The Window is Closing to Claim Tennessee Franchise Tax Refunds

A recent tax law change in Tennessee has opened the possibility that some business owners may be eligible for refunds on state franchise tax – but the window to claim those refunds is closing soon.

On May 10, 2024, Tennessee’s Governor signed into law SB 2103, which became Public Chapter No. 950. This legislation changed the method of calculating the franchise tax base under Tennessee’s Franchise and Excise Tax. Taxpayers who paid Tennessee franchise tax on the real and tangible property base are eligible for refunds for tax periods ending on or after March 31, 2020. The time to take advantage of this opportunity is dwindling, however, as refunds must be claimed by Dec. 2, 2024. (The legislation states that refunds are due by Nov. 30, 2024, but since that date is a Saturday, the Tennessee Department of Revenue (DOR) recently announced the revised date.)

What is the Tennessee franchise tax?

The Tennessee franchise tax is a privilege tax imposed on all entities except for not-for-profits that conduct business in Tennessee. The franchise tax rate is $0.25 per $100 (0.25%, or 0.0025) of the franchise tax base. 

Prior to the passing of the new legislation, the franchise tax was calculated on the higher of two bases:

1. A taxpayer’s net worth, apportioned in Tennessee; or
2. The total value of a taxpayer’s real and tangible property (owned or rented) in Tennessee.

Changes made by the legislation

The legislation eliminated the property base of the franchise tax, effective for tax years ending on or after Jan. 1, 2024. This leaves only the net worth measure of the tax in place for such years.

Taxpayers may, though, annually elect to continue to apply the alternative property measure if it results in higher tax liability. According to the Tennessee Franchise and Excuse Tax Manual, the intent of this election is to allow taxpayers to fully utilize any tax credits before they expire. 

The legislation also added a section to the Tennessee Code that authorizes the state’s tax commissioner to issue refunds for returns filed on or after Jan. 1, 2021, for tax periods ending on or after March 31, 2020. This allows taxpayers to request a refund for those prior periods equal to the difference between the franchise tax that would have been paid based on the apportioned net worth and the franchise tax that was actually paid when the return was filed.

Refund Criteria

While the incentive to claim a refund is promising for many, these refunds are subject to special criteria:

• The tax subject to refund must have been reported to the DOR on a return filed on or after Jan. 1, 2021, covering a tax period that ended on or after March 31, 2020.
• The refund claim must be filed between May 15, 2024, and Nov. 30, 2024.
• The submitted refund claim must include a statement that the taxpayer knowingly waives any claim by the taxpayer or the right to file suit alleging that the prior method of calculating the franchise tax was unconstitutional.
• Attorneys’ fees must not be added to the amount of refund due.
• The DOR is required to publish the names of taxpayers who were issued a refund and the range of the refund ($750 or less; $10,000 or less; or more than $10,000) on its website from May 31, 2025, through June 30, 2025.

Taxpayers claiming refunds must follow the procedures and use the DOR’s Claim for Refund form. Those who fail to properly file for their refund could be rejected on procedural grounds, especially if the refund is not submitted by the Dec. 2 deadline. For more detailed information about the refunds and the process, taxpayers should refer to the DOR’s website and Notice #24-05.

Other considerations

As noted above, taxpayers with expiring credit carryforwards should evaluate whether it makes sense to elect to pay on the property base in future years.

In addition, if a taxpayer has not yet filed for the 2023 tax year, Tennessee guidance has been updated so that taxpayers are not required to pay on the property base and request a refund. The return can be filed calculating and paying franchise tax on the net worth base only, but taxpayers doing so must submit a completed Pro Forma Schedule G reporting the property base as well as the Claim for Refund form. These forms are all available on the DOR’s website.

Next steps

Taxpayers who paid tax on the property base must decide whether they want to claim the benefit of the refunds by the Dec. 2 deadline for filing refund claims authorized under the new legislation.

Navigating these nuanced tax changes can be complex and tedious, especially when the stakes are high. Taxpayers should engage with a knowledgeable state and local tax advisor to help make these decisions and prepare a sound tax strategy for the future.

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Aprio is the brand name under which Aprio, LLP, and Aprio Advisory Group, LLC, deliver professional services. Since 1952, clients throughout the U.S. and across more than 50 countries have trusted Aprio for guidance on how to achieve what’s next. As a premier business advisory and accounting firm, Aprio Advisory Group, LLC, delivers advisory, tax, managed and private client services to build value, drive growth, manage risk and protect wealth, and Aprio, LLP, provides audit and attest services. With proven experience and genuine care, Aprio serves individuals, entrepreneurs, and businesses, from promising startups to market leaders alike. Aprio has grown to 2,000+ team members providing solutions to clients in industries including manufacturing and distribution, non-profit and education, professional services, real estate, construction, restaurant, franchise and hospitality, government contracting and technology and blockchain.

Jeff Glickman, Partner-in-Charge of Aprio’s State and Local Tax Group, partners with businesses conducting multistate operations to minimize state tax risks and maximize state tax benefits.