Proposed Franchise Tax TN HB 1893 and SB 2103

Proposed Franchise Tax Would Generate Significant Refund Opportunities

Current Tennessee Franchise and Excise Tax law requires that entities (corporations, subchapter S corporations, limited liability companies, professional limited liability companies, registered limited liability partnerships, professional registered limited liability partnerships, limited partnerships, cooperatives, joint-stock associations, business trusts, regulated investment companies, REITs, state-chartered or national banks, and state-chartered or federally chartered savings and loan associations) pay a Franchise Tax equal to 25 cents of every $100 of the greater of the entities Total Net Worth or Total Real & Tangible Personal Property.

Example of an actual client:
  1. Total net worth Schedule F1, Line 5…………………………….-304,227
  2. Total real and tangible personal property, Sch. G……………5,456,297
  3. Franchise tax (25 cents per $100 on the greater)…………………13,641

In a nutshell, these bills, if passed into law, would change the present law and remove the alternative tangible/realty property base from the Tennessee franchise tax (basically Schedule G). Additionally, the bills would require the payment of refunds for open years for taxpayers who paid on the tangible property base. The bills provide that the refund amount would be limited to the difference in tax between what was paid on the tangible/real property base and what would have been paid using the apportioned net worth base. In this example, the entire amount.

Right now, “open” years would include 2020, meaning the taxpayer could potentially apply for five years’ worth of refunds. If these bills are passed this year, as expected, the taxpayer will have until December 31, 2024, to file for 2020 before it drops off of the statute of limitations.

The refund is subject to the following provisions:

(1) The refund must be claimed within three years from December 31 of the year in which the payment was made or within any period covered by an extension permitted by existing law;

(2) The claim for refund, including information necessary to determine the proper amount due, must be filed on a form prescribed by the commissioner exclusively for the purpose of seeking a refund pursuant to this bill and must not include a claim for refund on any other basis. A claim on any other basis must be filed separately under existing law. The commissioner is also authorized to refund, under this bill, a claim timely filed under existing law and filed before January 1, 2024, that alleges that the franchise tax in the franchise tax law of 1999 or any provision of the franchise tax law of 1999, is unconstitutional by failing the internal consistency test. The commissioner is not authorized to make a refund under this bill unless a claim is filed;

(3) As used in this bill, “tax actually paid” includes any credits applied on the return. Credits must be reinstated but not paid as a refund;

(4) This bill does not prevent the commissioner from auditing the refund claim, appropriately adjusting or denying the claim, or auditing the amount of tax otherwise due under the franchise tax law of 1999 within the applicable statute of limitations;

(5) A refund due under this bill must first be used to offset any outstanding tax liabilities and is subject to the report of debts requirements in existing law;

(6) A denial of a refund claimed under this bill is subject to the remedies provided in existing law regarding taxpayer remedies for disputed taxes.

(7) Interest at the rate established by determination of rate of interest under the Internal Revenue Code for a large corporate overpayment in the amount of the federal short-term rate plus five-tenths of a percentage point must be added to the amount refunded under this bill beginning 90 days from the date the commissioner receives the refund claim and proper proof to verify that the refund or credit is due and payable; and

(8) Attorneys’ fees must not be added to the amount of refund due.

This will significantly impact you, our clients, and our workload to get those refunds back for you. We will be keeping a watchful eye on how this develops.

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