By Josh Moore, Partner
On April 19, 2023, the Tennessee Works Act of 2023 was passed by the Senate. The House passed the act the next day, and it is headed to Governor Bill Lee’s desk for signature. The act is one of the largest tax cuts in Tennessee’s history and provides large and small businesses with tax relief related to a variety of taxes imposed by the state. Some of the impacted taxes are:
Excise Tax: The Tennessee excise tax is a 6.5% income tax that is imposed on the taxable income of most entities doing business in the state.
The act establishes a standard deduction of up to $50,000 from the taxable income of a business subject to excise tax. This represents a savings of up to $3,250 per business.
Prior to January 1, 2023, Tennessee decoupled from the federal bonus depreciation provisions of the 2017 Tax Cuts and Jobs Act and required that businesses recompute their depreciation for Tennessee purposes without regard for the federal bonus depreciation allowed by the IRS. Starting in 2023, Tennessee conforms to the federal bonus depreciation provisions of the 2017 Tax Cuts and Jobs Act and businesses will be allowed to use the same bonus depreciation methodologies that they use for federal purposes for state purposes.
Franchise Tax: The Tennessee franchise tax is a tax based on the net worth or the book value of the property of corporations, limited partnerships, and limited liability companies doing business in the state. The tax rate is $0.25 per $100 of value or $250 in tax on $100,000 of value.
The act establishes a standard deduction of up to $500,000 of property only, not net worth, from the tax base. This represents a savings of up to $1,250 per business.
Franchise and Excise Tax Combined: Although the franchise tax and excise tax are two separate taxes, they are computed and paid at the same time and on the same forms. Several of the provisions of the act affect both taxes.
Prior to January 1, 2023, any unused Jobs Tax Credit and the Industrial Machinery Tax Credit could be carried forward for 15 years. Starting in 2023, the carryforward period is increased to 25 years for credits earned in tax years ending on or after December 31, 2008.
Prior to January 1, 2023, the state used a three-factor apportionment formula that triple-weights the sales factor. This changes to a 5X sales factor for 2023, an 11X sales factor in 2024, and then to a single sales factor only in 2025. This change will benefit companies located in Tennessee that have customers located outside of the state.
For 2023 and 2024, employers may claim a credit for paid family and medical leave equal to the federal employer tax credit allowed by IRC Section 45S on wages paid within the state. This credit can offset up to 50% of a business’s combined franchise and excise tax liability. Any unused credits can be carried forward for 25 years.
Sales and Use Tax:
A 3-month sales tax holiday on food and food ingredients will begin on August 1, 2023, and last until October 31, 2023.
Business Tax: The Tennessee business tax is a gross receipts tax on the sale of tangible personal property and most services to customers within the state. The tax rate ranges from 0.02% to 0.30% depending on the type of business.
Prior to January 1, 2023, only businesses with taxable sales of more than $10,000 were required to file an annual business tax return. The law increases this threshold to $100,000.
The top business tax rate of 0.30% is being reduced to 0.1875% starting in 2023.
Our team at Market Street Partners is continually researching and studying new legislation as it is enacted to better understand the opportunities available for our clients. Please contact us if you have any questions or concerns about how any specific provisions affect your situation.