Refund Opportunity for Tennessee Franchise Tax

Tax reform unlocks opportunities

In addition to an excise tax based on taxable income, Tennessee imposes a franchise tax on entities for the privilege of doing business within the state. The tax is 0.25% of taxable apportioned net worth, meaning the book value of assets less liabilities, multiplied by a business’ apportionment factor. However, historical law prohibits the measure of the tax from being less than the actual value of the real or tangible property owned, rented, or used in the state (property measure).

That is, the 0.25% tax is imposed on either:

1. a business’s apportioned net worth, or
2. the value of its real and tangible property owned or rented in the state, whichever is larger.

Taxpayers have challenged the property measure as being unconstitutional, claiming the structure of Tennessee’s franchise tax unlawfully discriminates interstate commerce under the dormant commerce clause and violates the internal consistency test.

Due to these challenges, legislation was recently enacted that would not only eliminate the property measure from the franchise tax base going forward, but would also permit taxpayers, without question, to claim refunds for prior year taxes.

Calculating your refund

Refunds will be granted based on the difference in tax between the amount paid on the property measure base and the amount that would have been paid using the apportioned net worth base.

For example, if the 2022 net worth tax was $20,000 but the property measure tax was $25,000, the business would have paid $25,000 in franchise taxes. A refund in the amount of $5,000 can now be claimed.

Net worth tax will affect refunds

For taxpayers who paid franchise tax based on the property measure, the tax on net worth is now important.

The apportioned net worth is calculated by subtracting the year end’s book value (GAAP) of a taxpayer’s liabilities from the book value of a taxpayer’s assets, with certain debt required to be added back. The computed net worth is then multiplied by the taxpayer’s Tennessee apportionment factor.

It’s important to scrutinize the net worth tax calculation and apportionment percentage during the refund claim periods (2020 – 2023) as well as in the future, as this will be the amount of franchise tax due, and on which the refunds will be based.

Refund claim procedures for 2020 – 2023 tax years

Under the direction of the Tennessee Department of Revenue, certain procedures have been instituted to claim the refund. The claim will be submitted under a two-step process:

1. File an amended return for the applicable year(s)
2. File a special refund claim form and report of debts for the applicable year(s)

Also, agreement with certain conditions surrounding a claim will be required.

To expedite the refunds, the state strongly encourages taxpayers to use its online portal, TNTAP, Tennessee Taxpayer Access Point, to submit amended returns, refund claims, report of debts, and supporting documentation.

For taxpayers who have not yet filed their 2023 tax return, the franchise tax must still be paid based on the property measure, if applicable. Once the return is processed, taxpayers can file an amended 2023 return and claim for refund.

Refund claims are generally applicable for tax years ending on or after March 31, 2020. Amended returns and claims for refunds must be timely filed between May 15, 2024 and November 30, 2024 (Saturday). No extensions are allowed beyond November 30, 2024.

Once the refund is granted and paid, the business’s name will be published on the revenue department’s website for one month — from May 31, 2025 through June 30, 2025.

How we can help

CLA’s state and local tax professionals can perform an analysis to determine whether this legislation may be applicable to your organization and the potential amount of the refund claim.

We’re happy to answer questions about this opportunity and offer assistance preparing and submitting the amended returns and refund claims.

Contact us

Does your organization qualify for a Tennessee franchise tax refund? Complete the form below to connect with CLA.