(1) Purpose. This Rule explains
how to determine the interest expense related to interest and dividend income
received on government obligations.
(2) General Rule. O.C.G.A.
§
§
48-7-21 and
48-7-27 require Georgia taxpayers
to add back or subtract interest and/or dividend income on certain United
States, state, and local government obligations. Interest and/or dividend
income is required to be added back if the obligations are subject to Georgia
taxation, but were exempt federally and thus were excluded from federal gross
income. Interest and/or dividend income must be subtracted if the obligations
were taxable federally, but are exempt for Georgia purposes. In addition,
certain adjustments must be made to reflect the fact that Georgia taxes this
income net of related interest expense. In order to treat all government
obligations consistently, the same formula is used to determine interest
expense directly or indirectly attributable to the production of the interest
or dividend income. The taxpayer's total interest expense is multiplied by a
fraction to determine such direct and indirect interest expense. The numerator
of the fraction is the total of the average adjusted bases of the obligations
at issue, and the denominator is the total of the average adjusted bases for
all assets of the taxpayer.
(3)
Interest on Obligations of Other States or Their Political Subdivisions;
Addition. Interest income received on obligations of any state other
than Georgia or on obligations of political subdivisions of such other states
must be added back to federal taxable income when calculating Georgia taxable
income to the extent such interest was not included in gross income for federal
income tax purposes. If any related interest expenses were not deducted from
federal taxable income, then the addition shall be reduced by the direct or
indirect interest expenses attributable to such income. The following formula
shall be utilized to determine such direct and indirect interest expense. The
total interest expense shall be multiplied by a fraction, the numerator of
which is the total of the taxpayer's average adjusted bases of the obligations
at issue, and the denominator of which is the total of the average adjusted
bases for all assets of the taxpayer. For example:
Taxpayer has $3,000 of interest income which is exempt from
federal income tax, but which is subject to Georgia taxation because the
interest derives from obligations of states other than Georgia. The $3,000 must
be added back, but the taxpayer is allowed to subtract the related interest
expense from the $3,000 so that it is properly taxed on a net income basis. The
total interest expense for the taxpayer is $100,000. The total of the average
adjusted bases for the obligations at issue is $60,000, and the total of the
average adjusted bases for all of the taxpayer's assets is $24,000,000. The
fraction of $60,000 over $24,000,000 yields 0.25%. Applying 0.25% to the
$100,000 total interest expense yields related interest expense of $250. The
$3,000 addback is thus reduced by the $250 of related interest expense,
resulting in a net figure of $2,750 of interest income that must be added back
to the Georgia tax base.
$3,000 - [$100,000 X $60,000/$24,000,000]=
$2,750 added back to the Georgia tax base
(4)
Interest or Dividends on
Obligations Exempted from Federal Income Tax But Not From State Income Tax;
Addition. Interest or dividends received on certain federal obligations
which are exempt from federal income tax but not from state income tax must be
added to taxable income. If any related interest expenses were not deducted
from federal taxable income, then the addition shall be reduced by the direct
or indirect interest expenses attributable to such income. The following
formula shall be utilized to determine such direct and indirect interest
expense. The total interest expense shall be multiplied by a fraction, the
numerator of which is the total of the taxpayer's average adjusted bases of the
obligations at issue, and the denominator of which is the total of the average
adjusted bases for all assets of the taxpayer. For example:
Taxpayer has $20,000 of interest income which is exempt from
federal income tax, but which is subject to Georgia taxation. The interest
income derives from federal obligations which are exempt from federal income
tax but which are not exempt from state income tax. The $20,000 must be added
back, but the taxpayer is allowed to subtract the related interest expense from
the $20,000 so that it is properly taxed on a net income basis. The total
interest expense for the taxpayer is $50,000. The total of the average adjusted
bases for the obligations at issue is $400,000, and the total of the average
adjusted bases for all of the taxpayer's assets is $4,000,000. The fraction of
$400,000 over $4,000,000 yields 10%. Applying 10% to the $50,000 total interest
expense yields related interest expense of $5,000. The $20,000 addback is thus
reduced by the $5,000 of related interest expense, resulting in a net figure of
$15,000 of interest income that must be added back to the Georgia tax
base.
$20,000 - [$50,000 X $400,000/$4,000,000]=
$15,000 added back to the Georgia tax base
(5)
Interest or Dividends on United
States Obligations; Subtraction. Interest or dividend income received on
United States obligations which is included in gross income for federal income
tax purposes, but which is exempt from state income taxes under federal and
Georgia law, must be subtracted from taxable income. Any direct or indirect
interest expenses attributable to such income shall first be applied to
determine the correct amount to be subtracted. The following formula shall be
utilized to determine the direct and indirect interest expense. The total
interest expense shall be multiplied by a fraction, the numerator of which is
the total of the taxpayer's average adjusted bases of the obligations at issue,
and the denominator of which is the total of the average adjusted bases for all
assets of the taxpayer. For example:
Taxpayer has $10,000 of interest income from United States
obligations which is taxable for federal income tax purposes, but which is
exempt from Georgia taxation. The interest income must be subtracted from the
Georgia tax base, but the taxpayer must first subtract the related interest
expense from the $10,000 so that only the net interest income is removed from
the base; otherwise the related interest expense will shield unrelated income
from Georgia taxation. The total interest expense for the taxpayer is $100,000.
The total of the average adjusted bases for the obligations at issue is
$200,000, and the average adjusted bases for all of the taxpayer's assets is
$10,000,000. The fraction of $200,000 over $10,000,000 yields 2%. Applying 2%
to the $100,000 total interest expense yields related interest expense of
$2,000. The $10,000 of interest income is thus first reduced by the $2,000 of
related interest expense, resulting in a net figure of $8,000 of interest
income that must be subtracted from the Georgia tax base.
$10,000 - [$100,000 X $200,000/$10,000,000]=
$8,000 subtracted from the Georgia tax base
Notes
Ga. Comp. R.
& Regs. R. 560-7-3-.10
O.C.G.A. Secs.
48-2-12,
48-7-21,
48-7-26,
48-7-27.
Original Rule entitled
"Regulations; Dependents" adopted. F. and eff. June 30, 1965.
Repealed: New Rule entitled "Personal Exemptions and
Credits for Dependents" adopted. F. Feb. 16,
1972; eff. Mar. 7,
1972.
Repealed: F. Dec. 26,
2001; eff. Jan. 15,
2002.
Amended: New Rule entitled "Interest Income on
Government Obligations" adopted. F. Mar. 3,
2008; eff. Mar. 23,
2008.
