Tennessee franchise tax property base repealed

Historically, the Tennessee franchise tax was imposed on the greater of (1) apportioned net worth or (2) the value of real and tangible property owned or rented in the state at a rate of .25%.

However, Tennessee lawmakers passed HB 1893/SB 2103 (the Legislation) which eliminated the property measure of the franchise tax for tax years ending on or after Jan. 1, 2024, and authorized refunds in specific years.

In response, the Tennessee Department of Revenue has issued guidance, which can be found at Tennessee Notice No. 24-05, TN Schedule G webpage, and is in the process of sending letters to potentially impacted taxpayers.

Refund claims for prior years

Taxpayers who are eligible for refund claims should request a refund based on the following:

Refund period:

• Tax years ending on or after March 31, 2020, and for which a return was filed with the department on or after Jan. 1, 2021.

Refund calculation:

• The amount of tax that may be refunded is the difference between the amount of franchise tax paid based on the property measure and the amount of tax that would have been owed based on the net worth measure.

Timing:

• Refund claims related to the Legislation must be filed between May 15, 2024, and Nov. 30, 2024.

Amended returns:

• As the first step, taxpayers must file amended returns for applicable years to calculate the franchise tax based solely on net worth.

Refund claim form(s):

• After the amended returns have been processed in the Tennessee Taxpayer Access Point (TNTAP) and the overpayments have been posted to their account, taxpayers must file the refund claim using the Claim for Refund of Franchise Tax Paid on Property Measure (schedule G) form (the Form). Taxpayers are strongly encouraged to file the Form in TNTAP to expediate the process. Note: this refund cannot be claimed using the department’s standard refund claim form.
• Refund claims must be accompanied by a completed Report of Debts Form if a refund of $200 or more is requested.

Supporting information:

• Taxpayers should consider submitting documentation to support the net worth calculations, by entity, to decrease the time required to process the refund claim.

Credits:

• For purposes of the refund claims, “tax actually paid” includes any schedule D credits applied on the return. The credits in excess of those that may be applied on the amended return(s) will be reinstated rather than paid as a refund.

Franchise tax reporting on 2023 calendar year returns and 2024 fiscal year returns

Returns filed for tax years ending on or before Dec. 31, 2023:

• Taxpayers must complete schedule G and calculate the franchise tax based on the greater of the property or net worth base. Taxpayers who pay based on the property base may request a refund based on the above.

Returns filed for tax years ending in 2024:

• Taxpayers should omit schedule G from the return and calculate the franchise tax based on net worth.

Additional considerations

The legislation has multiple considerations and terms that should be discussed in detail with your state tax advisor. Specifically, a few notable considerations that were included as part of the amendments to the original Legislation are:

Taxpayer refund disclosure

• For the period of May 31, 2025 – June 30, 2025, the department is required to publish the name of each taxpayer issued a refund and the corresponding refund based on specified ranges.

Waiver of legal filing

• If a taxpayer accepts a refund claim based on the Legislation, the taxpayer knowingly waives the right to any claim, in any court, alleging the property base of the franchise tax is unconstitutional by failing the internal consistency test. If a taxpayer chooses to file suit rather than pursue the refund claims, such suit must be filed on or before Nov. 30, 2024.

Next steps

Please contact your state tax advisor to discuss the impact of the legislation described above, including potential refund claims and 2024 estimated payments.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly US, LLP does not practice law, nor does it give legal advice, and makes no representations regarding questions of legal interpretation.