Since 2017, the Georgia HEART Program allowed taxpayers to make a donation to a qualified rural hospital organization (RHO) in Georgia and receive a tax credit on their Georgia income tax liability. Furthermore, these taxpayers were eligible to take an equal charitable deduction on their federal income tax return. This was a popular benefit for high-income tax payers who were subject to alternative minimum tax. However, when the Tax Cuts and Jobs Act of 2017 bundled and limited state and local tax with your property taxes to $10,000, high-income tax states like New York, California, New Jersey, and Connecticut started creating workarounds to ensure their state taxpayers weren’t affected by what they deemed as party politics.
In June 2019, the U.S. Department of the Treasury issued final rules that prevent charitable contributions made in exchange for state tax credits from circumventing the limitation on state and local tax deductions on federal returns.
In response, the Georgia Department of Revenue updated Rule 560-7-8-.57 so that a pass-through business entity (i.e., a limited liability company, S corporation, or partnership) can make a payment to an RHO that could qualify as an ordinary and necessary business expense for federal income tax purposes. Each owner of the pass-through business then may claim his or her share of the Georgia HEART credit corresponding to the business payment, based on his or her profit/loss percentage ownership of the business at the end of the year.
The IRS has also confirmed the potential federal deductibility of contributions to a qualified RHO by pass-through entities as an ordinary and necessary business expense, because under IRC § 162, businesses may deduct payments that bear a direct relationship to the taxpayer’s trade or business and that are made with a reasonable expectation of financial return. For example, if your business had operations near one of the 58 participating rural hospitals, your business could donate to an RHO to help ensure either the employees or customers of your business would have access to adequate health care.
With a substantiated deduction for your business, the individual shareholders or partners would then take the credit. The credit passed to shareholders can only offset up to the amount of tax generated from the passthrough including wages (basically, GA K-1 income plus wages paid from the passthrough multiplied by the Georgia marginal tax rate, which is 5.75% for 2019). Any excess amount that cannot be claimed by the taxpayer cannot be carried forward. Of course, a business owner’s share of the federal deduction must be added back to his or her Georgia taxable income, as the State of Georgia will not permit the business owner to have his or her Georgia taxable income from the business reduced by a federal business expense deduction, while also receiving a state income tax credit for the same amount.
When you submit your tax credit application to Georgia HEART as a pass-through owner planning to deduct the payment as a business expense, you will provide your personal information, as usual, as well as the name of the pass-through entity which will be making the payment. The business should document the financial rationale for making such payments. For example, the business expects to build brand awareness, increase customer or client loyalty, earn community goodwill, develop more business, and/or retain and recruit employees. The business should also estimate and document the value of those expected outcomes.