Tennessee Franchise and Excise Tax Guide - September 2019 - TN.gov
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Tennessee Franchise and Excise Tax Guide September 2019
Franchise and Excise Taxes Dear Tennessee Taxpayer, This franchise and excise tax guide is intended as an informal reference for taxpayers who wish to gain a better understanding of Tennessee franchise and excise tax requirements. It is not an all- inclusive document or a substitute for Tennessee franchise and excise tax statutes or rules and regulations. The information in this guide is current as of the date of publication. Tax laws, their interpretation, and their application can change due to legislative action, reviews, and court decisions. Frequently asked questions and answers are located on our website at www.TN.gov/revenue. If you cannot locate your answer, feel free to submit an electronic help ticket for an email response to your specific question. The Department of Revenue also offers a toll-free franchise and excise tax information line for Tennessee residents. The number is (800) 397-8395. If calling from Nashville or outside Tennessee, you may call (615) 253-0700. The Department of Revenue also offers a telecommunications device for the deaf (TDD) line at (615) 741-7398. Finally, if you have questions, please do not hesitate to contact any of the offices listed below. Sincerely, Taxpayer Services Division Tennessee Department of Revenue Toll-Free: (800) 342-1003 Taxpayer Services Division Out-of-State: (615) 253-0600 Andrew Jackson Building TDD: (615) 741-7398 500 Deaderick Street Nashville, Tennessee 37242-1099 Regional Offices Memphis Chattanooga Jackson 3150 Appling Road 1301 Riverfront Parkway Lowell Thomas State Office Building Bartlett, TN 38133 Suite 203 225 Dr. Martin L. King Jr. Drive Chattanooga, TN 37402 Suite 340 Jackson, TN 38301 Johnson City Knoxville 204 High Point Drive 7175 Strawberry Plains Pike Johnson City, TN 37601 Suite 209 Knoxville, TN 37902 1
Franchise and Excise Taxes Legislative Changes Included in the 2019 Franchise and Excise Tax Guide (1) Responders to state-declared disaster - Out-of-state businesses, who do not otherwise have nexus in Tennessee, who are responding to a state-declared disaster are exempt from franchise and excise taxes for the income generated from performing disaster or emergency related work in the state in response to the disaster, effective May 10, 2019. (Page 17) (2) Repatriated earnings and global intangible low-taxed income (GILTI) - For taxpayers with repatriated earnings or GILTI in their federal taxable income, Public Chapter 306 establishes adjustments for computing Tennessee net earnings. This legislation applies to all tax periods beginning on or after January 1, 2018. (Pages 23 and 25) (3) Job tax credit - Two provisions that allowed the Commissioners of Revenue and Economic and Community Development to lower the requirements for certain taxpayers to qualify for the job tax credit were repealed for tax years beginning on or after January 1, 2019. (Pages 44 and 46) (4) Financial institution credit – The definitions of “eligible activity” and “eligible housing entity” were expanded for the purpose of the community investment tax credit available to financial institutions, effective May 10, 2019. (Pages 48 and 49) (5) Broadband credit - The credit that was available to broadband service providers for purchases of qualified broadband internet access equipment used in Tier 3 and Tier 4 counties was repealed, effective July 1, 2019. (Page 50) 2
Franchise and Excise Taxes Table of Contents The Franchise and Excise Taxes 6 Who Is Liable? 6 Not-for-profit Status 7 Registration 7 Secretary of State Requirements 7 Nexus and Doing Business 7 Classifications of Businesses 8 Financial Institutions 8 Captive Real Estate Investment Trusts 10 Terminating a Business 11 Exempt Entities 13 Entities Specifically Exempted Under Statute 13 Publicly Traded Real Estate Investment Trusts 16 Annual Certification 16 The Franchise Tax 18 The Measure of the Tax 18 Net Worth 18 Adjustments and Other Provisions 20 Exemptions 21 The Excise Tax 22 The Measure of the Tax 22 Net Earnings 22 Additions 22 Deductions 23 Permanent Decoupling from Federal Provisions 25 Business and Non-business Earnings and Losses 25 Allocation of Non-business Earnings (Losses) 26 Intangible Expense Add-Back and Disclosure Requirements 26 Intangible Income 28 Gain or Loss Recognition on Distribution of Assets 28 Disclosure Requirements on Dividends Received from Captive REIT 29 Apportionment to Tennessee 30 Apportionment by Multi-state Corporations 30 The Property Factor 30 The Payroll Factor 30 The Receipts Factor 31 Market-based Sourcing 31 Distribution Incentives 33 3
Franchise and Excise Taxes Table of Contents Apportionment to Tennessee (continued) Variances from the Standard Apportionment Formula 33 Apportionment of the Net Worth of Common Carriers 34 Railroads 34 Motor Carriers 34 Rail and Motor Carriers 35 Pipelines 35 Air Carriers 35 Air Express Carriers 35 Barges 35 Manufacturers 36 Apportionment of Financial Institutions 36 Business and Non-business Earnings (Losses) 38 Credits 39 Income Tax Credit 39 Industrial Machinery Tax Credit 39 Job Tax Credit 40 General Provisions 40 Key Terms Defined 41 Additional Annual Credit Tier 2, 3, or 4 Enhancement County 43 Additional Annual Credit Higher Level of Investment and Job Creation 43 Additional Annual Credit Adventure Tourism District 45 Special Provisions 45 Job Tax Credit for Employing Persons with Disabilities 46 Community Resurgence Jobs Tax Credit 47 Legislative Changes to Job Tax Credit Public Chapters 1019 and 759 47 Part-time and Seasonal Adventure Tourism Jobs 48 Gross Premiums Tax Credit 48 Financial Institution Loans to Eligible Housing Entities 48 Tennessee Rural Opportunity Fund Credit 49 Brownfield Property Tax Credit 49 Consolidations, Mergers, and Like Events 50 Qualified Broadband Internet Access Equipment 50 Credits Repealed 50 Returns and Payments 51 Electronic Filing 51 Filing the Annual Return 51 Proration of Franchise Tax for Partial Year Returns 51 Financial Institutions Combined Return 51 Estimated Tax Payments and Penalties 52 Extension of Filing Time 52 Penalties for Late Filing 53 4
Franchise and Excise Taxes Table of Contents Penalties for Failure to Disclose Transactions 53 Delinquent Accounts Certified to the Secretary of State 53 Paper Forms 53 General Provisions 54 Mailing Date 54 Electronic Payments 54 Electronic Filing and Tennessee Taxpayer Access Point (TNTAP) 54 Penalties 55 Interest 55 Audits and Assessments 56 Audits and Overpayments 56 Keeping Records 56 Refunds 56 Dishonored Checks 57 The Taxpayer Bill of Rights 58 5
Franchise and Excise Taxes The Franchise and Excise Taxes Who Is Liable? The excise tax is a tax imposed on the Any person having substantial nexus with, privilege of doing business in Tennessee. and doing business in, Tennessee is liable General partnerships and sole for the franchise and excise tax. In this proprietorships are not subject to the tax. regard, “person” or “taxpayer” means The tax is based on net earnings or every corporation, subchapter S income for the tax year. [Tenn. Code Ann. corporation, Limited Liability Company, § 67-4-2007] professional limited liability company, registered limited liability partnership, The franchise tax is also levied upon the professional registered limited liability privilege of doing business in Tennessee partnership, limited partnership, and is based on the greater of net worth cooperative, joint-stock association, or the book value of real or tangible business trust, regulated investment personal property owned or used in company, real estate investment trust, Tennessee. For this purpose, net worth or state-chartered or national bank, or state- property values at the end of the taxable chartered or federally chartered savings period are used. [Tenn. Code Ann. § 67-4- and loan association. [Tenn. Code Ann. § 2104] 67-4-2004] Both taxes are state taxes for state A person doing business in Tennessee purposes only. No county, municipality, or without incorporating, domesticating, taxing district shall have power to levy like qualifying, or otherwise registering in taxes. Tennessee, or doing business in Tennessee while its charter or other Although the franchise and excise taxes registration is forfeited, revoked, or are two separate taxes, the intention of suspended, will not be relieved from filing the state legislature, and the policy of the a return and paying the tax for each tax Department of Revenue, is that they are year that it does business in Tennessee. part of the same taxing scheme. [Tenn. Code Ann. §§ 67-4-2105(c), 2007(b)] Generally, any taxpayer that is liable for one will be liable for both. The use of the If a taxpayer dissolves without settling its terms “franchise and excise tax” or “the franchise and excise tax obligations, the tax” in this publication will indicate officers, stockholders, partners, members, applicability to both taxes. Persons liable principals, or employees may be held for the tax will register for both on one liable for the tax to the extent that they form and must file returns on one form. received any of the entity’s corporate The taxable periods for both the franchise property in the liquidation process. [Tenn. and excise taxes are always coincidental. Code Ann. §§ 67-4-2016, 2117] A return is required for every fiscal closing of the corporate books of each taxpayer and must be filed coincidentally with each federal return filing period. 6
Franchise and Excise Taxes The Franchise and Excise Taxes appropriate forms and fees must be filed (continued) with the Tennessee Secretary of State. Any amendments must also be filed with the Not-for-profit Status Secretary of State’s office. All corporations, limited liability companies, Franchise and excise taxes are not and limited partnerships qualified with applicable to nonprofit persons as defined the Tennessee Secretary of State must file by law. They must file an annual report an annual report and pay a filing fee with with the Secretary of State and pay the that office. The report is due on the first filing fee. However, any nonprofit entity day of the fourth month following the with income from activities that are not corporation’s fiscal closing. related to the reason it was granted nonprofit status is liable for the franchise and excise taxes on that income. [Tenn. Nexus and Doing Business Code Ann. §§ 67-4-2007(a) and 67-4- [Tenn. Code Ann. § 67-4-2004] 2105(a)] For tax years beginning on or after Registration January 1, 2016, all nonexempt entities are subject to the tax if they are “doing All persons subject to the franchise and business in Tennessee” and have excise tax should register with the “substantial nexus in this state.” Department of Revenue within 15 days after the date the person becomes subject “Doing business in Tennessee” means an to the tax. Electronic registration is activity purposefully engaged in within available on the Tennessee Taxpayer Tennessee by a person with the object of Access Point (TNTAP) accessible from the gain, benefit, or advantage consistent with Department’s website. [Tenn. Code Ann. § the intent of the general assembly to 67-4-2003(c)]. There is no fee for subject such persons to the tax to the registration. fullest extent permitted by the Constitution. The law provides some Taxpayers that need additional exceptions to this definition. See Tenn. information concerning this tax may visit Code Ann. § 67-4-2004(14)(E). or call one of the Department of Revenue offices listed on the first page of this “Substantial nexus in this state” means publication. Trained personnel are any direct or indirect connection of the available there to explain Tennessee’s taxpayer to this state such that the tax system and to answer your taxpayer can be required under the questions. If online filing is not possible, Constitution of the United States to remit taxpayers may mail the Application for the tax. Such connection includes, but is Franchise, Excise Tax Registration form to not limited to, any of the following: the address shown on the instructions. + The taxpayer is organized or Secretary of State Requirements commercially domiciled in To obtain a corporate charter, articles of Tennessee; organization, a certificate of limited + The taxpayer owns or uses its partnership, or a certificate of authority capital in Tennessee; for out-of-state corporations, the 7
Franchise and Excise Taxes The Franchise and Excise Taxes (continued) Classifications of Businesses [Tenn. Code Ann. § 67-4-2007] + The taxpayer has a systematic and continuous business activity in this Businesses will be classified as state that has produced gross corporations, partnerships, or other types receipts attributable to customers in of business entities consistent with the Tennessee; way they are classified for federal income + The taxpayer licenses intangible tax purposes and taxed accordingly. property for use by another party in Entities disregarded for federal income the state and derives income from tax purposes, except limited liability that use of intangible property in companies whose single member is a this state; or corporation, will not be disregarded for + The taxpayer has a bright-line Tennessee franchise and excise tax presence in the state. A person has purposes. Except for unitary groups of a bright-line presence in this state financial institutions, captive REIT for a tax period if any of the affiliated groups, or business entities that following applies: have been required or permitted to file Receipts in TN > $ 500,000 or 25% franchise and excise tax returns on a of total receipts from sales combined, consolidated, or separate Property in TN > $ 50,000 or 25% accounting basis, each taxpayer will be of total property considered an separate and single Payroll in TN: > $ 50,000 or 25% of business entity for Tennessee franchise total compensation paid and excise tax purposes. Each entity will file its Tennessee franchise and excise tax With regard to motor carriers, substantial return reflecting only its own business nexus only exists if the carrier: (1) activities. provides intrastate transportation services Financial Institutions within Tennessee; (2) makes deliveries of [Tenn. Code Ann. §§ 67-4-2004 and 2105] goods into Tennessee that originate in another state; or (3) transports goods For franchise and excise tax purposes, a from Tennessee for delivery into another “financial institution” is defined as a state. holding company, any regulated financial corporation, a subsidiary of a holding Public Law 86-272 precludes the company or a regulated financial assessment of excise tax when the only corporation, an investment entity that is activity is solicitation of orders for sales of indirectly more than 50% owned by a tangible personal property to be accepted, holding company or a regulated financial approved, and shipped from outside corporation, or any other entity that is Tennessee. However, nexus would exist carrying on the business of a financial for franchise tax. institution. “Financial institution” does not include insurance companies subject to For tax year beginning prior to January 1, tax under Tenn. Code Ann. §§ 56-4-201 2016, before the definition of “substantial through 56-4-214. nexus” was enacted, a business was The Franchise and Excise Taxes generally required to have “physical (continued) presence” nexus. 8
Franchise and Excise Taxes The “business” of a financial institution is A financial institution is not considered to defined as the business that a regulated be conducting the business of a financial financial corporation may be authorized institution in this state if its only activity is to do under state or federal law or the the ownership of an interest in one or business that its subsidiary is authorized more of the following types of property, to do by the proper regulatory authorities; including activities that are required to the business that any person organized acquire or dispose of the property, to under the authority of the United States service the property, to collect income or organized under the laws of any other from the property, or to acquire or taxing jurisdiction or country does or has liquidate collateral relating to the authority to do that is substantially similar property: to the business that a corporation may be created to do under title 45, or any + A real estate mortgage investment business that a corporation or its conduit, real estate investment subsidiary is authorized to do by title 45; trust, or regulated investment otherwise making, acquiring, selling or company as defined by the Internal servicing loans or extensions of credit, Revenue Service. including, but not limited to, the following: + A loan-backed security representing secured or unsecured consumer loans; ownership or participation in a pool installment loans; mortgages or deeds of of promissory notes or certificates trust or other secured loans on real or of interest that provide for tangible personal property; credit card payments, or reasonable projections loans; secured or unsecured commercial of payments, on the notes or loans of any type; letters of credit and certificates. acceptance of drafts; the holding of + A loan, lease, note, or other asset participation loans in which more than attributed to this state in which the one (1) lender is a creditor to a common payment obligations were solicited borrower; loans arising in factoring; and and entered into by an independent any other transactions of a comparable person not acting on behalf of the economic effect; leasing or acting as an owner. agent, broker or adviser in connection + The right to service or collect income with leasing real and personal property from a loan or other asset from that is the economic equivalent of an which interest on the loan or other extension of credit; or operating a credit asset is attributed to this state and card business. in which the payment obligations were solicited and entered into by Notwithstanding the above definition, if an independent person that is not the business of a financial institution acting on behalf of the owner. generates less than fifty percent (50%) of a + Demand deposit clearing accounts, person's gross income, the person shall federal funds, certificates of deposit, not be considered to be a financial and other similar wholesale banking institution. For purposes of this instruments issued by other computation the gross income of a person financial institutions. does not include income from + Securities. nonrecurring, extraordinary transactions. 9
Franchise and Excise Taxes The Franchise and Excise Taxes combined return and pay tax based on (continued ) the apportioned combined net earnings of the entire captive REIT affiliated group, as + Any intangible, tangible, real, or personal property acquired in defined in Tenn. Code Ann. § 67-4-2006(a). satisfaction, fully or in part, of any a The members of the group shall designate payment obligation that is in one member that is subject to tax in this default, secured or unsecured, if the state to file the combined return. Each ownership of the interest would be member subject to tax in this state shall exempt otherwise. be jointly and severally liable for the tax imposed by this part with regard to the Captive Real Estate Investment Trusts affiliated group. [Tenn. Code Ann. § 67-4- [Tenn. Code Ann. §§ 67-4-2004, 2006, 2007(e)(3)] 2007, 2013, 2106, and 2111] Net Worth defined for a captive REIT “Captive real estate investment trust” or affiliated group: For a captive REIT “captive REIT” means an entity with an affiliated group, “net worth” is defined as election in effect under § 856(c)(1) of the the difference between the total assets Internal Revenue Code, compiled in 26 less the total liabilities of the affiliated U.S.C. § 856(c)(1), in which any other entity group at the close of business on the last or individual, directly or indirectly, has at day of the tax year, as shown by a pro least eighty percent (80%) ownership forma consolidated balance sheet interest by value determined in including all members of the group. The accordance with generally accepted pro forma consolidated balance sheet accounting principles and whose shares shall be prepared in accordance with are not traded on a national stock generally accepted accounting principles exchange. [Tenn. Code Ann. § 67-4-2004] wherein transactions and holdings between members of the group and “Captive REIT affiliated group” means a holdings in non-domestic persons have captive REIT and any entity in which the been eliminated. [Tenn. Code Ann. § 67-4- captive REIT, directly or indirectly, has 2106(b)] more than fifty percent (50%) ownership interest; provided, however, that a Net Worth Apportionment for a captive “captive REIT affiliated group” does not REIT affiliated group: Except as may be include a group in which the captive REIT otherwise provided in this part, the net is owned, directly or indirectly, by a bank, worth of a taxpayer doing business both a bank holding company, or a public REIT. in and outside Tennessee shall be [Tenn. Code Ann. § 67-4-2004] apportioned to this state by multiplying such values by a fraction, the numerator “Real estate investment trust” means an of which shall be the property factor plus entity that has an election in effect under the payroll factor plus triple the receipts § 856(c)(1) of the Internal Revenue Code. factor and the denominator of such [Tenn. Code Ann. § 67-4-2004] fraction shall be five. [Tenn. Code Ann. § 67-4-2111(a)(2))] Captive REIT affiliated groups are required to file a combined return. Persons subject to tax in this state that are members of a captive REIT affiliated group shall file a 10
Franchise and Excise Taxes The Franchise and Excise Taxes Ann. § 67-4-2013(d)] For all tax years (continued ) beginning before July 1, 2016, the sales factor was double weighted instead of “Net earnings” and “net loss” defined for a triple weighted. captive REIT affiliated group: Captive REIT affiliated group; “Net earnings” or “net Terminating a Business loss” is defined as the combined net earnings or net loss, for all members of Before a taxpayer can terminate its the affiliated group, with all dividends, charter, articles of organization, or receipts, and expenses resulting from certificate of limited partnership, or transactions between members of the withdraw its certificate of authority or affiliated group excluded when computing other similar document, a tax clearance combined net earnings, and subject to the certificate must be issued by the adjustments in Tenn. Code Ann. §§ 67-4- Department of Revenue. In order to 2006(b) and (c) on a combined basis, even receive a tax clearance certificate, a if some of the members would not be taxpayer must file all returns to date subject to taxation if considered apart and a final franchise and excise tax return from the affiliated group. [Tenn. Code through the date of liquidation or the date Ann. § 67-4-2006(a)(9)] the taxpayer ceased operations in Tennessee. Dividends Paid Deduction required to be added to Net Earnings: There shall be A taxpayer in the process of liquidating added to net earnings any deduction by a and ceasing business operations will be captive REIT for dividends paid, as defined considered in a “Final Return Status.” If the under 26 U.S.C. § 561, that is allowed and liquidation occurs all on one day, the taken under 26 U.S.C. § 857(b)(2)(B); franchise tax will be determined by the however, this add-back does not apply to balance sheet values immediately a captive REIT that is owned, directly or preceding liquidation. If the liquidation indirectly, by a bank, a bank holding occurs over more than one day, then the company, or a public REIT. [Tenn. Code taxpayer will use monthly average values Ann. § 67-4-2006(b)(1)(O)] to compute the franchise tax bases for any return(s) in a “Final Return Status.” A Net earnings apportionment for a captive schedule of liquidation, distribution, or REIT affiliated group: The net earnings of disposition of all assets must accompany a captive REIT affiliated group shall be these return(s). [Tenn. Code Ann. § 67-4- apportioned to Tennessee based on 2115] property, payroll, and triple weighted When these requirements have been met, receipts as provided in Tenn. Code Ann. § the Department of Revenue will issue the 67-4-2012, including the factors of those tax clearance certificate for termination or members of the affiliated group that withdrawal. The certificate will be mailed would not be subject to taxation in this to the taxpayer’s mailing address unless state if considered apart from the otherwise specified. affiliated group; however, dividends, receipts, and expenses resulting from transactions between members of the affiliated group shall be excluded for purposes of apportionment. [Tenn. Code 11
Franchise and Excise Taxes The Franchise and Excise Taxes (continued ) To complete the termination or withdrawal process, the taxpayer must contact the Tennessee Secretary of State’s office for that office’s requirements. The tax clearance certificate is valid for 45 days from the date of issue. It is the Commissioner’s responsibility to collect the franchise and excise tax due, plus any penalties and interest, from any officer, stockholder, partner, member, principal, or employee of a taxpayer that has ceased business without paying the tax, if such person has received property of the defunct business. The amount of tax that may be collected in this situation may not exceed the value of the property received by the person from whom collection is sought. [Tenn. Code Ann. §§ 67-4-2016 and 67-4-2117] 12
Franchise and Excise Taxes Exempt Entities + Certain venture capital funds Entities Specifically Exempted Under dealing primarily in trading Statute securities in non-publicly traded companies on its own behalf. The The law exempts seventeen entities capital of the fund may be derived from the franchise and excise tax: from investments by one or more affiliates if such affiliates also + Corporations organized in qualify as venture capital funds. Tennessee, whose sole purpose is [Tenn. Code Ann. § 67-4- furthering industrial development 2008(a)(5)] in Tennessee communities, whose + Certain limited liability companies, stockholders receive no income limited partnerships, and limited other than interest on money liability partnerships, the activities invested in the corporation, and of which are at least 66.67% whose officers receive no farming or holding personal compensation. [Tenn. Code Ann. § residences where one or more of 67-4-2008(a)(1)] its partners or members reside. + Corporations organized for the [Tenn. Code Ann. § 67-4- purpose of erecting or owning a 2008(a)(6)] meeting place for more than one + Limited liability companies, limited Masonic lodge, lodge of Odd liability partnerships, or limited Fellows, or similar lodge; which partnerships existing on May 1, could obtain general welfare 1999, that: charters; and whose stock is were at least 98% owned by owned by lodges participating in corporate members of an the common meeting place. affiliated group defined in 26 USC Commercial rental income § 1504(a); received by such corporations is were formed and operated for not tax exempt. [Tenn. Code Ann. the purpose of acquiring notes § 67-4-2008(a)(2)] and other evidence of + Regulated investment companies indebtedness from its members; or funds organized as unit the assets of which serve as investment trusts, taxable as security for third party borrowings grantor trusts under federal law, or indebtedness; and whose investment value had at least 80% of the income consists of at least 75% from these instruments included government bonds of the United in the income of a corporation States, the state of Tennessee, or doing business in Tennessee; and any county, municipal, or political were subject to apportionment subdivision of the state. [Tenn. rules. [Tenn. Code Ann. § 67-4- Code Ann. § 67-4-2008(a)(3)] 2008(a)(7)] + Federal and state credit unions, production credit associations, and investment companies organized under state law. [Tenn. Code Ann. § 67-4-2008(a)(4)] 13
Franchise and Excise Taxes Exempt Entities (continued) making this election must file the + Limited partnerships and limited required documentation with the liability companies organized Secretary of State to become fully exclusively for the purpose of liable for the debts, obligations, providing affordable housing are and liabilities of the entity and are exempt from franchise and excise referred to as “obligated taxes if the entity receives an members.” In the event that any allocation of low-income housing obligated member or any owner tax credits pursuant to § 401 of of an obligated member, whether the Internal Revenue Code (IRC) of such ownership is in whole, in 1986 and has in effect an part, direct, or indirect, provides “extended low-income housing limited liability protection, the commitment” as defined in obligated member entity is liable Internal Revenue Code § for franchise and excise taxes on 42(h)(6)(B) with respect to each the portion of income and equity residential building owned by the attributable to such obligated entity for the period covered by member. This is effective for tax the return. Effective for tax period periods ending on or after July 1, ending on or after June 20, 2003. 2005. [Tenn. Code Ann. § 67-4- [Tenn. Code Ann. § 67-4- 2008(a)(9)] 2008(a)(8)] + Entities, classified as partnerships + Limited liability companies, limited or trusts under 26 USC § 7701, or liability partnerships, or limited that have elected to be treated as partnerships, all of whose a REMIC or FASIT entity, whose members or partners are fully sole purpose is the asset-backed liable for the debts, obligations, securitization of debt obligations. and liabilities of the entity, and [Tenn. Code Ann. § 67-4- who have filed appropriate 2008(a)(10)] documentation with the office of + Non-corporate entities that are at the Secretary of State prior to the least 95% family owned. At least first day of the taxable year for 66.67% of the entity’s income which a return is filed. However, in must be derived from activities some instances, a secondary level that produce passive investment of limited liability entities may be income, or from a combination of formed between the initial limited the production of passive liability entity and the individual investment income and farming as owners in an attempt to avoid the defined by statute. Effective July 1, franchise and excise taxes while 2009, the definition of “rents” still providing limited liability to relative to passive investment the individual owners or partners. income was revised to include Members or partners of a limited only rental income from liability entity may make an residential or farm property. election for the entity to be “Residential property” includes treated as an exempt “obligated only property leased or rented for entity.” The members or partners residential purposes and includes 14
Franchise and Excise Taxes Exempt Entities (continued) diversified investing fund [Tenn. Code Ann. § 67-4-2008(a)(12)] not more than four residential units at any one location. Four + Tennessee historic property separately deeded condominium preservation or rehabilitation units within a building with over entities. [Tenn. Code Ann. § 67-4- four units would qualify. “Farm 2008(a)(13)] property” does not include + Effective June 3, 2008, insurance acreage used for recreational companies as defined in Tenn. purposes by clubs, including golf Code Ann. § 56-1-102 are exempt. course playing hole [Tenn. Code Ann. § 67-4 - improvements. Additionally, 2008(a)(14)] ownership units held in trust are + Any qualified TNInvestco, as not treated as owned by members defined in Tenn. Code Ann. § 4-28- of the family unless the ownership 102, that has received an units are property of a trust allocation of investment tax described in Tenn. Code Ann. § 67- credits and continues to 4-2008(a)(11)(B)(i)(e) (namely, a participate in the program testamentary trust). [Tenn. Code established by the Tennessee Ann. § 67-4-2008(a)(11)] Small Business Investment + Diversified investing funds are Company Credit Act. Effective date exempt from franchise and excise June 30, 2010. [Tenn. Code Ann. § taxes if the fund is a limited 67-4-2008(a)(15).] partnership, limited liability An exemption is available for company, or limited liability facilities owned directly, in whole partnership or business trust that or in part, by a branch of the is formed and operated for the United States Armed Forces. The purpose of buying, holding, or entity must derive more than 50% selling qualified investment of its gross income from the securities on its own behalf. The operation of facilities that are capital of the fund must be located on property owned or primarily derived from leased by the federal government investments by entities or and are operated primarily for the individuals that are not affiliated benefit of members of the United with the fund. At least 90% of the States Armed Forces. [Tenn. Code fund’s gross income must consist Ann. § 67-4-2008(a)(16)] of interest, dividends, and gains + Effective for tax periods ending on from the sale or exchange of such or after July 1, 2015, a franchise investment securities. No less and excise tax exemption is than ninety percent (90%) of the available for certain interests in diversified investing fund's cost of qualified low-income community its total assets consist of qualifying historic structures. The exemption investment securities, deposits at is available to: any qualified low- banks or other financial income community historic institutions, and office space and structure owner; any qualified equipment reasonably necessary to carry on its activities as a 15
Franchise and Excise Taxes Exempt Entities (continued) For an entity that does not directly or low-income community historic indirectly distribute 100 % of its net structure lessee; or any entity earnings or net losses to a publicly traded that directly or indirectly owns an real estate investment trust, the entity is interest in a qualified low-income exempt only to the extent of the community historic structure distribution to the publicly traded real owner, a qualified low-income estate investment trust. [Tenn. Code Ann. community historic structure § 67-4-2019] lessee, or both, and that has no business operations or assets Annual Certification other than: (a)its investment in the qualified low-income community Entities claiming exemption from historic structure owner, the franchise and excise taxes under Tenn. qualified low-income community Code Ann. § 67-4-2008, except as historic structure lessee, or both; indicated below, must file an application (b) business operations and assets for exemption with the Department. incidental to its investment in the Effective for tax years beginning on or qualified low-income community after January 1, 2017, the date for filing an historic structure owner, the application for exemption is the 15th day qualified low-income community of the fourth month following the close of historic structure lessee, or both; the first tax year for which the person and (c ) De minimis other claims the exemption. [Tenn. Code Ann. § operations and assets. "Qualified 67-4-2008(f)(1) [Public Chapter 194, Acts of low-income community historic 2017] structure," "Qualified low-income community historic structure Persons that have previously filed the lessee," and "Qualified low- statutorily required application for income community historic exemption must annually renew their structure owner” is defined in the exempt status. The renewal is due on or code. [Tenn. Code Ann. § 67-4- before the fifteenth day of the fourth 2008(a)(17) month following the close of the person’s tax year. Publicly Traded Real Estate Investment Trusts The initial application and annual renewal is made on form FAE 183 Application for Any entity treated as a partnership for Exemption / Annual Exemption Renewal. federal tax purposes that directly or indirectly distributes 100 percent of its net Persons claiming exemption under Tenn. earnings or net losses to a publicly traded Code Ann. §§ 67-4-2008(a)(6) or (11) must real estate investment trust is exempt complete the Disclosure of Activity section from the excise tax. A “publicly traded real of form FAE 183 when completing the estate investment trust” is defined as an form for the initial application and the entity that has an election in effect under annual renewal. § 856 of the Internal Revenue Code, and that files with the Securities and Exchange Commission and whose shares are traded on a national stock exchange. 16
Franchise and Excise Taxes Exempt Entities (continued) that business activities first began in the state. No person will be exempt from the franchise and excise taxes until the proper The disaster response period is the period exemption initial application or renewal that begins ten days before the date of form has been filed, as required. When a the earliest event establishing a disaster person fails to file the appropriate initial or emergency and that ends 120 days application or renewal form in a timely thereafter, or later if set by the governor manner, a statutory penalty of $200 will or president of the United States. Effective be imposed for the delinquent filing. May 10, 2019 [Tenn. Code Ann. § 58-2- [Tenn. Code Ann. § 67-4-2008(f)(3); Public 904(c)(5)] Chapter 194, Acts of 2017] Any person who claims exemption under Tenn. Code Ann. § 67-4-2008 but who fails to meet the criteria for exemption will be assessed all due tax, penalty, and interest. These requirements do not apply to persons qualified for exemption under Tenn. Code Ann. § 67-4-2008, sub§§ (a)(1), (a)(2), (a)(3), (a)(4), (a)(13), (a)(14), and (a)(15). Responders to a State-Declared Disaster Out-of-state businesses, who do not otherwise have nexus in Tennessee, who are responding to a state-declared disaster are exempt from franchise and excise taxes for the income generated from performing disaster or emergency related work in the state. This work includes repairing, renovating, installing, building, and rendering services or other business activities that relate to critical infrastructure that has been damaged, impaired, or destroyed during a disaster or emergency and activities conducted in good faith before a potential disaster to prepare for the provision of this work. After a disaster response period, if a responding out-of-state business remains in the state the business loses this exemption and may be subject to the franchise and excise tax from the date 17
Franchise and Excise Taxes The Franchise Tax furniture and office machinery and The Measure of the Tax equipment - 2; delivery or mobile equipment - 1. [Tenn. Code Ann. § 67-4- The franchise tax rate is 25 cents per 2108(a)(3)] $100, or major fraction thereof, of a taxpayer’s net worth at the close of the tax The value of owned or leased mobile year covered by the required return. The property, located both in and outside minimum franchise tax payable each year Tennessee during a tax period, will be is $100. A taxable business that is inactive determined on the basis of the total or has had its charter or other registration percentage of time this property is in the forfeited, revoked, or suspended, but has state during the tax period. The value of not been dissolved or otherwise properly an automobile or truck assigned to a terminated, is not relieved from filing a traveling employee will be considered in return and paying the minimum franchise Tennessee if the vehicle is licensed in and excise tax. [Tenn. Code Ann. §§ 67-4- Tennessee or if the employee’s 2106 and 2119] compensation is assigned to Tennessee for purposes of the taxpayer’s The measure of the tax levied will not be apportionment formula payroll factor. less than the actual book value (cost less [Tenn. Code Ann. § 67-4-2108(a)(4)] accumulated depreciation) of the real and tangible property owned or used in Net Worth Tennessee, excluding exempt inventory and two thirds of the capital investment For taxpayers filing on a separate entity used to qualify for the additional annual basis, “net worth” is defined as the jobs tax credit for higher level investments difference between a taxpayer’s total under Tenn. Code Ann. § 67-4-209(b)(2)(B). assets less its total liabilities. If the The value of any property under taxpayer does not maintain its books and construction and not actually utilized by records in accordance with generally the taxpayer will not be included in the tax accepted accounting principles, net worth base. [Tenn. Code Ann. § 67-4-2108(a)] will be computed according to the accounting method used by the taxpayer Property that is used primarily for air or for federal tax purposes, so long as the water pollution control or treatment of method fairly reflects the taxpayer’s net hazardous waste, certified by the worth for purposes of the franchise tax. appropriate government authority as For taxpayers required by this part to file necessary to meet the requirements of as a unitary group on a combined basis, state, federal, or local law, will not be “net worth” is defined as the difference included in the franchise tax minimum between each such taxpayer’s total assets measure. [Tenn. Code Ann. § 67-4-2108(5)] less its total liabilities computed in accordance with generally accepted The value of rental property will be accounting principles. [Tenn. Code Ann. § determined by multiplying the net annual 67-4-2106(b)] rental by the following multiples: real property - 8; machinery and equipment that is used in manufacturing - 3; 18
Franchise and Excise Taxes The Franchise Tax (continued) that, standing alone, is subject to the Effective for tax periods beginning on or Tennessee franchise tax; (2) All other after January 1, 2004, the deduction from domestic persons in which the taxpayer, a taxpayer’s net worth base for the value directly or indirectly, has more than fifty of stock held in companies doing business percent (50%) ownership interest; (3) All in Tennessee was repealed and replaced other domestic persons that, directly or with a voluntary election to calculate the indirectly, have more than fifty percent net worth base for franchise tax purposes (50%) ownership interest in the taxpayer; on a consolidated basis. Once made, the and (4) All other domestic persons in election is binding for a minimum of 5 which a person described in (3) above, years. Taxpayers continue to pay on the directly or indirectly, has more than fifty greater of apportioned net worth or the percent (50%) ownership interest, value of real and tangible personal regardless of whether such persons do property in Tennessee regardless of the business in Tennessee. A noncorporate method that is used to arrive at the taxable entity is more than fifty percent apportioned net worth. (50%) owned, if, upon liquidation more than fifty percent (50%) of the assets of A taxpayer that is a member of an the noncorporate taxable entity, directly affiliated group may elect to compute its or indirectly, accrue to a member or net worth on a consolidated basis, members of the affiliated group. A provided that, upon election, each “domestic person” is any person with more member of the group will be required to than twenty percent (20%) of the average compute its net worth on a consolidated of its property, payroll and receipts basis. The group election is made on the factors, as each factor is calculated for a Consolidated Net Worth Election separate entity under Tenn. Code Ann. § Registration Application. This election 67-4-2111, in the United States. [Tenn. should be made on or before the the due Code Ann. § 67-4-2004(15)] date of the return for the period for which the election is to first apply. The election An affiliated group will generally not be is binding for five years. Elections remain allowed to elect to compute net worth on in effect after the minimum period until a consolidated basis unless all members revoked. The affiliated group may revoke of the group close their taxable year on the election, after five years, by filing the the same date. If a member exits the Consolidated Net Worth Election consolidated group during a tax year Registration Application form with the because of a change in ownership, Revoke Election box checked. The form merger, or liquidation of the member, the should be mailed to the address shown member exiting the group will be on the form on or before the due date of excluded from the group and will the tax return for the period during which compute its net worth individually. such election is to be revoked. For a taxpayer electing to compute its net Tenn. Code Ann. § 67-4-2004(2) provides a worth on a consolidated basis, net worth uniform definition of an “affiliated group” is defined as the difference between the for franchise tax and excise tax purposes. total assets less the total liabilities of the An "affiliated group" is: (1) A taxpayer affiliated group at the close of business on 19
Franchise and Excise Taxes The Franchise Tax (continued) Adjustments and Other Provisions the last day of the tax year, as shown by a pro forma consolidated balance sheet If a corporation whose capital stock is including all members of the group. The inadequate for its business needs is pro forma consolidated balance sheet extended credit or has indebtedness to, should be prepared in accordance with or guaranteed by, a parent or affiliated generally accepted accounting principles corporation, the indebtedness must be wherein transactions and holdings included in computation of the between members of the group and corporation’s net worth franchise tax holdings in non-domestic persons have base. This provision only applies to been eliminated. [Tenn. Code Ann. § 67- taxpayers that have not elected to file net 4-2106(b)] worth on a consolidated basis. [Tenn. Code Ann. § 67-4-2107(c)(1)] The Commissioner of Revenue is For purposes of calculating the value of authorized, upon written request from the real and tangible personal property for taxpayer, to exclude one or more persons the franchise tax, railroad companies may from the taxpayer’s affiliated group if it is value such property in accordance with determined that the persons are so the method used for federal tax purposes remote from the taxpayer that it cannot so long as the method used for federal tax obtain the information necessary to purposes fairly reflects the property’s calculate the net worth of the group, and actual value. [Tenn. Code Ann. § 67-4- either that the person is included in the 2108(a)(3)] group only because of a direct or indirect interest or that the person has a direct or The franchise tax imposed on any indirect interest in both the taxpayer and manufacturer, one whose principal another person that is remote from the business is fabricating or processing taxpayer. In any case, excluding such tangible personal property for resale and persons from the affiliated group must use or consumption off the premises, will result in a fair representation of the be assessed only on the first $2 billion of affiliated group’s net worth. If the apportioned net worth or real and exclusion is granted, all members of the tangible personal property owned or used affiliated group are bound by it. The in Tennessee. [Tenn. Code Ann. § 67-4- Commissioner may require information to 2121] substantiate a request, due on or before the due date of the return when the For tax periods beginning on or after exclusion is to be applicable, and may for January 1, 2004, the provision under good cause accept a late filed request. which the value of an interest which is [Tenn. Code Ann. § 67- 4-2103(d)] held by one taxpayer in any other taxpayer paying the franchise tax, or the gross premiums tax levied under either Tenn. Code Ann. §s 56-4-205 or 56-4-206, and doing business in this state, could be deducted from the franchise tax of the first taxpayer was repealed. This provision was replaced with the option to elect to calculate the net worth base for franchise 20
Franchise and Excise Taxes tax purposes on a consolidated basis. [Tenn. Code Ann. § 67-4-2107(b)] The Franchise Tax (continued) Exemptions Exempt inventory may be excluded from the minimum measure of the franchise tax. “Exempt inventory” means that portion of a taxpayer's finished goods inventory in excess of $30 million that would otherwise be included in the minimum measure of the taxpayer’s franchise tax. Finished goods inventory for franchise tax purposes must be held at a manufacturing, warehousing, or distribution facility rather than at a facility where retail sales are made to customers. [Tenn. Code Ann. § 67-4-2108(a)(6)(B)-(C)] Exempt required capital investments may also be excluded from the minimum measure of the franchise tax. “Exempt required capital investments” means two thirds of the value of all capital investments that are the basis for the taxpayer’s entitlement to the job tax credit under Tenn. Code Ann. §§ 67-4- 2109(c)(2)(G) and (H). Under these provisions, certain capital investments in excess of $1 billion or $500 million, as the case may be, qualify taxpayers to take tax credits for certain qualifying jobs created as a result of such investment enterprises. [Tenn. Code Ann. § 67-4-2108(a)(1)(G)] 21
Franchise and Excise Taxes The Excise Tax In order to determine the loss carryover The Measure of the Tax from the current year, there is an add back on Schedule K of all nonbusiness All persons, except those with nonprofit earnings and any other income that was status or otherwise exempt, are subject to excluded from net earnings on Schedule J a 6.5% corporate excise tax on the net in determining the excise tax base. In earnings from business done in addition, there is an add back on Schedule Tennessee for the fiscal year. This tax is in K of any “discharge of indebtedness” in addition to any other taxes assessed the current year that was not included in under state law. Nonprofit persons and federal taxable income, and then any other exempt entities will be subject to excess amount applies to an offset of the the excise tax on net earnings in prior year’s NOL carryover available, Tennessee from all activities unrelated to applied to the oldest year first. [Tenn. and outside the scope of the activities that Code Ann. §§ 67-4-2006(c)(5&8] give them exempt status. A unitary group of financial institutions Except for unitary groups of financial may take qualified loss carryovers of any institutions, captive REIT affiliated groups, group member that is in existence as a and business entities that have been member of the group at the end of the tax required or permitted to file excise tax year if such loss has not been previously returns on a combined, consolidated, or taken by the member itself or by another separate accounting basis, each taxpayer unitary group of financial institutions is treated as a separate entity and must entitled to the loss when the member was file its excise tax return on a separate part of its unitary group. [Tenn. Code Ann. entity basis, reflecting only its own § 67-4-2006(c)(4)] business activities even though it may have filed a consolidated federal income Net Earnings tax return. [Tenn. Code Ann. § 67-4-2007] Net earnings (losses) are defined as In the case of consolidations, mergers, or federal taxable income (loss), before the like events, no carryover loss by the net operating loss deduction and special previous taxpayer will be allowed as a deductions provided for in the Internal deduction against the net earnings of the Revenue Code, plus or minus certain succeeding taxpayer. However, if the additions and deductions provided by previous taxpayer merges out of existence state law. Some examples of adjustments and into a surviving successor taxpayer are: that has no income, expenses, assets, Additions to Federal Taxable Income liabilities, equity, or net worth, the before the Net Operating Loss Deduction survivor of the merger may take any and Special Deductions (The list is not all qualified loss carryover incurred by the inclusive.) [Tenn. Code Ann. § 67-4- predecessor. [Tenn. Code Ann. § 67-4- 2006(b)(1)] 2006(c)(3)] 22
Franchise and Excise Taxes The Excise Tax (continued) + Any gain on the sale of an asset based on the asset’s federal tax + Tennessee excise tax deducted on basis without any adjustment as a the federal tax return. (Refunds of result of the taxpayer not having Tennessee excise taxes are been subject to Tennessee excise excluded from net income to the tax during any portion of the period extent they have been included in during which the taxpayer took federal taxable income in the year depreciation on the asset for of the refund.) Federal income tax purposes. [Tenn. + Interest income from state and local Code Ann. § 67-4-2006(b)(2)(C)] obligations to the extent not taxable + Any amount in excess of reasonable under federal law. The interest rent (2% per month of the appraised income so added back may be value of the property) that is paid, reduced by allowable amortization accrued, or incurred for the rental, and any interest expense not leasing, or comparable use of deductible for federal tax purposes. industrial and commercial real + Gains on sales of assets not already property (not tangible personal included in the net earnings property) owned by an affiliate, computations for federal tax whether or not the affiliate is purposes. (Capital gains are subject subject to the franchise and excise to the excise tax in the tax year taxes. [Tenn. Code Ann § 67-4- incurred.) 2006(b)(1)(N)] + Federal capital loss carrybacks or + An amount equal to 5% of carryovers. (Capital losses may be repatriated earnings and global deducted for excise tax purposes in intangible low-tax income (GILTI), the tax year incurred, and before any deductions, for all tax carryovers or carrybacks are not periods beginning on or after permitted.) January 1, 2018. [Tenn. Code Ann. + Percentage depletion in excess of §§ 67-4-2006(b)(1)(P), 67-4- cost depletion. (Only cost depletion 2006(b)(1)(Q)] is deductible for excise tax purposes.) Deductions from Federal Taxable Income + Charitable contribution carryovers. before the Net Operating Loss Deduction (Charitable contributions may be and Special Deductions (The list is not all deducted for excise tax purposes in inclusive.) [Tenn. Code Ann. § 67-4- the tax year that they are made. 2006(b)(2)] Carryovers are not permitted.) + Non-business losses net of related + Dividends earned by a taxpayer that expenses. owns 80% or more of the + Any gain that is not included in net outstanding capital stock of a earnings or loss that is realized by corporation. (Expenses incurred in an S corporation attributable to a earning the dividends need not IRC § 338(h)(10) election . reduce this deduction.) + Amounts included in federal taxable income but not taxable under state law. 23
Franchise and Excise Taxes The Excise Tax (continued) donation that the sales and use tax has actually been paid. [Tenn. Code + Actual charitable contributions Ann. § 67-4-2006(b)(2)(M)] made by the taxpayer during the tax + Effective for tax years beginning on year but not deducted for federal or after July 1, 2005, 75% of the purposes. (Contributions may be value of charitable donations made deducted for excise tax purposes to IRC 501(c)(3) exempt nonprofit in the tax ye year that they are corporations, associations, and made. Carryovers are not organizations; to IRC 501(c)(4) permitted.) (Real property exempt nonprofit civic leagues or contributed must be valued at book organizations; and to IRC 501(c)(5) value rather than fair market value.) and 501(c)(6) exempt associations and organizations. The receiving + Capital losses incurred during the exempt organization must be tax year not deducted for federal registered with the Department of purposes. (Capital losses may be Revenue for sales and use tax deducted for excise tax purposes in purposes, must spend the donated the tax year incurred. Capital loss funds on goods or services subject carryovers or carrybacks are not to the sales and use tax, and must permitted.) certify to the taxpayer making the + Net operating losses carryovers. donation that the sales and use tax (The carryover period for losses has actually been paid. Effective allocable to Tennessee is 15 years June 27, 2006, the exemption for for losses incurred in fiscal years donations made to organizations ending on or after January 15, 1984. exempt under IRC 501(c)(6) is Net operating losses can be claimed eliminated. [Tenn. Code Ann. § 67-4- only by the entity that suffered the 2006(b)(2)(P)] loss. Taxpayers are not entitled to + Any loss realized by an S use net operating losses that corporation attributable to a IRC § occurred before they became 338(h)(10) election. [Tenn. Code subject to the excise tax.) Ann. § 67-4-2006(b)(Q)] + Non-business earnings. (Non- + Any loss on the sale of an asset business earnings directly allocated based on the asset’s federal tax to Tennessee under Tenn. Code basis without any adjustment as a Ann. § 67-4-2011 are taxed in result of the taxpayer not having Tennessee at 100%.) been subject to Tennessee excise + Effective for tax years beginning on tax during any portion of the period or after July 1, 2004, 75% of the during which the taxpayer took amount donated to a qualified depreciation on the asset for federal public school support group. The income tax purposes. [Tenn. Code school support group must be Ann. § 67-4-2006(b)(2)(C)] registered with the Department of + Any amount in excess of reasonable Revenue for sales and use tax rent (2% per month of the appraised purposes, must spend the donated value of the property) that is funds on goods or services subject received for the rental, leasing, or to the sales and use tax, and must comparable use of industrial and certify to the taxpayer making the commercial real property (not 24
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