New Tax Legislation Shifts Consolidated Return Landscape in Georgia

Overview

Georgia imposes tax on the taxable net income of every corporation doing business in the state. Georgia is a separate reporting state, which means that each corporation doing business in the state must file a separate income tax return.

Nevertheless, Georgia has long permitted consolidated returns under narrow circumstances. The principal advantage of filing a consolidated return in Georgia is the ability to offset affiliated corporations’ Georgia taxable income and losses on a post-apportioned basis. Each member of the consolidated group separately computes its Georgia taxable income or loss, and the results are netted.

The Existing Consolidated Return Regime

For tax years beginning before January 1, 2023, O.C.G.A. § 48-7-21 allowed affiliated corporations that filed a consolidated federal income tax return to file a consolidated Georgia income tax return if (1) they obtained prior approval from the Department, or (2) the Department required it.² Taxpayers were required to submit an application for permission to file a consolidated return at least 75 days prior to the return due date or the filing of the return, whichever occurred first.³

The Department’s regulation, Ga. Comp. R. & Regs. 560-7-3-.13, provided that the Department would permit a group of affiliated corporations to file a consolidated return only if it would “clearly and equitably reflect the income of the corporations attributable to property owned, business done, and income derived from sources by the members of the affiliated group in Georgia.”⁴ Under that amorphous standard, the Department could, and commonly would, condition its approval on the affiliated group accepting adjustments to the computation of the group’s consolidated income. The Department could require adjustments to interest expense on intercompany indebtedness, the elimination of certain members from the Georgia consolidated group, or other adjustments the Department determined were necessary to clearly and equitably reflect the group’s income.⁵

The Department’s process of reviewing an application for permission to file consolidated was akin to an audit, and the Department could deny an application for failure to provide any information it requested.⁶ This scrutiny, and the Department’s ability to require adjustments in exchange for the ability to file consolidated, discouraged otherwise eligible corporations from seeking permission to file on a consolidated basis. To the extent the Department approved a group’s request to file a consolidated Georgia return, the group generally was required to continue filing a consolidated return for all future tax years.⁷

The New Consolidated Return Regime

H.B. 1058 eliminates the Department’s gatekeeping role with respect to consolidated Georgia income tax returns. For tax years beginning on or after January 1, 2023, affiliated corporations may elect to file a consolidated return without having to seek the Department’s approval. In addition, the Department is explicitly prohibited from requiring corporations to file on a consolidated basis.

The new legislation codifies much of the Department’s existing regulation in terms of group composition and the process for computing group income or loss. Under the new consolidated return regime, the affiliated corporations must be a “Georgia affiliated group” in order to make the election to file consolidated. “Georgia affiliated group” is defined as a group in which each corporation:

• Is a member of an “affiliated group” within the meaning of IRC § 1504 that files a consolidated federal income tax return;
• Is subject to taxation under Chapter 7 of Title 48 of the O.C.G.A., and is not otherwise immune from taxation under P.L. 86-272;⁸
• Has the same taxable year;
• Was a member of the affiliated group for the entire taxable year or was a member of the affiliated group for a portion of the taxable year if the member was subject to Georgia corporate income tax for such portion of the taxable year;
• Apportions and allocates Georgia taxable income or loss separately;
• Computes apportionable income or loss using separate apportionment factors; and
• Combines and reports taxable income or loss on a single group return that includes all members included on the consolidated federal income tax return that are eligible to be included in the Georgia affiliated group.

A Georgia affiliated group may make the election on an originally filed return, and the election is binding on the group and the Department for five years. The election automatically terminates after five years, but subsequent elections are permitted. Affiliated groups filing consolidated Georgia income tax returns under prior law may terminate their election for future tax years or continue to file a consolidated return under the previous criteria.

The legislation requires the Department to adopt regulations interpreting O.C.G.A. § 48-7-21 as amended. As a result, the Department may amend Ga. Comp. R. & Regs. r. 560-7-3-.13 as part of a future rulemaking.

Conclusion

H.B. 1058 is an improvement on Georgia’s existing consolidated return regime. The new legislation clears the way for more taxpayers to file on a consolidated basis. What remains to be seen is how the Department will implement the new legislation by regulation and what, if any, impact these changes will have on future audits.

The Pillsbury SALT Team will continue to monitor developments in this area.

^{[1] H.B. 1058, 156th Gen. Assemb., Reg. Sess. (Ga. 2022).}

^{[2] O.C.G.A. § 48-7-21(b)(7)(A)(i) (2021).}

^{[3] Ga. Comp. R. & Regs. 560-7-3-.13(2)(a).}

^{[4] Id. 560-7-3-.13(3)(a).}

^{[5] Id. 560-7-3-.13(3)(b)-(d).}

^{[6] Id. 560-7-3-.13(3)(e).}

^{[7] Id. 560-7-3-.13(4).}

^{[8] 15 U.S.C. §§ 381-84.}