A newly passed Tennessee law (SB 2103/HB 1893) has enacted important state franchise tax implications. Previously, the .25% franchise tax was imposed on the greater of the apportioned net worth or the value of real and tangible property owned or rented in the state. The new law repeals the “alternative minimum property” measure and instead requires that taxpayers calculate franchise tax using only their apportioned net worth. This change applies to tax years beginning on or after January 1, 2024.
Due to the change, the legislation creates the potential for a franchise tax refund. This refund would apply to tax years ending on or after March 31, 2020, and would be equal to the franchise tax paid using the minimum property calculation (i.e., the old method) minus the amount of tax that would be owed under the apportioned net worth calculation (i.e., the new method). Importantly, the refund can only be claimed until November 30, 2024. Refund claims will be made on a form that will be created for this specific purpose, so we are awaiting additional guidance around that.
Additionally, the new law requires public disclosure of refunds, so the Tennessee Department of Revenue will publish the names of businesses that file for a refund as well as the general range of the refund amount requested (i.e., $750, or less, $751-$10,000, or more than $10,000). This public disclosure will be on the DOR website from May 31, 2025, to June 30, 2025.
Taxpayers are allowed to annually opt into continuing to compute their franchise tax under the alternative minimum property measure if doing so will result in a higher franchise tax liability and a maximization of tax credit usage. If a taxpayer chooses to opt in, they are also choosing to waive the right to file suit regarding the constitutionality of that calculation method. Such legal challenges to the constitutionality of the method are possible, and are the basis for the legislative change, but it is important to note that a business also waives the right to file suit challenging the constitutionality if they claim a refund as described above.
The new law’s reformed franchise tax calculations are crucial, and may offer significant refund opportunities, so it is as important as ever for taxpayers to understand the guidelines to ensure compliance. We look forward to assisting clients through this process.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
