Tennessee enacts major changes to franchise tax

Businesses are expected to gain $1.55 billion in tax refunds and save about $4 billion over the next 10 years after Tennessee legislators approved a significant change to the state’s franchise tax.

Approval of the tax break came late in the final day of the Tennessee General Assembly’s 2024 session, and it followed more than four months of negotiations between the House, Senate, and Gov. Bill Lee. As a result, the TDOR estimates that about 100,000 taxpayers are owed refunds on eligible returns filed on or after January 1, 2021, and covering tax periods that ended on or after March 30, 2020.

The governor’s office advocated for the measure to avoid legal action from businesses that claimed the property-based method for calculating state franchise tax – commonly known as the “alternative base” – was invalid. The Tennessee Department of Revenue (TDOR) said more than 80 companies had requested refunds based on that argument.

The legislation’s fate appeared uncertain even in the final days before approval. As recently as early April, the House insisted on just one year of refunds – worth about $700 million – and a requirement for companies that receive refunds to be listed publicly. The final bill included much of the Senate’s initial version, but with some of the House’s transparency requirements.

Specifically, the legislation eliminates the alternative base, which is one of two ways that Tennessee’s franchise tax – the state’s primary tax on businesses – has been calculated for several decades. The changes are:

Alternative base eliminated. Effective January 1, 2024, the franchise tax rate must be based on the taxpayer’s net worth. Removed is the long-standing option to base the tax on the value of property owned or used by the taxpayer. Previously, taxpayers were required to pay the higher amount resulting from those two options.

Alternative base refunds. Businesses that paid franchise taxes determined by the alternative base for tax periods that ended on or after March 30, 2020, can file amended returns with amounts based on net worth. The difference between the two amounts will be refunded.

Refund requests will be accepted by the TDOR between May 15, 2024, and November 30, 2024. In addition to amended returns, the TDOR will require a specific refund claim form and additional procedures.

The names of companies that receive refunds will be released by the TDOR, along with the range – but not the exact amount – of refund they received. Those ranges are $0 to $750, $750 to $10,000, or $10,000 and higher. This information will be published online for a one-month period of May 31, 2025 to June 30, 2025.

If you think your company may be eligible for refunds, please contact your KraftCPAs tax advisor to determine next steps. The TDOR will discuss specific requirements regarding the refund requests in a webinar at 9 a.m. (CT) on May 7, 2024. Registration information is available on the TDOR website.

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