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

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