Tennessee Franchise Tax Explained

The franchise tax is a huge financial responsibility for every business operating within Tennessee. Whether your business is strictly local or an enterprise with businesses across multiple states, you want to understand what franchise tax may apply to it to maintain good compliance and reduce your tax liability. In the article below, we will see everything you have to know about Tennessee Franchise Tax, including its rate, calculation, some key deadlines, exemptions, and filing requirements.

What is the Tennessee Franchise Tax Rate?

Tennessee imposes a franchise tax of 0.25% or $0.25 per $100 on the greater of a company's net worth or the book value of real and tangible personal property owned or used in the state. The minimum franchise tax due will be $100 per year. This tax applies to all corporations, LLCs, and limited partnerships operating within the State of Tennessee.

How Franchise Tax Differs from Other Taxes

• Franchise Tax vs. Income Tax: Unlike income tax, which is based on the profits, the franchise tax is based on the net worth or the value of the property that a business has in this state.
• Franchise Tax vs. Sales Tax: The sales tax applies to the sale of goods and services, while the franchise tax is a privilege tax for the right to conduct business in Tennessee.
• Franchise Tax vs. Business Tax: Tennessee also has a business tax, which is assessed based on gross receipts and varies by industry, whereas franchise tax is fixed for any assets.

Who pays franchise tax in Tennessee?

Most of the business entities registered or doing business within Tennessee have to pay the franchise tax. These include:

• Corporation: C-corporation and S-corporation
• LLC:Limited Liability Company
• LPs and LLPs: Limited Partnerships and Limited Liability Partnerships
• Foreign entities with a presence in Tennessee

Certain organizations, including nonprofit entities and some exempt businesses, may be exempt from franchise tax (see below for exemptions).

Calculating Tennessee Franchise Tax

To calculate your Tennessee franchise tax, follow this formula:

1. Determine the greater of:
   • Your net worth (the sum of all your assets minus your total liabilities) or
   • The book value of your Tennessee property, real and tangible personal property owned or used in the state
2. Multiply this amount by 0.25% ($0.25 per $100).
3. The resulting amount must be at least the $100 minimum tax.

Example Calculation:

• A company has a net worth of $1,000,000 and $500,000 of property in Tennessee.
• The amount of the tax to be paid is 0.25% of $1,000,000 = $2,500.
• The business owes $2,500 because the tax is based on the higher of net worth or property value.

Key Deadlines and Filing Requirements

Franchise tax returns are due on the 15th day of the fourth month following the close of the business's fiscal year (April 15 for calendar-year taxpayers). Filings must be made on Tennessee's Franchise and Excise Tax Return (Form FAE170). Although encouraged, e-filing is not required; however, there are penalties assessed for late filings.

Managing Your Franchise Tax Obligations

1. Calculate Your Correct Net Worth: Make sure your financial statements show the correct amount of net worth.
2. Keep Property Records Up-to-Date: Assets in Tennessee should be correctly documented to avoid overpayment.
3. File On Time: There are penalties for late filing.
4. Avail Tax Planning Opportunities: Work with a tax professional to reduce liability by using available exemptions and deductions.

Is Franchise Tax Deductible for Federal Tax Return Purposes?

Businesses may be allowed to deduct the payments against franchise tax as an ordinary and necessary business expense on their federal tax return, whether IRS Form 1120 or 1065. The deductibility may be based upon the type of business structure or other specific circumstances of the particular business.

What Happens if a Business Fails to Pay Franchise Tax?

Businesses that don't pay their Tennessee franchise tax could face the following:

• Penalties and interest on the unpaid amount.
• Good standing loss with the Tennessee Secretary of State.
• Dissolution of business by state authorities.

How Does Franchise Tax Apply to Businesses Operating in Multiple States?

Where businesses have operations in a number of states, Tennessee only imposes on that amount of net worth or property value that arises from business transacted within the state. To that end, companies should adequately allocate income and follow state tax laws in Tennessee and other states.

Need to Manage Your Franchise Tax Obligations? Contact QMK Consulting

QMK Consulting is an accounting firm based in New York City, specializing in franchise tax compliance, accounting, and business financial planning. If you are unsure about your franchise tax obligations or need expert tax planning strategies for your business, our team is here to help.

FAQs

1. What is my franchise tax?

Franchise tax is a state-imposed tax based on the net worth or value of a business's property in Tennessee.

2. Does a single-member LLC pay franchise tax in Tennessee?

Yes, even single-member LLCs pay the franchise tax unless they opt to be taxed as a sole proprietorship.

3. Is Tennessee a franchise state?

Tennessee does require most businesses to pay franchise tax, but it is not a franchise registration state in the traditional sense, as in franchise business agreements.

4. Who is exempt from Tennessee franchise tax?

Certain nonprofits, government entities, and exempt organizations—such as certain family-owned non-corporate entities—may be exempt from franchise tax in Tennessee.

Ready to Simplify Your Franchise Tax Process?

Get a free consultation with Mohamed Karmous at QMK Consulting to help guide you through your Tennessee franchise tax in the most efficient manner possible.

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