Tennessee corporate income tax is a business tax that is levied on the gross taxable income of a registered business or corporation. In this article, we will discuss what is involved in Tennessee corporate income tax to help you, as a business owner, understand the tax laws and become tax compliant.

Corporate Income Tax

Corporate income tax is a bracketed business tax system levied on most businesses registered and conducting business in Tennessee. Businesses need to file a yearly tax return. Various qualifying business deductions are allowed. All non-flow-through entities (such as partnerships or S corporations) must report and pay tax on their earnings.

Tax Liable Businesses

A C corporation is the most common business structure subject to corporate tax. C corporations are subject to double taxation since they must pay corporate tax on their revenue as well as the personal income tax that shareholders and owners pay on withdrawn profits. Flow-through entities are not subject to double taxation as they do not have to pay corporate tax on revenue.

Tax-Exempt Organizations

An organization must apply for non-profit tax-exempt status from the IRS to qualify for tax-exemption. Tax-exempt entities under the 501(c) of the IRS include:

  • Recreational organizations, on the condition that their primary purpose is not for profit
  • Bona-fide religious institutions
  • Labor unions and worker organizations
  • Bona-fide charities
  • Non-profit educational and scientific institutions

Federal Corporate Tax

In Tennessee, corporations need to pay state corporate income tax and federal corporate income tax. The federal business tax has eight brackets based on income level. The brackets are not completely progressive. Thus, the corporate tax burden is spread evenly between businesses with different revenue levels.

Tennessee State Taxes

Corporate tax rates have been consistent and in effect since 1994. When calculating federal tax, state tax is first deducted from the business gross income.

Tennessee state taxes include the following:

  • Business or gross receipts tax
  • Sales and use tax
  • Franchise tax
  • Professionals tax

In regards to personal income tax, earned income is not taxed in Tennessee.

Business or Gross Receipts Tax

  • This is levied on specific types of businesses, such as wholesalers, retailers, personal services, and contractors.
  • The State Department of Revenue administers the business tax.
  • Business taxes are made up of the state business tax and municipal business tax. Each requires a tax return.
  • All businesses are to register within 15 days of start-up and pay either the filing fee of $15 or the business license tax. The clerk assigns a classification and tax rate. Thereafter, an annual fee is payable.
  • The business tax rate varies. It can be anything from 3/8 to 1/40 of 1 percent of gross receipts. Certain professionals and manufacturers such as medical services, farm extensions, and entities with less than $10,000 sales in a county are tax exempt.
  • Available tax deductions include written-off bad debt, out-of-state sales of services, interstate commerce sales, trade-in allowance, and discounts or returned goods.

Sales and Use Tax

Sales tax applies to a person or company manufacturing, distributing, or retailing tangible personal property in the state of Tennessee. Various other services are also taxed.

Franchise Tax

  • This is based on one of two factors: the book value or the net worth of the property, whichever is greater.
  • The rate is calculated at 25 cents per $100.
  • Excise and franchise tax are reported together and paid at the same time.

Professionals Tax

A wide variety of professional persons must pay $200 tax yearly to keep up their credentials.

Avoiding Double Taxation

In order to avoid double taxation in a flow-through entity, allowance is made to the holding entity for flow-through income to be excluded on its excise return. The excise return also excludes self-employment tax.

If a holding entity has an interest in other entities, its equity has the potential of double taxation. To avoid this, an affiliated group can jointly elect to compute the net worth based on consolidation. In order to do this, all members need to have the same tax year-end. The holding entity needs to have over 50 percent direct or indirect ownership in the affiliated member.

The franchise tax is calculated differently. It is based on the percentage of the consolidated net worth owned by all the members in the group. This assumes that each group member's assets are less than their consolidated net worth share. In this way, members who have negative capital balances are balanced out by those who have positive capital balances.

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