Tennessee Business Taxes

Starting and operating a business in Tennessee requires understanding the various state and local taxes that apply to businesses. Tennessee’s business tax structure is unique in that it offers a mix of statewide taxes such as the franchise and excise taxes, as well as local business taxes administered by county and city governments. The state is known for having no personal income tax on wages, but businesses in Tennessee are subject to a range of tax obligations that vary depending on the type of business and its revenue. This includes taxes on gross receipts, franchise taxes on net worth, and excise taxes on income. Additionally, there are local business taxes that must be paid annually by most businesses operating in the state. To stay compliant and avoid penalties, business owners need to understand which taxes apply to their operations and how to file them correctly.

State Business Taxes in Tennessee

1. Tennessee Franchise Tax

The franchise tax in Tennessee is levied on a business’s net worth or the value of its real and tangible personal property, whichever is higher. This tax is required of all corporations, limited liability companies (LLCs), and limited partnerships that operate within the state.

• Rate: The franchise tax is calculated at a rate of 0.25% ($0.25 per $100) on either the business’s net worth or tangible property, whichever is greater.
• Minimum Franchise Tax: There is a minimum tax of $100, regardless of the size or income of the business.
• Who Pays: Most business entities, including corporations and LLCs, must pay the franchise tax. Sole proprietorships and general partnerships are exempt unless they elect to be taxed as a corporation.

2. Tennessee Excise Tax

The excise tax is effectively a corporate income tax that applies to the net income earned by businesses operating in Tennessee. It applies to all business entities subject to the franchise tax.

• Rate: The excise tax is imposed at a flat rate of 6.5% on the net taxable income of the business.
• Deductions: Businesses are allowed to deduct certain expenses, such as salaries and other business costs, before calculating the excise tax owed.

Who Must Pay Franchise and Excise Taxes in Tennessee?

• Corporations: All corporations, including S corporations, are subject to both the franchise and excise taxes.
• LLCs: LLCs are generally subject to franchise and excise taxes unless they are taxed as disregarded entities or partnerships.
• Limited Partnerships: These entities are subject to the franchise and excise tax unless exempted under specific conditions.
• Exempt Entities: Sole proprietorships and general partnerships are typically exempt from franchise and excise taxes, though they may opt to pay them if they wish to be taxed as a corporation.

Tennessee Local Business Tax

In addition to state taxes, most businesses in Tennessee must pay an annual business tax to the county or city where they operate. This tax is a privilege tax for conducting business in Tennessee and applies to all businesses except for certain exempt entities.

How the Local Business Tax Works in Tennessee?

• Tax Base: The local business tax is calculated based on gross receipts, meaning the total revenue generated by the business before any expenses are deducted.
• Tax Rates: The rate varies depending on the business classification. Tennessee divides businesses into five classifications, each with its own tax rate:
  • Classification 1: Retailers and food services.
  • Classification 2: Wholesale dealers.
  • Classification 3: Contractors.
  • Classification 4: Financial institutions and insurance companies.
  • Classification 5: Service providers.
• Filing: Business owners are required to file and pay the local business tax annually. The tax return and payment must be submitted to the Tennessee Department of Revenue, which administers the tax on behalf of local governments.

Who Is Exempt from Local Business Taxes in Tennessee?

Some businesses and professions are exempt from the local business tax, including:

• Manufacturers
• Certain agricultural businesses
• Nonprofits
• Professional services such as medical, legal, or accounting services (if licensed by the state)

Sales and Use Tax in Tennessee

Tennessee’s sales tax is a significant source of revenue for the state. Businesses that sell goods or certain services must collect and remit sales tax on their sales.

Sales Tax Rates

• State Rate: The state-level sales tax rate in Tennessee is 7% on most goods and services.
• Local Sales Taxes: Counties and cities can impose their own additional sales tax, which typically ranges from 1.5% to 2.75%. This means that the effective sales tax rate can be as high as 9.75% in some parts of the state.
• What Is Taxable?: Most tangible personal property and some services are subject to sales tax. However, certain items, such as prescription drugs and groceries, may be taxed at lower rates or exempt entirely.
• Use Tax: If a business purchases goods out of state for use in Tennessee and no sales tax was paid at the time of purchase, the business must pay use tax at the same rate as the sales tax.

Filing and Paying Tennessee Business Taxes

Tennessee businesses can file and pay their taxes using the Tennessee Taxpayer Access Point (TNTAP), an online portal provided by the Tennessee Department of Revenue. The platform allows for convenient filing and payment of state taxes, as well as local business taxes.

Failure to file and pay Tennessee business taxes on time can result in penalties, including late fees and interest. The state may also revoke business licenses if taxes remain unpaid for an extended period.

Franchise and Excise Taxes are generally due on the 15th day of the fourth month following the end of your fiscal year (usually April 15 for calendar year filers).

Local business taxes are due annually on the 15th day of the fourth month after the end of your fiscal year.