Tennessee Department of Revenue Issues Notices on Tennessee Works Tax Act Changes
The Tennessee Department of Revenue has recently issued Important Notices #23-04 through #23-11 regarding changes made by the Tennessee Works Tax Act (SB275/HB323), which was passed in April by the Tennessee General Assembly.
The legislation includes a three-month grocery tax holiday and a paid family leave tax credit. It also provides tax relief for Tennessee businesses and makes several changes to Tennessee’s tax laws intended to increase the state’s economic competitiveness.
Important Notice #23-04: Standard Excise Tax Deduction
The Tennessee Works Tax Act, Public Chapter 377 (2023), creates a new $50,000 standard deduction from net earnings when calculating Tennessee excise tax for tax years ending on or after Dec. 31, 2024.
The standard deduction applies to pre-apportioned, net earnings as calculated under Tenn. Code Ann. § 67-4-2006 (“adjusted net earnings”). Furthermore, the deduction cannot create or increase a net operating loss. Therefore, for taxpayers with $50,000 or less in pre-apportioned, adjusted net earnings, this deduction will reduce net earnings to $0.
See Important Notice #23-04 for more information.
Important Notice #23-05: Franchise Tax Minimum Measure Deduction
Under the Tennessee Works Tax Act, for tax years ending on or after Dec. 31, 2024, the real and tangible property measure of the franchise tax base, as computed under Tenn. Code Ann. § 67-4-2108 (the “minimum measure”), will apply to the value of the property that is in excess of $500,000.
Therefore, up to $500,000 of a taxpayer’s aggregate property value, as determined under Tenn. Code Ann. § 67-4-2108 at the close of the tax year, will be excluded from the franchise tax minimum measure. The annual franchise tax continues to be based on the greater of the taxpayer’s net worth or its minimum measure. The $500,000 exclusion does not apply to the net worth franchise tax base.
See Important Notice #23-05 for more information.
Important Notice #23-06: Tax Credit Carryforward Periods
The Tennessee Works Tax Act extends the credit carryforward periods for several franchise and excise tax credits to 25 years, which is an increase from previous carryforward periods of 15 years. The extended credit carryforward periods apply to tax credits earned in tax years ending on or after Dec. 31, 2008. Tax credits earned before this date do not qualify for the 25-year credit carryforward period.
Applicable credits include:
- Industrial machinery credits
- Brownfield property credits
- Job tax credits
- Community investment credits
- Qualified production credits
- Paid Family and Medical Leave Credit
See Important Notice #23-06 for more information.
Important Notice #23-07: Bonus Depreciation
The Tennessee Works Tax Act aligns Tennessee with the federal bonus deprecation provisions found in the federal Tax Cuts and Jobs Act of 2017. Bonus depreciation is an accelerated method of depreciation that allows businesses to immediately deduct a percentage of the cost of eligible assets in the same year those assets are placed in service.
Taxpayers may take bonus depreciation deductions for assets purchased on or after Jan. 1, 2023, for Tennessee excise tax purposes, in the year of the purchase if the taxpayer takes bonus depreciation on the asset for federal tax purposes. For assets purchased on or before Dec. 31, 2022, bonus depreciation deductions continue to be disallowed.
See Important Notice #23-07 for more information.
Important Notice #23-08: Business Tax Filing Threshold
The Tennessee Works Tax Act increases the business tax filing threshold from $10,000 to $100,000 per jurisdiction. Therefore, taxpayers with less than $100,000 in annual gross receipts are not required to file an annual business tax return.
The Act also increases the gross sales threshold for contractors who perform contracts in Tennessee from $50,000 to $100,000. These contractors will only be considered to have established a “deemed location” in a given jurisdiction if their annual gross receipts are more than $100,000.
The filing threshold is calculated on a per jurisdiction basis. Businesses with multiple locations in the same jurisdiction must combine the gross receipts of each location. For example, if a business has two locations in Knoxville, one location has $55,000 in gross sales and the other location has $50,000 in gross sales, the business will have to file and pay business tax because it has more than $100,000 in gross sales in the same jurisdiction.
See Important Notice #23-08 for more information.
Important Notice #23-09: Sales Tax Holiday for Food and Food Ingredients
The Tennessee Works Tax Act creates a new sales tax holiday starting at 12:01 a.m. on Tuesday, Aug. 1, 2023, and ending at 11:59 p.m. on Tuesday, Oct. 31, 2023. During this period, food and food ingredients may be purchased tax free. Food and food ingredients purchased from a micro market or vending machine remain subject to sales tax.
“Food and food ingredients” are defined as 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. Food ingredients do not include alcoholic beverages, tobacco, candy, dietary supplements and prepared food. For more information and examples of food and food ingredients, please see Important Notice 17-20. The most common example of a dealer selling food and food ingredients is a grocery store. Food and food ingredients are those items otherwise taxed at the 4% state sales tax rate plus the applicable local rate.
See Important Notice #23-09 for more information.
Important Notice #23-10: Paid Family and Medical Leave Credit
Effective for tax years ending on or after Dec. 31, 2023, but before Dec. 31, 2025, the Tennessee Works Tax Act creates a new temporary tax credit that is allowed against a taxpayer’s combined franchise and excise tax liability. The Tennessee credit is based on the federal paid family and medical leave credit under Internal Revenue Code §45S.
Specifically, the Tennessee credit is equal to the federal credit taken under IRC §45S, but only with respect to compensation paid to qualifying employees in Tennessee during the tax period. For purposes of this credit, compensation is paid in Tennessee if it is paid to a qualifying employee whose payroll would be sourced to this state pursuant to the apportionment sourcing provisions under Tenn. Code Ann. § 67-4-2012.
The credit may be used to offset up to 50% of the combined franchise and excise tax liability shown on the return before the credit is taken, and any unused credit may be carried forward up to 25 years.
See Important Notice #23-10 for more information.
Important Notice #23-11: Single Sales Factor Apportionment
The Tennessee Works Tax Act transitions Tennessee from a three-factor apportionment formula to a single sales factor apportionment formula over a three-year period. Single sales factor apportionment will be mandatory for taxpayers who use the standard apportionment formula.
Single sales factor apportionment will be phased in over a three-year period by gradually increasing the weighting of the sales factor in the three-factor apportionment formula as follows:
- For tax years ending on or after Dec. 31, 2023, but before Dec. 31, 2024, the sales factor of the standard, three-factor apportionment formula will be weighted five times, and the total of the property, payroll, and sales factors will be divided by seven.
- For tax years ending on or after Dec. 31, 2024, but before Dec. 31, 2025, the sales factor of the standard, three-factor apportionment formula will be weighted 11 times, and the total of the property, payroll, and sales factors will be divided by 13.
- For tax years ending on or after Dec. 31, 2025, the standard apportionment formula will consist of the sales factor only.
See Important Notice #23-11 for more information.