We definitely geek out a little more than most about tax legislation, but the recently passed Tennessee Works Tax Act is absolutely one we think everyone should be excited about! The Tennessee General Assembly recently approved more than $400M in tax cuts, representing the largest tax cut in Tennessee history. Represented by Senate Bill 275 and House Bill 323, the Tennessee Works Tax Act was signed by Governor Bill Lee on May 11, 2023. The legislation enacted several changes to the state’s sources of tax revenue: Sales & Use, Franchise & Excise, and Business Tax. Let’s dive into how these changes may affect you and/or your small business.
Sales & Use Tax
The state is no stranger to sales tax holidays, but this is the first three-month grocery tax holiday. There will be no sales tax on food and food ingredients sold in grocery stores between August-October 2023. As a state with high sales tax this can really add up over three months, especially for large families. Maybe it’s time to consider buying that extra garage fridge/freezer you’ve been debating on and load up!
The Tennessee Department of Revenue defines food and food ingredients as liquid, concentrated, solid, frozen, dried, or dehydrated substances consumed for taste or nutritional value. Alcoholic beverages, tobacco, candy, and dietary supplements are specifically excluded…no matter how tasty (and of course nutritional) they are. Still unsure about what qualifies? TN Sales and Use Notice #17-20 gives some examples.
Own a grocery store? If so, your sales tax return will look a little different these three months. The state will use the information reported to reimburse local governments for lost revenue during the sales tax holiday.
Business Tax, in effect since 1971, is the state’s gross receipts tax on sales of tangible property and certain services. Effective for tax years ending on or after December 31, 2023, The Tennessee Works Tax Act increases the filing threshold from $10,000 to $100,000 and contractor ‘deemed location’ threshold from $50,000 to $100,000. Businesses with annual gross receipts under $100,000 may still be required to obtain a minimal activity business license.
The state estimates that roughly 140,000 Tennessee businesses will no longer have to pay business tax. Similar to sales tax, the state will compensate localities for lost revenue through adjustments to the state revenue share.
Under current legislation all Tennessee businesses pay a $100 minimum franchise tax unless qualifying for a tax exemption. For entities that own or pay rent for property in the state the franchise base can creep up quickly. For tax years ending on or after December 31, 2024 the franchise tax on property owned or rented in the state will apply to the value of property in excess of $500,000. The exclusion does not apply to the net worth franchise base. With franchise tax being calculated on the greater of the net book value of property OR your net worth, this means a savings of up to $1,250 per year for those whose NBV of property significantly exceeds net worth.
Under current legislation entities with taxable income in Tennessee pay 6.5% excise tax. For tax years ending on or after December 31, 2024 the Tennessee Works Tax Act creates a pre-apportioned $50,000 standard deduction from state net earnings when calculating state excise tax. Businesses cannot use the standard deduction to create or increase a net operating loss. Therefore, taxpayers will receive no future benefit for any unused standard deduction from one year to the next. The value of this tax cut could be up to $3,250 per year for those businesses with taxable income exceeding $50,000.
These combined changes could result in tax savings of up to $4,500 per taxpayer per year in franchise and excise taxes alone.
Other franchise and excise tax changes under the Tennessee Works Tax Act:
- Adoption of bonus depreciation: The Tennessee Works Tax Act aligns Tennessee with the federal bonus depreciation provisions currently enacted. Historically, the state has not conformed to federal bonus depreciation, which often resulted in Tennessee companies having more taxable income in the state than they did for federal income tax purposes.
- Adoption of single sales factor apportionment: Entities that operate in multiple states pay income tax in each state. The amount of income that is sourced to that state is based on state apportionment legislation. Over the past several years states have started transitioning from a three-factor (property, payroll, sales) apportionment formula to a single sales factor apportionment formula. Over a three-year period, Tennessee will phase in a single sales factor apportionment formula by gradually increasing the sales factor. Single sales factor apportionment will be completely phased in for tax years ending on or after December 31, 2025.
- Extension of tax credit carryforward periods: The state offers several incentives to companies to bring business to the state. The Tennessee Works Tax Act increases the credit carryforward period from 15 years to 25 years and applies retroactively to tax credits earned in tax years ending on or after December 31, 2008. The Department will apply the new carryforward period automatically, so taxpayers do not need to contact the department to apply.
- Creation of Paid Family & Medical Leave Credit: Internal Revenue Code Section 45S provides a tax credit to employers who offer family and medical leave to their employees. This tax credit is equal to a percentage of the wages paid to qualifying employees. The Tennessee Works Tax Act creates a new, temporary, credit against taxpayers’ combined franchise and excise tax liability equal to the federal credit taken with respect to compensation paid to qualified employees in Tennessee.
These changes are expected to boost small businesses while ensuring that local governments are compensated for the lost revenue. The changes also further align Tennessee with federal and other state income tax provisions.
Confused? Overwhelmed? Not sure if or how this impacts you? Contact us via e-mail or give us a call at 865-691-8509. We’d love to help you understand and strategize accordingly!