Tennessee imposes franchise and excise taxes, not a traditional corporate income tax
Tennessee does not impose a traditional corporate income tax. Instead, the state levies two separate taxes on corporations and most limited liability companies doing business in Tennessee: a franchise tax and an excise tax. The franchise tax is a privilege tax based on the taxpayer's net worth—the difference between total assets and total liabilities as derived from the taxpayer's books and records. The excise tax is imposed on net earnings or income for the tax year at a rate of 6.5 percent. Both taxes apply to corporations, limited partnerships, limited liability companies, and business trusts chartered, qualified, or registered in Tennessee or doing business in the state with substantial nexus. Entities with nonprofit status or otherwise exempt are not subject to these taxes unless they have unrelated business taxable income.
Franchise and excise tax rates
Tennessee imposes a franchise tax at a rate of 0.25% (or $0.25 per $100) of the greater of net worth or real and tangible property in Tennessee, with a minimum annual tax of $100. The excise tax is imposed at a rate of 6.5% of net earnings from business conducted in Tennessee. Both taxes apply to all entities doing business in Tennessee with substantial nexus, except those with nonprofit status or otherwise exempt.
Substantial nexus standards for franchise and excise tax
Tennessee requires both "doing business" in the state and "substantial nexus" for franchise and excise tax liability. Physical presence is not required. A taxpayer has substantial nexus under bright-line presence standards if it has at least $50,000 of property or payroll in Tennessee, at least $500,000 of receipts in the state, or at least 25% of its total property, payroll, or receipts in Tennessee. A taxpayer may also have substantial nexus without meeting the bright-line thresholds if it engages in systematic and continuous business activity in the state that produces receipts attributable to Tennessee customers.
Source: Tenn. Dep't of Revenue, F&E-17 Physical Presence Not Required
Standard apportionment formula transitioned to single sales factor in 2025
For tax years ending on or after December 31, 2025, Tennessee requires all taxpayers to apportion net earnings and net worth using a single sales factor formula, with limited exceptions. The apportionment percentage equals the taxpayer's Tennessee receipts divided by total receipts everywhere. For the 2024 tax year, a transition formula applied: property factor plus payroll factor plus five times the receipts factor, divided by seven. Telecommunications companies and certain other industries remain subject to the prior three-factor formula (property + payroll + 3x receipts, divided by 5).
Source: Tenn. Franchise & Excise Tax Manual, June 2025, pp. 22–23
Franchise tax base: net worth calculation
Tennessee's franchise tax is imposed on a taxpayer's net worth apportioned to Tennessee. Effective for tax years ending on or after January 1, 2024, the franchise tax base is computed solely on net worth; the alternative property-based minimum measure that existed before 2024 was repealed by Public Chapter 519 (2023).
## Net worth definition — separate entity basis
For taxpayers filing on a separate entity basis, net worth is the difference between a taxpayer's total assets and its total liabilities, computed in accordance with generally accepted accounting principles (GAAP), measured at the close of business on the last day of the tax year. Tenn. Code Ann. § 67-4-2106(b) provides this definition.
If a taxpayer does not maintain its books and records in accordance with GAAP, net worth must be computed using the accounting method the taxpayer uses for federal income tax purposes, so long as that method fairly reflects the taxpayer's net worth for franchise tax purposes. The statute permits this fallback to federal reporting standards when GAAP is not applied.
## Consolidated net worth election
A taxpayer that is a member of an affiliated group may elect with its affiliates to compute franchise tax net worth on a consolidated basis. Under this election, net worth is defined as the difference between total assets and total liabilities of the affiliated group at the close of business on the last day of the tax year, as shown by a pro forma consolidated balance sheet that includes all members of the group. Tenn. Code Ann. § 67-4-2106(b) defines consolidated net worth.
The pro forma consolidated balance sheet must be prepared in accordance with GAAP, and transactions and holdings between members of the group and holdings in non-domestic persons must be eliminated. The Tennessee Franchise & Excise Tax Manual explains that the election must be filed prior to the statutory due date (including extensions) of the return for the period in which the election takes effect. The election is binding for a minimum of five years and remains in effect after the minimum period until revoked. Tenn. Code Ann. § 67-4-2109(e); Manual Ch. 9, p. 172.
## Minimum franchise tax
Regardless of the net worth calculation, Tennessee imposes a minimum annual franchise tax of $100. Tenn. Code Ann. § 67-4-2119 establishes this floor, which applies to all taxpayers subject to franchise tax.
## Short-period and final returns
When a return covers less than twelve months, including returns of taxpayers in final return status, the franchise tax is prorated to cover the proportionate part of the year. Tenn. Code Ann. § 67-4-2115(b). The statute excludes any return based on a fifty-two to fifty-three-week year from proration.
For a taxpayer in final return status—defined as a taxpayer that has ceased doing business, begun liquidation, withdrawn from Tennessee, or otherwise ceased to be subject to the franchise tax—the franchise tax on a final return is computed using either the taxpayer's net worth immediately preceding liquidation or the average monthly values of net worth, depending on how the business actually liquidates. Average monthly value is determined by totaling the value of net worth as of the final day of each month of the tax period, then dividing that total by the number of months in the tax period. Tenn. Code Ann. § 67-4-2115(b); Manual Ch. 9, p. 178.
## Repeal of property-based minimum measure and transition election
Before tax years ending on or after January 1, 2024, Tennessee's franchise tax base was computed as the greater of net worth or the value of real and tangible property owned or used in Tennessee (excluding exempt inventory and exempt required capital investments under the prior version of Tenn. Code Ann. § 67-4-2108). Public Chapter 519 (2023) repealed this property-based minimum measure effective for tax years ending on or after January 1, 2024. Manual Ch. 10, p. 208.
However, Tenn. Code Ann. § 67-4-2123 permits a taxpayer to elect annually to use the pre-2024 minimum tax base under the old § 67-4-2108 if (1) the election results in a higher tax for the tax period, and (2) the taxpayer waives any claim that the minimum tax base is unconstitutional by failing the internal consistency test. This election is optional and must be made year by year; it is not binding for future periods.
Source: Tenn. Code Ann. §§ 67-4-2106, 67-4-2108, 67-4-2109, 67-4-2115, 67-4-2119, 67-4-2123; Tenn. Franchise & Excise Tax Manual, June 2025, Ch. 9–10; FT-1 Franchise Tax Computation
Excise tax base: computation of net earnings subject to tax
Tennessee's 6.5% excise tax is imposed on a taxpayer's net earnings apportioned to Tennessee. The computation begins with federal taxable income, applies Tennessee-specific additions and subtractions, apportions the result, deducts net operating loss carryovers, and then subtracts a $50,000 standard deduction (for tax years ending on or after December 31, 2024) to arrive at net earnings subject to tax.
## Starting point: federal taxable income (entity-type dependent)
For C corporations and most entities taxed as corporations for federal purposes, "net earnings" is defined as federal taxable income or loss before the net operating loss deduction and before the special deductions for dividends received under I.R.C. §§ 241–247, subject to Tennessee-specific adjustments. Tennessee Franchise & Excise Tax Manual, June 2025, Ch. 12, p. 231 (citing Tenn. Code Ann. § 67-4-2006(a)(1)). This includes any taxpayer that files a federal Form 1120 or variation, except S corporations and unitary businesses.
For S corporations, net earnings is federal taxable income from the federal Form 1120S before the operating loss deduction, adjusted as described below. Manual, Ch. 12, p. 231 (citing § 67-4-2006(a)(2)).
For partnerships (including LLCs taxed as partnerships), net earnings is the partner's distributive share of ordinary business income from federal Schedule K-1 (Form 1065), adjusted. Manual, Ch. 12, p. 231 (citing § 67-4-2006(a)(4)).
For single-member LLCs treated as disregarded entities for federal purposes, net earnings is the net profit from all businesses as reported on federal Form 1040 Schedule C, including amounts subject to self-employment tax, less the amount subject to self-employment taxes (to avoid double taxation of that component). Manual, Ch. 12, p. 231 (citing § 67-4-2006(a)(7)).
Unitary groups of financial institutions compute net earnings on a combined basis. § 67-4-2006(a)(3); Manual, Ch. 12, p. 232.
Most taxpayers file excise tax returns on a separate-entity basis, even if they filed a consolidated federal income tax return with affiliates. Federal taxable income must be recomputed as if the taxpayer had filed its federal return separately. Manual, Ch. 12, p. 232 (citing Tenn. Code Ann. § 67-4-2007(e)(1)).
## Required additions to federal taxable income
Tennessee requires taxpayers to add back to federal taxable income:
- Intangible expenses paid to affiliates that were deducted federally (§ 67-4-2006(b)(1)(K)). The add-back is subject to disclosure requirements and may have limited exceptions if the taxpayer demonstrates the transaction meets economic-substance or tax-parity conditions. Manual, Ch. 12, p. 234.
- Bonus depreciation in excess of that allowed under I.R.C. § 168 as it existed immediately before the Job Creation and Worker Assistance Act of 2002, for assets purchased on or before December 31, 2022 (§ 67-4-2006(b)(1)(H)). Tennessee decoupled from most post-2002 federal bonus-depreciation expansions for these assets. Manual, Ch. 12, p. 235.
- Tennessee excise tax deducted on the federal return (to prevent circularity, since excise tax is itself a deduction for federal purposes). Manual, Ch. 12, p. 245 (citing § 67-4-2006(b)(1)(M)).
- Pass-through losses or expenses allocated to the taxpayer from a pass-through entity that itself is subject to and files an excise tax return (§ 67-4-2006(b)(1)(J)), to prevent double deduction. Manual, Ch. 12, p. 242.
- Gain on the sale of a distributed asset when a taxpayer distributes an asset to a non-taxable entity or individual and the asset is sold within twelve months (§ 67-4-2006(b)(1)(I)). Manual, Ch. 12, p. 242.
The statute lists additional required additions; these are among the most common. Manual, Ch. 12, p. 231–246.
## Required subtractions from federal taxable income
Tennessee allows taxpayers to subtract from federal taxable income:
- Dividends from 80%-or-more-owned subsidiaries (§ 67-4-2006(b)(2)(A)). If the taxpayer owns 80% or more of another corporation's outstanding capital stock, dividends received from that subsidiary are excluded from Tennessee net earnings. Manual, Ch. 12, p. 247.
- Amounts included in federal taxable income but not taxable under Tennessee law (§ 67-4-2006(b)(2)(B)). Manual, Ch. 12, p. 247.
- Excess bonus depreciation subtraction, for taxpayers who added back bonus depreciation on prior returns and whose actual federal depreciation in later years is less than Tennessee depreciation (§ 67-4-2006(b)(2)(I)). Manual, Ch. 12, p. 250.
- Reserve for bad debts adjustments for certain financial institutions (§ 67-4-2006(b)(2)(J)). Manual, Ch. 12, p. 251.
The statute provides additional subtractions; these are the most commonly applied. Manual, Ch. 12, p. 247–252.
## Apportionment, NOL deduction, and $50,000 standard deduction
After computing net earnings or loss with the above adjustments, a taxpayer doing business both inside and outside Tennessee apportions that amount to Tennessee using the applicable apportionment formula (single sales factor for most taxpayers for tax years ending on or after December 31, 2025, as discussed in the apportionment-formula section of this guide). Manual, Ch. 12, p. 253 (citing § 67-4-2006(c)(1)).
The taxpayer then deducts any net operating loss (NOL) carryovers from prior tax years. Tennessee permits a taxpayer to carry forward NOLs incurred in fiscal years ending on or after July 1, 1999, for a period of fifteen years (increased from seven years by 2016 legislation). Manual, Ch. 12, p. 253 (citing § 67-4-2006(c)(2), (c)(3)). NOL is defined as the excess of allowable deductions over total income allocable to Tennessee for the year of the loss. Unitary groups of financial institutions determine NOLs on a combined basis; all other taxpayers compute NOLs on a separate-entity basis, and—except in narrow circumstances—NOLs do not transfer when a predecessor merges into a successor. § 67-4-2006(c)(3); Manual, Ch. 12, p. 254.
Finally, for tax years ending on or after December 31, 2024, the taxpayer subtracts a $50,000 standard deduction from apportioned net earnings (after the NOL deduction). This deduction cannot reduce net earnings below zero. Public Chapter 377 (2023), codified at Tenn. Code Ann. § 67-4-2007(d); Manual, Ch. 12, p. 256. The standard deduction is part of the Tennessee Works Tax Act small-business relief package.
The result after these steps is net earnings subject to excise tax, to which the 6.5% rate applies.