Tennessee businesses received a welcome update to the state’s franchise tax structure this spring with HB 1893 and SB 2103, which were passed in the Tennessee General Assembly on April 25, 2024, then signed by Governor Bill Lee on May 10, 2024. With the passing of the legislation officially into law in the state of Tennessee, the long-standing property measure, known as Schedule G, has been eliminated from the franchise tax calculation. This move streamlines the tax code and offers potential tax relief for many businesses.
What Was the Property Measure (Schedule G)?
Previously, Tennessee’s franchise tax levied a tax on businesses based on the greater of two factors:
Tangible property value in the state (Schedule G): This included the value of real estate, machinery, equipment and other physical assets owned by the business within Tennessee.
Apportioned net worth (Schedule F1 or F2): This is considered a portion of the business’s total net worth based on its activity within the state.
For some businesses with significant physical assets in Tennessee, Schedule G could result in a higher tax burden than their net worth justifies. This could place them at a disadvantage compared to businesses with a more service-oriented model.
Repealing Schedule G: Streamlining the Tax Code
The repeal of Schedule G simplifies the franchise tax calculation for businesses. Companies will now solely base their franchise tax liability on their apportioned net worth reported on Schedule F1 or F2 of FAE170. This eliminates the need to track and value physical property, potentially reducing administrative burdens and associated costs.
This change also promotes a more balanced tax system across industries. Businesses that rely heavily on physical assets will no longer be penalized for their property holdings. The playing field is leveled, potentially attracting new businesses and encouraging existing ones to expand in Tennessee.
Special Refunds for Past Payments
While the repeal is effective for tax years ending on or after January 1, 2024, the legislation recognizes that some businesses may have overpaid franchise taxes in prior years due to Schedule G. To address this, the law authorizes special refunds for eligible taxpayers.
Businesses that paid franchise tax on the property measure for tax years ending between March 31, 2020, and Dec. 31, 2023, can claim a refund if they meet specific criteria, including:
Filing a franchise tax return with the Tennessee Department of Revenue (DOR) on or after Jan. 1, 2021, for the relevant tax period.
The tax is subject to refund and must have been reported for a tax period ending on or after March 31, 2020.
Additionally, businesses that previously filed claims challenging the constitutionality of Schedule G based on the “internal consistency test” may also be eligible for refunds for all years included in their original claim.
Claiming Your Refund
The Tennessee DOR has established a dedicated webpage outlining the refund process for the property measure franchise tax, including details on eligibility requirements and instructions for filing a refund claim. It’s important to note that a specific claim form is required, and the claim period has a deadline. Businesses should carefully review the information provided by the Tennessee DOR to ensure they submit a complete and timely claim. The TN DOR also strongly encourages the filing of amended reports and claims for refund using the Tennessee Taxpayer Access Point (TNTAP).
Impact on Tennessee Businesses
The elimination of Schedule G and the availability of refunds for past payments are positive developments for Tennessee businesses. The simplified tax calculation process will reduce administrative burdens and potentially lower tax liabilities for many companies. Additionally, the refund opportunity provides some relief for businesses that may have overpaid franchise taxes in prior years.
This modernization of the franchise tax strengthens Tennessee’s position as a business-friendly state. By simplifying the tax code and offering potential tax relief, the state is sending a clear message that it welcomes and supports business growth. Such changes represent a significant step towards a more competitive tax environment in Tennessee. To determine if your business is eligible for a refund, or for help navigating the claim process effectively, reach out to your Windham Brannon advisory today, or contact Tim Clancy, Windham Brannon’s State and Local Tax Practice Leader.
