Compilation of Rules and Regulations of the State of Georgia › Department 560 - RULES OF DEPARTMENT OF REVENUE › Chapter 560-7 - INCOME TAX DIVISION › Subject 560-7-3 - SUBSTANTIVE REGULATIONS › Rule 560-7-3-.10 - Interest Income on Government Obligations

Current through Rules and Regulations filed through June 27, 2024
(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
O.C.G.A. Secs.
				  48-2-12,  48-7-21,  48-7-26,  48-7-27.