If you are a corporation, limited partnership (LP), limited liability company (LLC), or business trust. . .chartered, qualified, or registered in Tennessee or doing business in this state, then you must register for and pay franchise and excise taxes. This sometimes comes as a surprise to people who incorporate or create their entities in another state (like Delaware, Nevada, or Wyoming) but then do business or own property inside that entity in the State of Tennessee.
The lesson here is that while you may want to use an LLC in Wyoming for the business you have in Tennessee, you cannot escape paying taxes to the state where you’re actually doing business.
WHAT HAPPENS IF I DON’T REGISTER MY (WYOMING/NEVADA/DELAWARE) COMPANY AS A FOREIGN CORPORATION IN TENNESSEE?
Failure to register your “foreign” corporation, LLC or other type of entity in Tennessee when you are doing business in Tennessee will result in two expensive problems: (1) you cannot bring a lawsuit in the state against anyone who damages your company; and (2) when it is discovered that you haven’t registered, you will have to pay all the franchise and excise taxes that were due from the moment you started doing business in Tennessee plus a penalty of treble that amount. So if you should have paid $10,000 over the years, you will end up paying 3 times that amount ($30,000) in penalties. Ouch.
WHAT WILL MY FRANCHISE TAX BE?
The franchise tax is based on the greater of (1) net worth or (2) the book value of real or tangible personal property owned or used in Tennessee. The minimum franchise tax of $100 is payable if you are incorporated, domesticated, qualified, or otherwise registered through the Secretary of State to do business in Tennessee, regardless of whether the company is active or inactive. Failing to register does not mean that you aren’t liable for this tax (see above).
Franchise tax= 0.25% of the greater of net worth or real and tangible property in Tennessee. The minimum tax is $100.
EXAMPLE: A campground operating in Tennessee with a book value of $500,000 will owe $1,250.
WHAT WILL MY EXCISE TAX BE?
The excise tax is based on net earnings or income for the tax year. Excise tax= 6.5% of Tennessee taxable income.
EXAMPLE: A campground operating in Tennessee has taxable income of $65,000. The excise tax will be $4,225.
If you have a combined (franchise and excise) tax liability of $5,000 or more in both the prior and current tax years, your taxes must be paid in quarterly estimated payments on the 15th of April, June, September and the following January.
WHEN ARE THE TAXES DUE?
They’re due on the 15th day of the 4th month following the close of your books and records. For business with a 1/1-12/31 calendar year, this tax is due on April 15th of the following year.
HOW DO I FILE AND PAY MY TAXES TO TENNESSEE STATE?
All registration and filing of taxes is done electronically, online through the TNTAP system. https://tntap.tn.gov/eservices/
AM I EXEMPT?
There are 17 different types of entities that are exempt from the franchise and excise taxes, which are listed below. However, one of the most popular exemptions I’m asked about in my practice is #11, the “FONCE” or Family Owned Non-Corporate Entity. People who own vacation rental properties can take advantage of this exemption by making a timely filing of the right form each year. (FAE 183. . .see info below.)
- Industrial Development Corporations
- Masonic lodges and similar lodges
- Regulated Investment Companies owning 75% in United States, Tennessee, or local bonds
- Federal and state credit unions
- Venture Capital Funds
- Farming / personal residence in LLCs or LPs
- LLCs or LPs that acquire receivables from an affiliate that reported the income in TN
- LLCs or LPs that provide affordable housing and receives Low-Income Housing Credits
- LLCs or LPs where the members are fully-obligated for the debts of the entity (OME)
- Partnership, trust, REMIC, or FASIT that has asset-backed security of debt obligations
- Family Owned Non-Corporate Entity (FONCE)
- LLC, LP, or business trust organized as a Diversified Investing Fund
- Tennessee historic property preservation entities
- Insurance companies
- TN Investco entity that receives investment credits under Tennessee Small Business Act
- Any entity owned in whole or part by the Armed Forces and has 50% of income from property primarily for benefit of members of Armed Forces
- Qualified Low-Income Community Historic Structure
Entities 5-12 and 16-17 listed above must file an application for exemption on form FAE 183, Application for Exemption/Annual Exemption Renewal. Thereafter, they must annually certify that they continue to be eligible for the exemption.
WHAT ABOUT TAX CREDITS?
For Investing In Tennessee
A standard job tax credit is available to taxpayers that invest in Tennessee and create jobs as a result of the investment. Taxpayers that meet the requirements of a qualified business enterprise, make the required capital investment of at least $500,000 * within three years (five years in a tier 3 or 4 enhancement county), and create a minimum number of qualified jobs from the investment may receive a job tax credit equal to $4,500 for each qualified job.
The minimum number of qualified jobs that must be created from the investment are:
- 25 jobs in a tier 1 or 2 enhancement county,
- 20 jobs in a tier 3 enhancement county, or
- 10 jobs in a tier 4 enhancement county.
Each county in the state is annually designated as a tier 1, 2, 3, or 4 enhancement county. Taxpayers must submit a Job Tax Credit Business Plan and receive tentative approval from the Department before any credit may be taken. The standard job tax credit may offset up to 50% of the taxpayers franchise and excise taxes. Unused standard job tax credit may be carried forward up to 15 years. Taxpayers that qualify may also receive an additional annual job tax credit.
For Taxpayers Who Employ Persons With Disabilities and For Taxpayers Who Are Located in High-Poverty Areas
There is a job tax credit available to taxpayers that employ persons with disabilities.and a community resurgence job tax credit for businesses located in a high-poverty area according to the 2013 American Community Survey.