Tennessee Franchise and Excise Tax: Who Pays, Filing, and Credits

The Tennessee franchise and excise tax is a combined state-level business tax with two parts: a 6.5% excise tax on Tennessee net earnings and a 0.25% franchise tax on apportioned net worth. Nearly every corporation, LLC, limited partnership, and S corporation doing business in Tennessee owes both taxes, files a single combined return on Form FAE 170, and must file and pay electronically through the Tennessee Taxpayer Access Point (TNTAP).

Who Owes the Tax

Tennessee’s F&E tax applies to every corporation (including S corporations), LLC, limited partnership, limited liability partnership, business trust, regulated investment company, REIT, and banking institution doing business in the state.¹ Unlike most states, Tennessee taxes S corporations and entities treated as partnerships at the entity level rather than only at the owner level.

Sole proprietors and general partnerships in which every partner bears full personal liability for the entity’s debts are not “persons” under the statute and do not owe the tax.¹ Inactive entities still registered with the Secretary of State remain on the hook: they must file a return each year and pay at least the $100 minimum franchise tax.

Entities That Are Exempt

Several categories of entities can be exempted from the F&E tax if they file the paperwork on time:

Obligated member entities, where every member or partner has voluntarily assumed full personal liability for the entity’s debts and filed the required documentation with the Secretary of State. If any member keeps limited liability protection, the exemption covers only the portion of income and equity not attributable to that member.
Affordable housing entities organized exclusively to provide affordable housing, holding federal low-income housing tax credits and an extended low-income housing commitment.
Venture capital funds formed exclusively to buy, hold, and sell securities of nonpublicly traded companies on their own behalf.
Family farm and residence entities where at least two-thirds of activity is farming or holding personal residences and at least 95% of ownership is held by related individuals or their trusts.
Regulated investment companies or unit investment trusts holding at least 75% of investments in U.S., Tennessee, or local government bonds.
Federal and state-chartered credit unions, along with production credit associations.

Exempt entities must file Form FAE 183 by the 15th day of the fourth month after the close of the tax year.² Miss that filing and the entity owes tax for the full year even if it otherwise qualifies.

When an Out-of-State Business Owes the Tax

An out-of-state business becomes subject to F&E tax once it has “nexus” with Tennessee. Physical presence is the clearest trigger: owning or leasing property in the state, storing inventory there, or having employees working there.³

Even without physical presence, Tennessee asserts nexus over a business that crosses any one of these bright lines: at least $500,000 in Tennessee receipts, at least $50,000 in Tennessee property or payroll, or Tennessee receipts, property, or payroll exceeding 25% of the business’s totals everywhere.

Tennessee-formed entities are subject to the tax from the date of formation. Out-of-state entities that aren’t registered with the Secretary of State become liable from the date they begin operating in the state with substantial nexus.³ Once nexus exists, the entity must register with the Tennessee Secretary of State and the Department of Revenue before filing.

How the Excise Tax Is Calculated

The excise tax is 6.5% of Tennessee net earnings.⁴ Start with federal taxable income, then apply Tennessee-specific adjustments. Common additions include any Tennessee excise tax expense that was deducted federally. Subtractions cover items such as differences between state and federal property basis.

Tennessee now conforms to federal bonus depreciation under the Tax Cuts and Jobs Act for assets purchased on or after January 1, 2023. Whatever bonus depreciation you claim federally, you can claim for Tennessee excise tax purposes. For 2026, the applicable bonus depreciation rate is 20% of the asset’s cost.⁵

For tax years ending on or after December 31, 2024, a $50,000 standard deduction is available against net earnings. The deduction equals the lesser of $50,000 or net earnings before the deduction, and it cannot create or increase a net loss.⁶ For a small business with modest profits, that alone can zero out the excise tax.

How the Franchise Tax Is Calculated

The franchise tax is 0.25% of Tennessee-apportioned net worth.⁴ Net worth is the book value of total assets minus total liabilities, determined under GAAP or the method used for federal income tax reporting. Whatever the calculation produces, the minimum franchise tax is $100 for every registered entity, even inactive ones.⁷

The franchise tax used to be based on the greater of apportioned net worth or the value of Tennessee real and tangible personal property. That property measure was retroactively repealed for tax years ending on or after January 1, 2024.⁸ The base is now net worth alone. The refund window for past property-measure payments closed on November 30, 2024.⁹

Apportionment for Multistate Businesses

A business operating in Tennessee and at least one other state has to apportion its income and net worth to determine what Tennessee can tax. For tax years ending on or after December 31, 2025, Tennessee uses a single-sales-factor formula: only the ratio of Tennessee sales to total sales everywhere sets the apportionment percentage.⁶ This replaced the older three-factor formula that also weighted property and payroll.

Sourcing follows two rules. Services and intangibles use market-based sourcing, so sales are attributed to the state where the customer receives the benefit. Tangible goods are sourced to Tennessee if the property is shipped to a purchaser in the state. The same apportionment ratio applies to both the excise tax base (net earnings) and the franchise tax base (net worth).

Filing, Deadlines, and Extensions

Every entity subject to the tax files Form FAE 170, combining both taxes on one return. Returns and payments must be submitted electronically through TNTAP or an approved software vendor.¹⁰

The return is due on the 15th day of the fourth month after the close of the tax year. For calendar-year filers, that’s April 15.¹¹ Full payment is due on the original date whether or not you request more time to file.

Tennessee grants a seven-month filing extension if by the original due date you pay either 90% of the current year’s liability or 100% of the prior year’s liability (annualized if the prior year was a short period).⁴ The extension only pushes back filing, not payment. Any shortfall at the original due date still draws penalties and interest.

Quarterly Estimated Payments

If your combined F&E liability is $5,000 or more in both the current and prior year, you must make quarterly estimated payments on Form FAE 172.⁴ Installments are due on the 15th day of the fourth, sixth, and ninth months of the current tax year and the 15th day of the first month of the following year.¹² For a calendar-year filer, that’s April 15, June 15, September 15, and January 15.

Underpaying an installment triggers a separate penalty of 2% per month or partial month, capped at 24%.¹¹ The penalty is calculated on each installment separately, so a shortfall in April keeps compounding until it’s cured.

Penalties and Interest for Late Payment

Late filing or late payment carries a penalty of 5% of the unpaid tax for each 30-day period (or fraction) the tax is unpaid, up to 25%. The minimum penalty is $15 even when no tax is owed.¹³ The clock runs from the original due date, not the extended one.

Interest accrues on any unpaid tax from the original due date. The Department of Revenue resets the rate every six months. Through June 30, 2026, the rate is 11.50%. Taxpayers on an installment payment agreement pay 13.25%.¹⁴ At those rates, a lingering balance gets expensive quickly.

Credits That Can Reduce What You Owe

Job Tax Credit

The Job Tax Credit is $4,500 for each qualified new job created during the investment period, rising to $5,000 per job in certain enhanced counties.¹⁵ To qualify, a business generally has to make a minimum $500,000 capital investment in Tennessee property and create at least 25 new jobs, though the job threshold drops to 20 or 10 in higher-tier enhancement counties.

The standard credit can offset up to 50% of combined F&E liability in a given year, and unused credits carry forward up to 25 years (for credits earned in tax years ending on or after December 31, 2008).¹⁵ An enhanced annual credit available in tier 2 counties allows a full 100% offset but does not carry forward. Businesses must file a business plan with the Department of Revenue to qualify.

Industrial Machinery Credit

The Industrial Machinery Credit starts at 1% of the purchase price of qualifying industrial equipment purchased and located in Tennessee, and rises with the size of the investment:¹⁶

Over $100 million invested: 3%
Over $250 million invested: 5%
Over $500 million invested: 7%
Over $1 billion invested: 10%

Qualifying businesses include manufacturing, warehousing, and distribution operations.

Paid Family and Medical Leave Credit

Tennessee mirrored the federal employer credit for paid family and medical leave under IRC Section 45S. The credit could offset up to 50% of combined F&E tax, with unused amounts carrying forward for 25 years.¹⁷ It was available only for tax years ending on or after December 31, 2023, but before December 31, 2025.¹⁸ Businesses that earned the credit during that window can still use carryforwards on later returns.

Closing the Books: Dissolving or Withdrawing

An entity keeps owing the tax, at minimum the $100 franchise floor, every year it remains registered with the Secretary of State. Going dormant does not stop the meter. To end the obligation, the entity has to formally dissolve or withdraw.

The steps run in sequence. File every outstanding F&E return through the date of liquidation or the date Tennessee operations ceased, then file a final return with the “final return” box checked. Attach a statement of liquidation showing how assets were distributed, plus balance sheets for the final and preceding tax periods. Pay all outstanding tax.¹⁹

Checking the “final return” box on Form FAE 170 automatically requests a tax clearance certificate from the Department of Revenue. The Secretary of State won’t accept Articles of Dissolution or a certificate of withdrawal without that clearance.¹⁹ On a short-period final return, the franchise tax is prorated by day but can never drop below the $100 minimum. The excise tax is not prorated; you report only the income and expenses for the period the return covers.

1
Justia Law. Tennessee Code 67-4-2004 – Parts 20 and 21 Definitions
2
Justia Law. Tennessee Code 67-4-2008 – Exemptions
3
TN.gov. Out-of-State Businesses and Nexus in TN
4
TN.gov. Due Dates and Tax Rates
5
TN.gov. Notice 23-07 – Tennessee Works Tax Act Adopts Bonus Depreciation
6
TN.gov. Franchise and Excise Tax Manual – December 2024
7
TN.gov. Franchise and Excise Tax
8
TN.gov. Important Notice – Franchise Tax Property Measure Repeal
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TN.gov. Notice 24-05 – Franchise Tax Property Measure Repeal
10
TN.gov. About Electronic Filing
11
Justia Law. Tennessee Code 67-4-2015 – Filing of Returns – Payment of Tax – Penalty
12
TN.gov. FAE172 – Quarterly Franchise, Excise Tax Declaration
13
Justia Law. Tennessee Code 67-1-804 – Delinquency
14
Tennessee Department of Revenue. GEN-16 – Penalties and Interest
15
Justia Law. Tennessee Code 67-4-2109 – Credit for Job Creation
16
Justia Law. Tennessee Code 67-4-2009 – Credits
17
TN.gov. Notice 23-10 – Tennessee Works Tax Act Creates Paid Family and Medical Leave Credit
18
TN.gov. Schedule BP – Franchise and Excise Brownfield Property Credit
19
TN.gov. Franchise and Excise Tax Manual – Chapter 5 Filing Requirements