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2024 Small Business Taxes in Tennessee

April 11th, 2024 | 8 min. read

By Matt Patrick

If the thought of deciphering state taxes makes you want to run for the hills, take a deep breath — you’re not the only business owner dreaming of a tax-free utopia!

Tennessee might not have an individual income tax, but there’s still plenty to consider for businesses with franchise and excise, business, tangible property, and sales taxes. It can feel like a lot, whether you’re just starting out or have been in business for a while. Like every government bureaucracy, they’re going to get their money somewhere so Tennessee is no different.

At Patrick Accounting, we know tax time can be stressful. We’re in the thick of it, just like you. That’s why we’ve put together this easy-to-follow guide. We know the ins and outs of Tennessee’s tax system and we’re here to walk you through it with clear, helpful information to get you on the right track.

Let’s dive into the nitty-gritty of Tennessee’s business taxes. By the end of this guide, you’ll not only understand what taxes to pay but also how to do it without pulling your hair out.

Understanding How Tennessee Taxes Businesses

Companies that do business in Tennessee generally pay three main types of taxes: franchise and excise, business tax (a tax on gross receipts and tied your business license, and sales and use.

You can register for all three on a single application through the Tennessee Taxpayer Access Point (TNTAP).

Which Tennessee Businesses Are Subject to the Franchise and Excise Taxes?

Essentially, if your business is breathing the sweet air of the Volunteer State, chances are you’re on the hook for these taxes. The taxes apply to corporations, limited partnerships, limited liability companies (LLCs), and business trusts that are chartered, qualified, or registered in Tennessee or are doing business in the state. Sole proprietors and general partnerships aren’t subject to either tax.

How Is Tennessee’s Franchise Tax Computed?

The franchise tax in Tennessee is like a cover charge for the privilege of operating in the state. It’s calculated based on the greater of 1) net worth or the book value of real property or 2) tangible personal property owned or used in Tennessee.

The rate is 0.25 percent of the greater figure, and the minimum tax is $100, regardless of whether the business is active or inactive.

How Is Tennessee’s Excise Tax Computed?

On the other hand, The excise tax (income tax on business income) is based on your business’s profits. This tax is computed at a rate of 6.5% on your net earnings or income produced within the state.

Are There Any Tax Exemptions or Credits?

Yes, Tennessee offers a silver lining in the form of seventeen exemptions that can lighten your tax burden.

In addition, franchise and excise tax liability can be offset by credits, including the job tax credit and qualified production tax credit.

Paying Your Franchise and Excise Taxes in Tennessee

The taxes are paid on Form FAE 170, “Franchise and Excise Tax Return.” The form is due on the 15th day of the fourth month after the close of your books and records. For calendar year filers, that’s April 15 in the following year.

In a lot of states, there is a benefit to being an S Corporation. In Tennessee, it’s not always the case. The benefit you receive on the federal tax level is often offset by a higher tax in Tennessee on Company profits. Before you decide it is best to discuss your particular situation with your accountant or attorney.

Do I Need to Make Estimated Payments?

You might. Tennessee likes to keep the cash flow steady throughout the year, which means businesses are required to make estimated tax payments if their franchise and excise tax liability exceeds $5,000 annually. These payments are due quarterly, so it’s important to mark your calendar to avoid any surprises.

What Is Tennessee’s Business Tax?

Tennessee’s Business tax is a “privilege tax” imposed on a business’s gross sales of tangible personal property and services, for the privilege of doing business in the state. It consists of the state business tax and the city business tax. This is tied to the maintaining of your business license, or your authority to operate a business in TN.

How Is Tennessee’s State Business Tax Computed?

The state business tax is based on gross receipts. The rate varies based on 1) your business type and 2) whether you’re considered a retailer or a wholesaler.

Tennessee has five classifications based on a taxpayer’s dominant business activities (where the majority of your taxable sales are generated), plus a separate category for antique malls, flea markets, gun shows, and the like. You must choose one classification for each of your locations.

Most of the classifications include a rate for retailers and another for wholesalers. You’re considered a retailer if more than half of your taxable gross sales are retail sales; you’re deemed a wholesaler if more than half of your taxable gross sales are wholesale sales. Wholesale sales include, but aren’t limited to:

  • Sales to a retailer for resale
  • Sales of materials that become part of a product for resale
  • Sales of goods to the government, a governmental agency, or a nonprofit

To determine your tax, decide if you’re operating as a retailer or a wholesaler at each location. Then, apply the relevant rate to all your taxable gross sales for that spot.

Are There Any Deductions, Exemptions, or Credits?

Tennessee allows taxpayers to reduce their total gross sales by a number of deductions. The state gives you a hand by allowing several types of tax credits that you can apply directly against what you owe, though there’s a catch: you can only use these credits to knock off up to 50% of your tax bill.

The state also recognizes several exemptions from the tax. For example, while most sales of services are subject to the business tax, 16 types are exempt, including:

  • Medical, dental, and health services
  • Legal services
  • Educational services
  • Accounting, auditing, and bookkeeping
  • Banking
  • Insurance
  • Landlords
  • Veterinary services
  • Architecture, engineering, and land surveying

Which Businesses Are Subject to Tennessee’s Business Tax?

Generally, any entity that conducts business within any county or incorporated municipality in Tennessee should register for and remit the business tax.

Special Considerations for Out-of-State and Online Businesses

Out-of-state businesses might also need to pay Tennessee’s business tax, but only if they have a “substantial nexus” with the state. What does that mean? Essentially, it’s a fancy way of saying your business has a significant enough connection to Tennessee that it’s fair for the state to tax you.

You’re likely to have this kind of connection if your business:

  • Sell a service delivered to a location in Tennessee
  • Lease items in Tennessee
  • Sell items that are shipped or delivered to a location in Tennessee
  • Make sales as a natural gas marketer to customers located in Tennessee through the presence of your property in Tennessee, through the holding of pipeline capacity on pipelines located in Tennessee, or by using someone located in Tennessee acting on your behalf.

If your business has a location in a city with a business tax, you’ll also need to pay that.

How Do I Pay Tennessee’s Business Tax?

By filing Form BUS 428, “Business Tax Return,” annually. The deadline is the 15th day of the fourth month following the end of your business’s fiscal year.

It’s important to note that if you have an active business tax account with the Tennessee Department of Revenue, you’re required to file this return even if your business didn’t generate any gross receipts during the period.

Do I Need to Pay Estimated Business Tax Payments?

No, they’re not required for business taxes in Tennessee.

What Is Tennessee’s Sales and Use Tax Rate?

In general, sales and use tax can have a number of quirky rules that are highly dependent on a state-by-state and location-by-location basis.

We highly recommend that you have a clear understanding of what is subject to sales tax and what is not when selling products and services. While services are generally not taxable in Tennessee, there are a number of services that are taxable above what you may think makes sense.

If you have any concerns, reach out to the Tennessee Department of Revenue or your accountant to make sure that you are collecting any sales tax required when selling products or services in Tennessee or really in any state.

Tennessee Sales Tax

Tennessee’s sales tax has two parts: the state portion and the local portion. The state rate is 7% of the purchase price. The local portion varies by county but caps at 2.75%. There’s an extra 2.75% tax on any single item of tangible personal property priced between $1,600 and $3,200.

Tennessee Use Tax

The use tax is paid when the Tennessee sales tax wasn’t collected by the seller. This includes items bought or shipped into Tennessee, with the rate mirroring the sales tax.

Typical examples of this are purchasing equipment or computers from out-of-state vendors that are not charging you tax on the purchase. Unfortunately, this is one of the first things a Tennessee Department of Revenue auditor will look for when they audit your sales tax paid.

Understanding Tennessee’s Single Article Local Tax

Under Tennessee law, local tax only applies to the first $1,600 of an item’s price.

A “single article” refers to any item sold as a complete unit, distinct from accessories or extra parts. This does not apply to items sold in sets or as part of groupings. Typically, you see this applied when you buy furniture or a car in Tennessee. You would not have to pay the full 9.75% sales tax on your entire car purchase.

Sales and Use Tax Exemptions and Credits

Tennessee offers a range of tax exemptions and credits to lighten the tax burden on businesses and consumers:

Entity-Based Exemptions

Targets specific types of organizations, like qualified farmers and manufacturers, recognizing their unique contribution to the economy.

Product-Based Exemptions

Applies to certain items deemed necessary or beneficial, such as gasoline, textbooks, and healthcare products, aiming to make these items more accessible.

Use-Based Exemptions

Provided for specific uses of goods or services, recognizing that certain uses contribute to the public good or economic development.

Tennessee also offers:

  • A headquarters tax credit for taxpayers establishing a qualified headquarters facility in the state.
  • A qualified production exemption for the sale, use, storage, or consumption of tangible personal property, computer software, or services that are necessary to and primarily used for a “qualified production” in the state.

What if I Already Paid Sales or Use Tax to Another State?

If you’ve paid sales or use tax on an item in another state, Tennessee allows you to apply that as a credit against the use tax you owe in Tennessee, provided it does not exceed the Tennessee use tax amount. This prevents double taxation on the same item.

Do Marketplace Sellers Need to Pay Sales and Use Taxes?

Online sellers, including those who sell through marketplaces, need to be aware of their tax obligations. Physical presence in Tennessee or exceeding $100,000 in sales within Tennessee triggers the requirement to register and remit sales and use tax.

However, if all sales are conducted through marketplace facilitators that collect tax on behalf of sellers, the sellers may not need to register independently but must still comply with filing requirements.

How Do I Pay Tennesse’s Sales and Use Tax?

You file Form SLS 450, “State and Local Sales and Use Tax Return.” The return generally is filed monthly, on the 20th day of the month following the end of the reporting period.

For businesses with lower tax liabilities, there are options to file quarterly or annually. All filings are completed through the Tennessee Taxpayer Access Point (TNTAP) or via approved software solutions.

Do I Need to Pay Estimated Sales and Use Taxes?

No, Tennessee doesn’t require estimated payments for sales and use taxes.

Does Tennessee Have a Withholding Tax for Employees?

No – Tennessee does not have a withholding tax for employees. This is because Tennessee is one of the few states that do not levy a personal income tax on wages.

What About Unemployment Taxes in Tennessee?

In Tennessee, if you’re running a business with employees, you’ll need to get familiar with unemployment taxes. Here’s how it breaks down in simple terms:

Every employer needs to complete form LB- M 0441, “Report to Determine Status, Application for Employer Number.” This form is your first step, as it helps figure out if you need to pay unemployment taxes based on your business type, the size of your workforce, and how much you’re paying them.

So, when might you need to pay these taxes?

  • If you’re already paying federal unemployment tax and have at least one employee in Tennessee. It doesn’t matter how long they’ve worked for you or how much they’ve earned.
  • Or, if your total gross wages hit $1,500 or more in any quarter of the calendar year, or you’ve had at least one employee on the payroll for 20 different weeks in the current or previous calendar year. The number of hours (full-time or part-time) doesn’t matter, nor does it matter if it’s the same employee across all those weeks.

The tax itself is only on the first $7,000 of each employee’s wages. The rate is adjusted semi-annually. The balance in the Unemployment Insurance Trust Fund on June 30 and December 31 of each year determines which of the six premium rate tables will apply for the following six-month period.

Conquering Tennessee’s Tax Terrain

It’s evident that while Tennessee’s tax structure presents unique challenges, it also offers opportunities for savvy business owners.

Whether you’re just starting or looking to refine your tax strategies, our team is here to guide you every step of the way. If you have questions about how these taxes apply to your business or need personalized advice to navigate Tennessee’s tax landscape confidently, we’re here to help. Contact us today!