On May 10, 2024, Tennessee legislation was passed by the Tennessee House and Senate that repeals the alternative property measure of the franchise tax effective for tax years ending on or after January 1, 2024. The legislation also authorizes refund claims for taxpayers to the extent that the tax they paid under the property measure exceeded the net worth measure of the tax.
Who Does This Legislation Apply To?
All entities doing business in Tennessee and having a substantial nexus in Tennessee, except for not-for-profits and other exempt entities, are subject to the franchise tax. This includes corporations, subchapter S corporations, limited liability companies, professional limited liability companies, registered limited liability partnerships, professional registered limited liability partnerships, limited partnerships, cooperatives, joint-stock associations, business trusts, regulated investment companies, REITs, state-chartered or national banks, and state-chartered or federally chartered savings and loan associations.
What Should Taxpayers Consider Doing?
Taxpayers who paid tax on the minimum, tangible property base should consider whether they want to claim the benefit of the refunds offered under the conditions imposed by the legislation. That decision needs to be made before November 30, 2024 deadline for filing refund claims authorized under the legislation. Further, taxpayers will want to consider the impact of the law change on future estimated tax payments for the 2024 tax year to the extent the taxpayer anticipated it would be paying franchise tax on the minimum base.
Analysis of the Law
The Tennessee franchise tax is a privilege tax imposed on entities for the privilege of doing business in Tennessee. The franchise tax is imposed on a taxpayer’s apportioned net worth at the close of the tax year covered by the required return. However, “the measure of the tax levied...shall in no case be less than the actual value of the real or tangible property owned or used in Tennessee, excluding exempt inventory and exempt required capital investments.” (Tenn. Code Ann. Sec. 67-4-2108(a)(1)) The franchise tax rate is $0.25 per $100 (0.25%, or 0.0025) of the franchise tax base.
The Legislation eliminates the alternative property measure of the franchise tax base, effective for tax years ending on or after January 1, 2024. This would leave only the net worth measure of the tax in place for such years. Also, taxpayers would be allowed to annually elect to continue to apply the alternative property measure, but only if it results in a higher tax liability.
Refunds Authorized
Pursuant to the legislation, the Department of Revenue is directed to issue refunds “equal to the amount of tax actually paid minus the amount of tax otherwise due without regard to Sec. 67-4-2108" (the alternative property measure of the tax). “Tax actually paid” includes any credits applied on the return. Credits must be reinstated but not paid as a refund.
The tax subject to refund must have been reported to the Department on a return filed on or after January 1, 2021, covering a tax period that ended on or after March 31, 2020, and the refund claim must be filed between May 15 and November 30, 2024.
Interest would accrue at the federal short-term rate plus 0.5% beginning 90 days from the date the Department receives the refund claim and supporting information.
Refund Claim Procedures for 2020 – 2023 Tax Years
Under the direction of the Tennessee Department of Revenue, certain procedures have been instituted to claim the refund. The claim will be submitted under a two-step process:
Also, agreement with certain conditions surrounding a claim will be required.
To expedite the refunds, the state strongly encourages taxpayers to use its online portal, TNTAP, Tennessee Taxpayer Access Point, to submit amended returns, refund claims, report of debts, and supporting documentation.
For taxpayers who have not yet filed their 2023 tax return, the franchise tax must still be paid based on the property measure, if applicable. Once the return is processed, taxpayers can file an amended 2023 return and claim for refund.
Refund claims are generally applicable for tax years ending on or after March 31, 2020. Amended returns and claims for refunds must be timely filed between May 15, 2024 and November 30, 2024 (Saturday). No extensions are allowed beyond November 30, 2024.
Reach out to our State & Local Tax Team if you have any questions or need assistance!