Tennessee Legislature Repeals the Alternative Property Tax Measure of Franchise Tax; Tax Refunds Authorized by Legislation; Deadlines and Procedures Announced

After extended debate, the Tennessee Legislature has repealed the alternative property measure of the franchise tax. Going forward, the franchise tax will only be based on net worth. Taxpayers had raised arguments regarding whether the alternative property measure was Constitutional, prompting the repeal.

It is worth remembering that all entities, including S Corporations, partnerships, LLCs, and LLPs, are subject to Tennessee’s franchise tax and excise tax. Material refunds should be available to both in-state and out-of-state businesses. There is no refund opportunity if you have paid the franchise tax based on the net worth measure. If you paid based on the property measure, continue reading as you can apply for a refund.

The repeal is effective for tax years ending on or after January 1, 2024, but more importantly, the Legislature authorized refunds for taxpayers for prior years. As part of the enabling legislation, the Legislature provided funding for refunds, and Tennessee expects ample funds to pay all claims.

What to Consider – Refunds

If you paid tax on the property measure and wish to pursue a refund, you must make a refund claim between May 15, 2024, and November 30, 2024. The legislation enacting the repeal authorizes refunds for the tax years 2020 through 2023 in the amount of the tax actually paid minus any amounts otherwise due. In other words, a taxpayer’s refund is the amount paid under the property measure minus the amount that would have been due under the net worth measure.

The Tennessee Department of Revenue has issued guidance in the form of Tax Notice #24-05, covering the procedures, forms, and schedules for making a refund claim. The procedures for obtaining a refund are specific. A Taxpayer must amend each tax year separately and file those returns chronologically. Taxpayers must wait until the return has been processed and the overpayment shows before submitting the refund claim. The 2023 tax return should be prepared and amended under the prior rules. We recommend taxpayers collaborate closely with their advisors as refund claims rejected for procedural errors may not be curable after the November 30th deadline.

Taxpayers with credit carryforwards should carefully consider the impact on their tax credits by the refund claims and repeal of the property measure. For example, the term tax actually paid includes credits claimed on filed returns. Any credits, such as the industrial machinery or jobs tax credit, exceeding the amount allowed on an amended return are reinstated to the taxpayer’s account and not allowed as a refund.

Taxpayers should also carefully review prior year net worth calculations and amounts reported, which will impact the potential refund. If there are net worth amounts erroneously reported on previous returns, taxpayers may want to consider amending those returns separately from the refund claim.

What to Consider – Estimated Payments

Taxpayers who based estimated payments for 2024 on the property measure should recalculate based on the net worth measure. Taxpayers with significant credit carryforwards should evaluate whether those credits are utilizable. The legislation permits an election to pay taxes based on the property measure if it results in higher taxes. A taxpayer might consider this election if tax credits are at risk of expiring or subject to a valuation allowance.

Other Considerations

The repeal legislation also directs the Department of Revenue to publish the name of each taxpayer issued a refund and the range of that refund. The Department of Revenue will publish refunds in three categories as follows: (1) $750 or less; (2) $751 to $10,000; and (3) more than $10,000. Taxpayers should consider that the public, including competitors, could see the refund range.

Next Steps

Marcum will be monitoring the procedures and forms issued by the Department to ensure that we file all our clients’ refund claims in a timely manner. Should you wish to discuss a potential refund claim or the impact on your business, please reach out to Joe Feehan, State and Local Tax Partner, at [email protected] or 617.807.5153 or Cathy Werthan, Nashville Office Managing Partner, at [email protected] or 615.245.4070.