Tennessee Franchise and Excise Tax Explained
Understand the core principles of Tennessee's Franchise and Excise tax. Our guide clarifies this two-part business privilege tax for liable entities.
The Tennessee Franchise and Excise tax is a business privilege tax for operating within the state. It is comprised of two distinct taxes: the franchise tax, which is calculated on a company’s net worth, and the excise tax, which is based on its net income. This dual tax structure applies to most entities doing business in Tennessee.
Determining Who Must File
The requirement to file and pay franchise and excise taxes extends to business structures that are either chartered in Tennessee or registered to do business in the state. This liability exists whether the company is actively conducting business or is inactive. Liable entities include:
- Corporations
- S corporations
- Limited liability companies (LLCs)
- Limited partnerships
Certain organizations are exempt from the franchise and excise tax. A notable exemption is for a family-owned non-corporate entity (FONCE), where at least 95% of the ownership must be held by family members and the entity meets specific income tests. Some nonprofit organizations and homeowners’ associations may also be exempt, provided they meet the statutory requirements for their status. General partnerships and sole proprietorships are not subject to the franchise and excise tax.
Calculating the Franchise Tax
A company’s net worth for the franchise tax is determined from its balance sheet and represents the book value of the company’s total assets minus its total liabilities. The specific items included are dictated by schedules in the tax return, which guide the calculation based on the entity’s accounting records.
The franchise tax is levied at a rate of $0.25 per $100 of the company’s net worth. Regardless of the outcome of this calculation, there is a minimum franchise tax of $100 that every liable entity must pay annually. This ensures a baseline contribution from every registered business.
Recent legislation has repealed the alternative property-based measure for calculating the franchise tax for tax years ending on or after January 1, 2024. Businesses that paid franchise tax based on the property measure in previous years may be eligible for refunds. Taxpayers can seek these refunds for tax years ending on or after March 31, 2020, for which a return was filed on or after January 1, 2021.
Calculating the Excise Tax
The excise tax is calculated at a flat rate of 6.5% on the business’s Tennessee taxable income. The starting point for this calculation is the company’s federal taxable income, which is then adjusted for certain state-specific additions and subtractions. For businesses that operate exclusively within the state, their entire net earnings are subject to this tax.
For businesses with operations both inside and outside of Tennessee, an apportionment formula is used to determine the portion of total income that is subject to the state’s excise tax. Tennessee uses a single-sales factor apportionment formula. This method focuses on comparing the revenue generated from customers within Tennessee to the company’s total sales everywhere.
The apportionment percentage is calculated by dividing the total sales in Tennessee by the total sales from all locations. This resulting percentage is then multiplied by the company’s total net earnings to arrive at the income apportioned to Tennessee. This apportioned income is the amount upon which the 6.5% excise tax is applied.
Available Tax Credits
After calculating the gross franchise and excise tax liability, businesses may be able to apply various tax credits to reduce the final amount owed. These credits are designed to incentivize specific business activities and investments within the state. The credits are non-refundable, meaning they can reduce the tax liability to zero, but will not result in a refund.
One credit is the job tax credit, available to qualified businesses that create a certain number of new jobs and make a capital investment. This credit offers $4,500 for each new qualified job, though it is limited to 50% of the combined franchise and excise tax liability. Another credit is for industrial machinery, which allows businesses to recover a portion of the sales tax paid on the purchase of qualified equipment.
Other credits target specific industries or community-focused activities, such as locating a headquarters in the state, investing in community development projects, or producing motion pictures. Each credit has its own set of specific qualifications and application procedures.
Filing and Payment Procedures
All franchise and excise tax returns must be filed electronically. The primary form for the annual return is the FAE170, which is filed through the Tennessee Taxpayer Access Point, known as TNTAP. This online portal is the mandatory platform for all filings and payments.
The standard due date for the annual return is the 15th day of the fourth month following the close of the business’s accounting year. For calendar-year filers, this means the deadline is April 15th. A business can file for an automatic six-month extension, but this only provides more time to file the return, not to pay the tax owed.
Any tax liability must be paid by the original due date to avoid penalties and interest. Businesses that anticipate their combined tax liability to be $5,000 or more for the year are required to make quarterly estimated tax payments. These payments are due on the 15th day of the fourth, sixth, ninth, and twelfth months of the tax year. Failure to make timely estimated payments can result in underpayment penalties.