You’re looking at a state that famously has no personal income tax, so you'd think Tennessee is a total breeze for business owners. Honestly, it kind of is—until you hit the Tennessee franchise excise tax. It's the "secret sauce" that funds the state's budget, and if you’re running an LLC or a Corp in Nashville, Memphis, or even a remote shop in the Smokies, you've likely felt the sting of that annual FAE170 filing.
Actually, calling it a "tax" is a bit of an understatement. It’s two different animals living under one roof. One tracks what you own (Franchise), and the other tracks what you made (Excise). If you’re used to other states where you just pay a flat $50 filing fee, Tennessee is going to give you a bit of a reality check.
The Massive 2024 Shift: No More Property Measure
For decades, the Tennessee franchise excise tax was calculated in a way that felt borderline predatory to manufacturers and real estate developers. You basically had to pay 0.25% on the greater of two things: your company's net worth or the value of the property you owned or used in the state.
That "property measure" (the old Schedule G) was a nightmare. It meant if you owned a $10 million warehouse but your business hadn't turned a profit yet, you were still cutting a massive check to the Department of Revenue.
Well, that's gone.
As of early 2024, after some serious legal pressure regarding the constitutionality of the tax, Governor Bill Lee signed legislation that killed the property measure entirely. Now, the franchise tax is strictly based on your apportioned net worth. This is huge. It leveled the playing field for businesses that are "asset-heavy" but "cash-light."
Breaking Down the "E" in F&E: The Excise Tax
While the franchise side looks at your balance sheet, the excise tax looks at your P&L. It’s a flat 6.5% on your net earnings.
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Wait. Before you panic about that 6.5% number, there's a new cushion. Starting with tax years ending on or after December 31, 2024, Tennessee introduced a $50,000 standard deduction. Basically, you get to chop 50k off your net earnings before that 6.5% rate even touches your money.
How the Math Actually Works
Let's say you run a tech consulting firm. You made $200,000 in net profit this year.
- You take your $200,000.
- You subtract the $50,000 standard deduction (thanks, Tennessee Works Act).
- You're left with $150,000.
- You pay 6.5% on that $150,000.
That equals $9,750. In the "old days" (pre-2024), you would have paid $13,000. That’s a massive difference for a small business.
Who Actually Has to Pay This?
This is where people get tripped up. Most people think, "I'm a small LLC, I don't owe this."
Wrong.
If you are a Corporation, an LLC (even a single-member one), a Limited Partnership, or a Business Trust, you are in the club. Tennessee doesn't care if you're a "pass-through" for federal purposes. Even if your LLC's income "flows through" to your personal 1040, you still owe the Tennessee franchise excise tax at the entity level.
The only folks who really escape this are general partnerships and sole proprietorships. If you’re just "John Doe dba John’s Landscaping" and you haven't registered as an LLC with the Secretary of State, you're off the hook for F&E (though you probably still owe the local Business Tax).
The $100 Minimum: The Fee for Existing
Even if your business loses $100,000 and your net worth is $0, you still have to pay. The minimum franchise tax is **$100**. Think of it as the cover charge for the privilege of doing business in the Volunteer State.
And don't forget the $500,000 property exemption. While the "property measure" was repealed for the calculation of the tax base, there is also a specific exemption for the first $500,000 of property for those who might still be caught in certain transitional filings. Honestly, the state is making a real effort to be less of a headache for small shops.
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Apportionment: What if I'm Not Just in Tennessee?
If you’re a multi-state business, you don't pay tax on everything you make—only the portion "apportioned" to Tennessee.
Historically, Tennessee used a "triple-threat" formula: property, payroll, and sales. It was a mess. But we are currently in the middle of a transition to Single Sales Factor Apportionment.
- By the end of 2025, your tax will be based entirely on your sales in the state.
- If you have a massive office in Nashville but all your customers are in Kentucky, your Tennessee tax bill is about to get a whole lot smaller.
Surprising Traps to Watch Out For
- The "Nexus" Trap: You don't need a physical office in Tennessee to owe the tax. If you have "substantial nexus"—which basically means you’re making enough money from Tennessee customers—you might be liable.
- The "FONCE" Exemption: If you’re a family-owned non-corporate entity (mostly for farming or holding family assets), you might be exempt. But you have to file a specific application every single year. Forget once, and the Department of Revenue will be knocking.
- Estimated Payments: If you expect to owe more than $5,000 in combined F&E tax, you have to pay in quarters. If you wait until April 15th to pay the whole thing, the interest and penalties will eat you alive.
Real-World Example: The "New" vs. "Old" Tax
Imagine a small boutique hotel in Chattanooga.
- Net Worth: $1,000,000
- Property Value: $4,000,000
- Net Profit: $100,000
Under the old 2023 rules: They would have paid 0.25% on the $4M property (because it was higher than net worth), which is $10,000. Plus 6.5% on the $100k profit ($6,500). Total: $16,500.
Under the 2026 rules: They pay 0.25% on the $1,000,000 net worth ($2,500). Plus 6.5% on the profit after the $50k deduction ($3,250). Total: $5,750.
That hotel owner just saved over $10,000 because of these law changes. It’s probably the most business-friendly shift in Tennessee history.
What You Need To Do Right Now
If you've been blindly paying your tax every year, stop and look at your 2024 and 2025 returns.
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First, check if you qualify for a refund. The state allowed businesses that paid the "property measure" between 2020 and 2023 to file for refunds. Most of those deadlines passed in late 2024, but if you were in a disaster area (like the counties affected by Hurricane Helene), you might still have a window.
Second, make sure your accountant is using the Single Sales Factor for your apportionment. If they are still trying to factor in your Tennessee payroll or office equipment for the 2026 tax year, they’re doing it wrong and costing you money.
Finally, keep an eye on your net worth calculation. Since the tax is now strictly based on net worth, how you book your assets and liabilities matters more than ever.
Register for a TNTAP account (Tennessee Taxpayer Access Point). It’s actually a pretty decent portal—for a government website. You can see your balance, file your FAE170, and make those quarterly estimated payments without having to mail a check and hope for the best.
Tennessee is getting more competitive, and while the franchise excise tax is still a hurdle, the new rules make it a lot easier to clear. Keep your books clean, claim your deductions, and make sure you aren't paying for property values that the law no longer requires you to include.