On May 11, 2023, Governor Bill Lee signed the Tennessee Works Act (the Act) which provides more than $400 million in tax savings. The bill covers various types of Tennessee tax. Some of the changes include federal bonus depreciation conformity, increasing the business tax filing threshold, a new standard deduction for excise tax, a new deduction from the franchise tax minimum measure, the adoption of a single sales factor formula, and a 2023 sales tax holiday for food and food ingredients.
What does this mean?
Federal bonus depreciation conformity
Federal bonus depreciation pursuant to IRC section 168(k) will be permitted for assets purchased on or after Jan. 1, 2023, for the purposes of excise (income) tax as Tennessee will follow the same phase out schedule followed for federal purposes. The bonus depreciation deduction is not permitted for assets purchased on or before Dec. 31, 2022.
Increase in business tax filing threshold
Before the Act, businesses with $10,000 or more of annual in-state gross receipts were required to file a Tennessee business tax return regardless of whether or not a physical place of business was maintained in the state. For tax years ending on or after Dec. 31, 2023, the Act increases this filing threshold to $100,000. The threshold is calculated on a per jurisdiction basis. Businesses with multiple locations in the same jurisdiction must combine the receipts from each location. Additionally, businesses with annual gross receipts in a jurisdiction between $3,000 and $100,000 must obtain a minimal activity license every year from the local county and/or incorporated municipality for each location within the jurisdiction.
In the case of businesses with no physical locations in Tennessee, the $100,000 threshold would be applied on a statewide basis.
Excise tax standard deduction
For tax years ending on or after Dec. 31, 2024, the Act creates a new standard deduction of $50,000 when calculating the net earnings portion of excise tax in order to provide relief to small businesses. The deduction applies to the pre-apportioned net earnings. The deduction cannot create or increase a net operating loss. Therefore, any net earnings less than $50,000 are reduced to $0. The deduction will be reported on Schedule J of the Franchise and Excise return.
Franchise tax tangible property exclusion
The state’s franchise tax is calculated under the greater amount of the following two methodologies:
- Apportioned net worth
- Tennessee real and tangible personal property (Property)
The Act creates an exclusion for the calculation of the minimum measure for purposes of the Property franchise tax base for tax years ending on or after Dec. 31, 2024. The minimum measure calculation now includes an exclusion of the first $500,000 of aggregate property value of the taxpayer. The annual franchise tax is still based on the greater of the taxpayer’s net worth and Property above the minimum measure amount. The exclusion only applies to the calculation of the minimum measure, and not the net worth calculation.
Franchise and excise tax single sales factor apportionment formula phase in
For tax years ending before Dec. 31, 2023, Tennessee applies a three-factor apportionment formula including a property, payroll, and a triple-weighted sales factor (three times the sales factor).
The Act introduces a transition from a three-factor apportionment formula to a single sales factor formula between tax year 2023 and tax year 2025.
- For tax years ending on or after Dec. 31, 2023, but before Dec. 31, 2024, the apportionment formula will be a three-factor formula with five times the sales factor, with a denominator of seven.
- For tax years ending on or after Dec. 31, 2024, but before Dec. 31, 2025, the apportionment formula will be a three-factor formula with 11 times the sales factor, with a denominator of 13.
- For tax years ending on or after Dec. 31, 2025, the apportionment formula will be a single sales factor formula.
Taxpayers will have an option to elect a three-factor formula with triple-weighted sales if the taxpayer has net earnings and it will result in a higher apportionment ratio. Lastly, manufacturers that already elect to use a single sales factor formula may continue to do so during the phaseout period.
Sales tax holiday on food and food ingredients
The Act creates a sales tax holiday from Aug. 1 through Oct. 31, 2023, for “food and food ingredients”. Items falling under this definition will be exempt from sales tax during this period, otherwise they are subject to the 4% state sales tax rate plus any applicable local rate. Sellers of food and food ingredients must report all exempt sales.
According to the Act, the definition for food and food ingredients includes liquid, concentrated, solid, frozen, dried, or dehydrated substances that are sold to be ingested or chewed by humans and are consumed for their taste or nutritional value. However, alcoholic beverages, tobacco, candy, dietary supplements, and prepared food do not meet this definition and will not be availed the sales tax holiday exemption.
What does CohnReznick think?
In addition to benefiting in-state small businesses, the Tennessee Works Act will provide tax relief to businesses that have significant property and payroll within the state; especially since all the surrounding states have recently limited or eliminated the measure of property and payrolls from their income and business tax bases to become more competitive in bringing business investment into their respective states. Companies with Tennessee tax filing obligations should review these key Act provisions to identify its impact on their future liabilities in the state.
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