended Georgia returns to claim a refund.
• By removing the limitation that only partnerships that are owned and controlled by individuals or some trusts and estates allowed to be S corporation shareholders could make the Georgia PTE tax election, Georgia follows other states, including North Carolina and Virginia, that recently removed similar impediments to the election.  
• Taxpayers selling digital goods and products should start preparing to charge, collect, and remit sales tax on the sale of those items to end users in Georgia, effective January 1, 2024. Also on that date, taxpayers should be prepared to accrue and remit use tax for purchases of digital goods and products for which they are not charged Georgia sales tax, also effective January 1, 2024.

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