The Council on State Taxation has a great acronym—COST.
And COST has recently published a report entitled “The Impact of Federal Tax Reform on State Corporate Income Taxes.” Here’s a link to the Cost Report.
Tennessee is often thought of as a tax-friendly state for residents and businesses. There is no broad-based state income tax on all income, although we still have the Hall Income Tax on certain items of income for some people (essentially interest and dividends). The Hall Income Tax is being phased out over a number of years. Last year the rate was 4%. This year it’s 3%. It will be fully repealed as of January 1, 2021.
But there is an income tax on businesses in Tennessee-the Tennessee Excise Tax. The excise tax is imposed on Tennessee businesses (except for general partnerships, sole proprietorships, and certain businesses that have an exemption). The rate is 6.5%, and the tax is based on net earnings or income for the year.
Net earnings are defined as federal taxable income, before the net operating loss deduction and special deductions provided for in the Internal Revenue Code, plus or minus certain additions and deductions provided by state law. There is a helpful Tennessee Department of Revenue Guide on the Franchise and Excise Tax, which you can read here.
So, since the base for calculating the Tennessee excise tax is federal taxable income, the question then becomes what impact will the new federal tax law–the 2017 Tax Cuts and Jobs Act (TCJA)–have on the excise tax liability for Tennessee businesses?
Well, the COST Report estimates that the Tennessee excise tax base (i.e., federal taxable income) for businesses will increase by 12% due to changes in the federal tax law because of the TCJA.
Gulp.
Now, that doesn’t mean that each and every Tennessee business will pay more excise tax or that each and every Tennessee business will see its tax base for calculating the excise tax go up by 12%. This is an estimate by COST with a lot of disclaimers and assumptions set out in its Report. If you read the Report, take a look at some of those disclaimers and assumptions on pages 1-2 and 19 of the Report.
Still, it bears watching and perhaps doing a bit of number crunching if your Tennessee business has been paying a fair amount of Tennessee excise tax in the past. With the changes in federal tax law brought about by the TCJA, you might see a larger Tennessee excise tax liability in your future.