Owners of interests in pass-through entities (S corporation, LLC and partnerships) are eligible for tax credits of up to $10,000 of a taxpayer’s tax liability from pass-through entities. The liability is calculated at 5.75% of Georgia estimated taxable income from pass-through entities selected by the taxpayer. The individual taxpayer, not the pass-through entity, is awarded the tax credit. Therefore, the paperwork must be submitted to the DOR in the name of the individual owner, rather than in the name of the business (pass through entity).
GRACE urges you to consult with your tax professional to determine the specifics of your personal tax situation.
Frequently Asked Questions (FAQs)
for Owners of Pass-Through Entities
(S Corporations, LLCs, and Partnerships)
What is the difference between C corporations and pass-through entities?
A C corporation pays taxes directly to the government. A pass-through entity does not. The owners pay the income taxes on the company’s income. Each year, the owners of the pass-through receive a statement from the company giving the owner the amount of company income for which he or she is responsible. The form is IRS form K-1. The company’s income is included on the owner’s income tax returns.
What is a pass-through entity?
A pass-through entity is a for-profit company that doesn’t pay taxes directly to the government. The tax liability (taxes owed) passes through to the owners. The owners are responsible for paying the company’s taxes on their personal income tax returns.
What are the types of pass-through entities?
There are three broad categories: S corporations, limited liability companies (LLCs) and partnerships. S corporations can include P.C.’s (professional corporations which are typically formed by physicians, dentists, attorneys, CPAs, and architects) and P.A.’s (professional associations for physicians’ practices). Partnerships may also include limited partnerships (LPs) or limited liability partnerships (LLPs).
How can I tell if an entity is a pass-through?
It is difficult for an outsider to know whether an entity is a pass-through or is a direct taxpaying company. The owners can usually self-identify or will consult their tax advisers.
If a for-profit corporation is not an S corporation, it must be a C corporation. It must be one or the other. Either way, there is GRACE eligibility. A C corporation can redirect up to 75 percent of the company’s estimated income tax liability.
What is the maximum tax credit available?
Each owner is eligible for up to $10,000 of pass-through entity tax liability to the taxpayer. The maximum is the lesser of the actual pass-through tax liability or $10,000.
Is the taxpayer eligible for a tax credit on each pass-through entity in which he owns an interest?
No. The tax credit is per-taxpayer. If the taxpayer owns interests in more than one pass-through, he may choose which entities he wants to include in the tax credit calculation.
How is the pass-through tax credit liability calculated?
The taxpayer estimates pass-through income for the tax year and multiplies the estimate by 6%. The product is the estimated tax liability.
Example: The company will have an estimated taxable income of $500,000. The taxpayer owns a 30% interest in the company and is therefore responsible for tax on $150,000 (30% x $500,000). The taxpayer’s pass-through tax liability is $8,625 (5.75% x $150,000). Therefore, the credit on the taxpayer’s pass-through share of the company’s tax liability caps at $8,625.
What if the taxpayer cannot use all of the tax credit in one tax year?
It depends. Here is an interpretation from the Office of Tax Policy of the Georgia Department of Revenue:
An individual that is a member, shareholder, or partner in a pass-through entity can have a carry forward if when the taxpayer claims the tax credit on their income tax return, the credit amount, which is based on their actual income (not the estimated income), is claimed but not used.
This is illustrated by the example in paragraph (9) of Revenue Rule 560-7-8-.47 which states:
Example: Taxpayer, an individual taxpayer, is the sole shareholder of A Inc., an S corporation; Taxpayer is also a 50% partner in BC Company, a partnership; and Taxpayer is also a 20% member of a limited liability company, XYZ Company, which is taxed as a partnership. Taxpayer requests preapproval for the qualified education expense (QEE) credit for calendar year 2014 by submitting Form IT-QEE-TP1. On Form IT-QEE-TP1, Taxpayer estimates that the taxpayer’s Georgia income from A Inc. is $120,000, and that Taxpayer’s share of Georgia income from BC Company is $60,000, Taxpayer chooses not to include any income from XYZ Company when estimating Georgia income for purposes of the QEE credit; therefore the Department preapproves Taxpayer for $10,000 QEE credit (since $10,000 is less than $10,350, i.e., 5.75% of $180,000). Taxpayer makes a $10,000 donation to the SSO within 60 days of receiving preapproval from the Department and before the end of 2014. When Taxpayer files Taxpayer’s 2014 Georgia income tax return, Taxpayer received a salary from A Inc. of $50,000 and A Inc.’s actual Georgia income is $60,000; Taxpayer’s actual share of Georgia income from BC Company is $20,000 and Taxpayer received a guaranteed payment from BC Company of $15,000; Taxpayer’s actual share of Georgia income from XYZ Company is $5,000 (the Taxpayer can choose to include this company even though it was not considered at the time of preapproval), Taxpayer can only claim $8,625 QEE credit (which is 5.75% of the $150,000 actual income from Taxpayer’s selected pass through entities), and the extra $1,375 cannot be claimed by Taxpayer and cannot be carried forward. Any amount of the $8,625 QEE credit claimed but not used on the taxpayer’s 2014 Georgia income tax return shall be allowed to be carried forward to apply to the taxpayer’s succeeding five years’ tax liability.
How can I find out more about the tax credit for pass-through entities?
GRACE can provide general information. For advice specific to the taxpayer’s situation , he or she should contact a tax professional.