What Is the Tennessee Excise Tax and Who Pays It?
Understand Tennessee's corporate tax on net earnings, from how it applies to different business structures to the key rules for calculation and compliance.
The Tennessee excise tax is a business tax calculated on a company’s net earnings for a given tax year from activities conducted within the state. This tax is distinct from the state’s franchise tax, which is based on a company’s net worth or the value of its property in Tennessee. Both taxes are reported together on the same return, but the excise tax specifically targets an enterprise’s profitability.
Who Pays the Tennessee Excise Tax
Most for-profit entities conducting business in Tennessee must pay the excise tax, including C-corporations, S-corporations, limited liability companies (LLCs), and limited partnerships (LPs). The requirement to pay is triggered by having a substantial connection, or nexus, with the state, which can be established through physical presence or significant economic activity.
Certain business structures are not subject to the excise tax. Sole proprietorships and general partnerships are exempt from this tax obligation. Additionally, some nonprofit organizations and entities that are fully exempt from federal income tax may also be exempt from the Tennessee excise tax. An exemption exists for certain family-owned, non-corporate entities (FONCEs) that meet strict criteria related to ownership and income type.
How to Calculate the Excise Tax
The calculation begins with the business’s federal taxable income, which is then modified by specific state-level adjustments. After making these adjustments to find the Tennessee net earnings, businesses can take a standard deduction of $50,000. This deduction is applied before income is apportioned to Tennessee and cannot create or increase a net loss.
For businesses operating in multiple states, the next step is to apportion their net earnings to determine the amount attributable to Tennessee operations. The state uses a single-sales factor apportionment formula, meaning the portion of income subject to the excise tax is based on its percentage of total sales sourced to Tennessee. For example, if 20% of a company’s sales are to customers in Tennessee, then 20% of its net earnings would be apportioned to the state.
Once the apportioned net earnings are calculated, the state’s excise tax rate of 6.5% is applied to this amount. If a company’s apportioned net earnings are $100,000, the excise tax would be $6,500 before any credits are applied.
After calculating the initial tax, businesses can subtract any applicable tax credits to reduce their final bill. Tennessee offers several credits, such as the Industrial Machinery Credit, which allows a credit of 1% of the purchase price of eligible machinery. Another is the Job Tax Credit, which provides a $4,500 credit for each new full-time job created. These credits can offset up to 50% of the excise tax liability, and unused portions can often be carried forward for up to 25 years.
Filing and Paying the Tax
To prepare for filing, a business must gather several documents.
- The Franchise and Excise Tax Return, Form FAE 170
- A finalized federal income tax return
- A detailed balance sheet for the franchise tax portion
- Comprehensive sales data broken down by state for apportionment
- Any documentation supporting claims for tax credits
The annual franchise and excise tax return is due on the 15th day of the fourth month following the end of the business’s fiscal year. For calendar-year filers, this deadline is April 15. Businesses that anticipate a combined tax liability of $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, and ninth months of the current tax year, with a final payment due on the 15th day of the first month of the following year.
Filing and payment must be completed electronically through the Tennessee Taxpayer Access Point (TNTAP) portal. Businesses can upload their completed Form FAE 170 and submit payment directly to the Department of Revenue through the portal. Upon successful submission, the system provides a confirmation receipt for the taxpayer’s records.