January 29, 2025 |Tax Preparation Services
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Tennessee Franchise Tax: Rates, Filing Requirements & Exemptions (2026)
If your business operates in Tennessee, understanding the state's franchise and excise tax requirements is essential to staying compliant and avoiding unnecessary penalties. Whether you're a local business, an LLC, a corporation, or a company operating in multiple states, Tennessee's business tax rules can directly affect your finances and legal standing.
Unlike income tax, the Tennessee franchise tax is based on the greater of your company's net worth or the value of its Tennessee property. Most businesses are also subject to the Tennessee excise tax, making it important to understand how these taxes work together.
In this guide, you'll learn who must pay Tennessee franchise tax, how it's calculated, filing deadlines, exemptions, multi-state considerations, and practical tips for maintaining compliance while minimizing tax risks.
What Is the Tennessee Franchise and Excise Tax?
Many business owners assume Tennessee imposes only a franchise tax, but most taxable entities are subject to both the franchise tax and the excise tax.
Tennessee Franchise Tax
The franchise tax is a privilege tax for the right to conduct business in Tennessee. It is calculated based on the greater of:
A company's net worth, or
The book value of real and tangible personal property owned or used in Tennessee.
Tennessee Excise Tax
The excise tax is a separate tax imposed on a company's taxable earnings from doing business in Tennessee.
Although these taxes are calculated differently, businesses generally file both using the same Franchise & Excise Tax Return (Form FAE170).
Understanding the relationship between these two taxes helps businesses prepare more accurate financial statements and avoid filing errors.
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 businesses organized or conducting business in Tennessee are required to file franchise tax returns.
Common entities include:
C Corporations
S Corporations
Limited Liability Companies (LLCs)
Limited Partnerships (LPs)
Limited Liability Partnerships (LLPs)
Professional Limited Liability Companies (PLLCs)
Foreign entities registered to do business in Tennessee
Some organizations may qualify for exemptions, including certain nonprofit organizations, governmental entities, and qualifying family-owned non-corporate businesses.
Because exemption rules can be complex, businesses should review their eligibility carefully before assuming they are exempt.
Calculating Tennessee Franchise Tax
To calculate your Tennessee franchise tax, follow this formula:
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
Multiply this amount by 0.25% ($0.25 per $100).
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.
Best Practices for Tennessee Franchise Tax Compliance
Maintaining compliance becomes much easier when businesses establish consistent financial procedures.
Consider these best practices:
Reconcile financial statements before preparing tax returns.
Maintain accurate asset and property records.
Review net worth calculations annually.
Monitor filing deadlines throughout the year.
Update ownership and business information when changes occur.
Work with a qualified tax advisor familiar with Tennessee business taxes.
Review tax planning opportunities before year-end rather than after filing.
Proactive tax planning often reduces surprises and helps businesses make better financial decisions.
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 You Don't Pay Tennessee Franchise Tax?
Failure to file or pay franchise tax can lead to several consequences, including:
Late filing penalties.
Interest on unpaid tax balances.
Loss of good standing.
Administrative collection actions.
Difficulty obtaining financing.
Potential administrative dissolution of the business.
Addressing compliance issues promptly can significantly reduce long-term costs.
Common Tennessee Franchise Tax Mistakes
Many compliance problems stem from avoidable mistakes, including:
Using outdated financial information.
Incorrectly calculating net worth.
Forgetting to include Tennessee property values.
Missing filing deadlines.
Assuming no tax is due because the business was unprofitable.
Overlooking changes in business structure.
Failing to maintain supporting documentation.
Regular accounting reviews can help identify these issues before they result in penalties.
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
At QMK Consulting, we help businesses:
Prepare Franchise & Excise Tax Returns.
Review financial statements before filing.
Calculate franchise tax accurately.
Resolve tax compliance issues.
Develop proactive tax planning strategies.
Support businesses operating in multiple states.
Improve accounting systems that simplify future tax reporting.
Our goal is to help businesses remain compliant while making informed financial decisions that support long-term growth.
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.
