Tennessee franchise tax change creates refund opportunity
On April 25, 2024, Tennessee’s General Assembly enacted House Bill No. 1893/Senate Bill No. 2103, which removes the property measure from the Tennessee franchise tax. The bill authorizes refunds to taxpayers that paid franchise tax based on the value of real or tangible property owned or rented in the state for all applicable open years.Tennessee franchise tax background
Tennessee imposes an income (excise) and franchise tax on business taxpayers with nexus in the state. Historically, Tennessee imposed a franchise tax on the greater of two bases: (1) the book value of the taxpayer’s real or tangible property owned or used in Tennessee (property measure); or (2) the taxpayer’s apportioned net worth. The franchise tax rate is 0.25% of the franchise tax base. The minimum tax is $100.
Recently, the property measure came under scrutiny for violating the Commerce Clause of the U.S. Constitution. Tennessee lawmakers were advised that the state could be exposed to significant legal risk due to pending lawsuits challenging the constitutionality of the property measure. Due to these concerns, Tennessee Governor Bill Lee announced plans to restructure the state’s franchise tax.
Tennessee franchise tax changes
Effective for tax years ending on or after Jan. 1, 2024, the legislation removes the property measure from the Tennessee franchise tax base. Additionally, taxpayers who paid franchise tax on the greater property measure can recalculate the tax using the apportioned net worth and file refund claims for the difference in tax actually paid. To the extent a taxpayer utilized credits on the return, the credits will be reinstated but won’t be paid as a refund. The franchise tax subject to refund must have been reported on a Tennessee return filed on or after Jan. 1, 2021, covering a tax period that ended on or after March 31, 2020.
Effective for tax years ending on or after Jan. 1, 2024, the legislation removes the property measure from the Tennessee franchise tax base.
Refund claim procedures
Refund claims must be filed between May 15 and Nov. 30, 2024. Filing the claim is a two-step process:
- Amend the return(s) for the periods to be included in the refund.
- Report the franchise tax on the amended refunds using net worth (Schedule F).
- Submit the Claim for Refund of Franchise Tax Paid on Property Measure (Schedule G) form.
- The standard claim for refund form will not be accepted for this purpose.
The Department strongly encourages taxpayers to amend returns and file a claim form electronically in TNTAP. If you’re unable to file electronically, you may submit a paper-amended return and a paper refund claim form.
By filing the refund claim, the taxpayer is affirmatively waiving any claim by the taxpayer or the right to file suit alleging that the franchise tax under prior law was unconstitutional by failing the internal consistency test.
Interest will be computed beginning 90 days after Tennessee receives the refund claim and proper proof to verify the refund.
Public disclosure
The Tennessee Department of Revenue will publish the name of each taxpayer receiving refunds and the applicable range of refund issued on its website from May 31 through June 30, 2025. The applicable ranges are:
- $750 or less
- $751 to $10,000
- $10,001 and greater
Taxpayers sensitive to publicity should be aware of the published list.
Next steps for Tennessee franchise tax
For taxpayers who haven’t yet filed a 2023 return, the return will need to be filed under the prior law (i.e., complete both Schedule F (net worth) and Schedule G (property) and pay the franchise tax based on the greater of the two alternative tax bases.)
The Department has created a streamlined two-step process for amending returns and submitting refund claims through Tennessee Taxpayer Access Point (TNTAP) resource. Taxpayers should review their records and/or consult with their tax advisors to amend returns and submit refund claims for applicable tax years before the Nov. 30, 2024, deadline.
In addition to the refund opportunity, taxpayers should consider the impact on 2024 estimated tax payments.
