Tennessee has emerged as a thriving hub for businesses of all sizes and industries. Its pro-business environment, including no individual state income tax and low corporate taxes, has attracted entrepreneurs, companies, and everything in between. Plus, if you do file a Business Tax Return, the IRS allows certain tax deductions on franchise and excise, business, and sales and use tax filings that can significantly reduce your business’s tax liability.
Additionally, Tennessee recently released new legislation that increases the threshold for those required to file business taxes from $10,000 gross receipts to $100,000 gross receipts!
In this article, we’ll talk about everything you need to know about Business Tax credits, exemptions, and deductions so you can minimize your business tax liability in Tennessee.
Tennessee Business Tax Background
Tennessee business tax has undergone various changes in its history. The tax originally stemmed from the “Business Tax Act of 1971,” which aimed to replace a local tangible personal property tax on business inventories. However, a change to the Tennessee State Constitution in 1973 allowed the implementation of a gross receipts tax on businesses, resulting in the introduction of the business tax.
The TN Business Tax applies to gross sales of tangible personal property and certain business services and is levied at state and county levels. A City Business District tax may also apply to those who conduct business within the downtown area of a city. The specific requirements and thresholds have evolved over the years, with significant changes in its structure and administration.
What Taxes Do Businesses Currently Pay in Tennessee?
Tennessee business tax has two tiers: the state-level tax and the local-level tax. The state-level tax is levied on those who conduct business within the state. Incorporated businesses must register with the Secretary of State and the Department of Revenue. Each year they are required to file an Annual Report with the Secretary of State and Form TN170 F&E with the Department of Revenue.
At the local-level, all individuals and incorporated entities that conduct business in one or more TN counties must first obtain a Business License from the County Clerk’s office in each county where they have a physical business presence or are selling tangible personal property or taxable services. They are required to file an annual Business Tax Return.
The amount of tax assessed depends upon the municipality where the business is located and the county (or counties) where business is conducted. Some of the larger cities in Tennessee assess an additional City Business District tax, which is reported and assessed in the annual Business Tax filing.
Here’s a summary of how they work:
- Businesses selling tangible personal property and/or certain services in Tennessee are generally subject to the state-level business tax.
- Individuals, firms, partnerships, corporations, and other entities conducting business within the state are liable for this tax unless exempted.
- Government entities like the United States of America and the State of Tennessee, as well as electric membership cooperatives, or utility districts are not considered “persons” subject to this tax. There are also a handful of other industries that are exempt from this tax.
- Businesses without a physical location in Tennessee can still be subject to this tax if they have substantial nexus. Substantial nexus may be established by selling tangible personal property shipped to Tennessee, providing services delivered in the state, leasing tangible personal property in Tennessee, or selling natural gas to in-state customers.
- Each county and municipality in Tennessee can enact a business tax by passing a resolution or ordinance.
- Currently, 215 counties and municipalities in the state impose this tax.
- To be subject to a local-level tax, a business must have a physical presence, place of business, or another qualifying presence within a county or municipality that has implemented the tax.
- If a business operates within a county with a business tax license, it is required to pay both the state-level and local-level business taxes.
These taxes apply to various types of businesses operating within Tennessee, and specific rules may apply to certain industries. The business’s location, activities, and decisions made by local taxing authorities determine the amount of taxes they must pay. Plus, some counties may have multi-tiered municipal-level business tax systems, which can further affect tax obligations.
Contact your municipality or county clerk’s office to determine your tax obligations, particularly if you are unsure about your location falling within city limits. Before you file, see a professional CPA to help cross all your Ts and dot your Is to avoid getting crossways with taxing authorities in locations where you intend to conduct business.
What Tennessee Business Tax Credits Are There?
Tennessee offers various business tax credits and incentives to encourage economic development, investment, and job creation within the state. These credits can help businesses reduce their tax liabilities. Some of the notable Tennessee business tax credits and incentives include:
Personal Property Credit
Personal property taxes can be credited against a business’s total business tax liability under specific circumstances, considering property location, timing, and lease agreements.
Research and Development Tax Credit
If your business engages in qualified research and development activities in Tennessee, you may be eligible for a tax credit. This credit can significantly reduce your tax liability and encourage innovation within your organization.
To qualify for the Research and Development Tax Credit, your business must meet certain criteria, including conducting research that is technological in nature and aimed at discovering new information to develop new products or processes.
Job Tax Credit
Tennessee offers a Job Tax Credit to businesses that create new full-time jobs in the state. This credit can help offset some of the costs associated with hiring and expanding your workforce. The amount of the credit varies depending on factors such as location and the number of jobs created.
Energy Efficiency and Renewable Energy Credits
Tennessee provides tax incentives for businesses that invest in energy-efficient equipment and renewable energy projects. These credits not only help reduce your tax liability but also promote sustainability and environmental responsibility. Eligible projects can include energy-efficient lighting, solar installations, and more.
Film Production Tax Credit
For businesses involved in film and television production, Tennessee offers a Film Production Tax Credit to encourage the growth of the state’s entertainment industry. This credit can be substantial and covers a portion of the expenses incurred during qualified film and television production projects in Tennessee.
Historic Preservation Tax Credit
If your business is involved in the restoration and preservation of historic properties in Tennessee, you may be eligible for the Historic Preservation Tax Credit. This credit can offset a portion of the costs associated with rehabilitating historic structures, helping to revitalize communities and preserve Tennessee’s rich history.
What Business Tax Deductions Can I Claim in TN?
Tennessee offers several business tax deductions that can help reduce a company’s taxable income, ultimately lowering its tax liability. Some common business tax deductions in Tennessee include:
- Cash Discounts: Taxpayers can deduct cash discounts offered and taken on sales from their business tax base.
- Returned Items: Proceeds from returned items, refunded to customers in cash or credit, can be deducted from gross sales subject to business tax.
- Trade-In Allowances: Taxpayers can deduct the trade-in value for items sold, calculated as the difference between the sale price of the new or used article and the credit given for the used article.
- Repossessed Goods: When taxpayers repossess property sold under a security agreement, they can deduct the difference between the remaining amount due on the property’s selling price and $500. This deduction only applies to the principal amount.
- Subcontractor Payments: Contractors can deduct amounts paid to subcontractors who hold business licenses or licenses from the state board for performing specific activities.
- Sales of Services Delivered Outside Tennessee: Taxpayers may deduct the sale of services delivered to locations outside Tennessee, based on current law.
- Commissions Derived from Services in Tennessee: Commissions derived from services performed in Tennessee on behalf of out-of-state businesses cannot be deducted.
- Sales of Tangible Personal Property in Interstate Commerce: Sales in bona fide interstate commerce can be deducted, but sales to in-state customers are subject to business tax.
- School to Student Sales: Sales of school supplies and meals made on campus at elementary and secondary schools can be deducted, but sales by private independent contractors cannot.
- Bad Debts: Taxpayers can deduct bad debts arising from sales on which they previously paid business tax, with certain exceptions.
- Miscellaneous Federal and State Excise Taxes: Deductions are allowed for specific federal and state excise taxes paid directly to the applicable governmental agency.
- Accommodation Sales: Proceeds from bona fide accommodation sales can be deducted if included in gross sales reported on the Business Tax Return.
- Patronage Dividends: Cash and other patronage dividends from cooperative selling associations or corporations may be deducted.
- Public Warehousing and Storage – Leases: Sales for leases of warehouse space without additional services can be excluded or deducted.
- Motor Vehicle Rentals – Refundable Deposits: Refundable deposits made by customers for motor vehicle rentals can be deducted if actually refunded.
- Funeral Directors – Cash Advances: Charges for “cash advances” made by funeral directors acting as agents for their customers can be included in gross sales but deducted when calculating business tax.
These deductions help businesses reduce their tax liability and are subject to specific rules and documentation requirements. For example, the credits cannot offset more than 50% of tax liability.
What Are Business Tax Exemptions in Tennessee?
In Tennessee, business tax exemptions and exclusions can vary based on the specific type of business, the activities it conducts, and the products or services it offers. Some common exemptions and exclusions may include:
- Manufacturing Exemptions: Many states, including Tennessee, offer exemptions for businesses engaged in manufacturing or processing tangible personal property. This typically includes machinery and equipment used in the manufacturing process, as well as raw materials and components.
- Agricultural Exemptions: Certain agricultural activities and products may be exempt from business taxes. This can include farming, forestry, and the sale of agricultural products.
- Nonprofit Organizations: Nonprofit organizations are often exempt from certain state and local taxes, including business taxes. To qualify, the organization must meet specific criteria and operate for charitable, religious, educational, or other nonprofit purposes.
- Sales for Resale: Many states exempt sales of tangible personal property when the buyer intends to resell the item. This prevents double taxation at various stages of the supply chain.
- Services Exemptions: While sales of tangible personal property are often subject to business taxes, services may be exempt. The specific services that qualify for an exemption can vary widely.
- Government Exemptions: Sales to federal, state, or local government entities are typically exempt from business taxes.
- Small Business Exemptions: Some states offer exemptions or reduced tax rates for small businesses that meet certain criteria, such as annual gross sales below a specified threshold.
- Energy and Utilities Exemptions: Some states exempt sales of utilities, such as electricity and natural gas, from business taxes.
- Export Sales: Sales of goods or services that are destined for export outside of the state or country may be exempt.
- Educational and Healthcare Institutions: Certain sales to educational and healthcare institutions may be exempt from business taxes.
Please note that the availability of these exemptions and exclusions can change over time, and there may be additional, more specific exemptions in Tennessee’s business tax laws. For the most up-to-date and specific information, it’s essential to consult the latest version of the Tennessee Business Tax Manual or directly contact the Tennessee Department of Revenue or a tax professional, like the team at TriStar CPAs.
Who Has to Pay Business Taxes in Tennessee?
In Tennessee, business taxes generally apply to entities that engage in business activities within the state. However, new legislation could impact your next business tax filing.
Tennessee legislators have recently increased the threshold that triggers a requirement to file a Business Tax Return. The old threshold was $10,000 in gross receipts. Now, only those businesses with gross receipts of $100,000 or more are required to file a Business Tax Return. This change is effective for tax years ending on 12/31/2023. That means this change will cover all of 2023.
Business owners who anticipate gross receipts to be $3,000 – $99,999 in tax year 2023 should update their licensing before the end of this year to avoid the rush. Those who fail to update their business license by the filing deadline, 4/15/2024, must file a Business Tax Return even if earnings are less than $100,000.
There’s no change for businesses with less than $3,000 in gross revenue and those with $100,000 (or more) in gross revenue. It’s business as usual!
Business owners with less than $3,000 in gross receipts do not have to have a license at all. No registration, no license, no tax.
Business owners with $100,000 or more in gross receipts in one or more Tennessee counties must register for a license in each. Gross receipts of less than $100,000 in one or more counties in Tennessee, yet in aggregate, gross receipts that meet or exceed the $100,000 threshold are reported and taxed in the county of domicile. Gross receipts of $100,000 or more in any one county are reported and taxed in the county where earned. Licenses are automatically renewed with the filing of your annual Business Tax Return.
The big change is for business owners who expect gross receipts to be $3,000-$99,999 in 2023. Those who find themselves in this category should contact the state as soon as possible with a request to convert their existing license to a “Minimal Activity License” with an effective date of 1/1/2023. Make this request by calling 615-253-0600, Ext. 3, or by submitting it through your TNTAP account.
The change is effective for tax years ending on or after 12/31/23. Tax years ending before 12/31/23 will fall under the old rules. Renew your Minimal Activity License in 2024 directly with the County Clerk in the county where you are doing business. The annual renewal will no longer be automatic if your business gross receipts are less than $100,000.
We here at TriStar CPAs are ready to assist you in changing to the new “Minimal Activity” License. Reach out to us with any questions!
Help With Tennessee Taxes From TriStar CPAs
Taking advantage of these business tax deductions and credits in Tennessee can provide significant financial benefits for your company while contributing to the state’s economic growth and development. However, navigating the complex world of tax incentives and credits can be challenging. It’s advisable to consult with a qualified tax professional or accountant who specializes in Tennessee tax laws to maximize savings while remaining compliant with state regulations. By leveraging these tax-reducing opportunities effectively, you can help your business thrive in the vibrant business environment of Tennessee.
Talk to experienced professionals at TriStar CPAs for the best tax advice and the optimal tax liability outcome for your business in Tennessee. We have decades of experience helping businesses save on their taxes; become one of those businesses today! Let’s partner, let’s plan.