Competitive Tax Incentives make Tennessee a smart decision for doing business. Tennessee has long been considered a state with one of the most business- friendly economic climates in the nation with one of the nation’s lowest per capita tax burdens, no tax on personal income and no state property tax.
Basic Tax Information
Franchise Tax:
- Tax on the greater of net worth or book value of property owned or used in Tennessee.
- Tax rate is 25¢ per $100.
- Finished goods inventory in excess of $30 million may be excluded.
- Pollution Control Equipment is exempt from franchise tax base.
- Property under construction and not being utilized is not included.
- Property rented from the industrial development corporation may be valued by capitalizing it on the books.
- Tennessee exempts two-thirds (2/3) of the capital investment of companies qualifying for the Job Tax Super Credit from the property measure of the franchise tax base during those tax years in which the annual Super Credit is allowed.
Excise Tax:
- Tax is based on the net earnings of the company derived from doing business in Tennessee. Companies doing business in Tennessee and other states use a 3-factor apportionment. formula of property, payroll and sales with sales double-weighted.
- Tax rate is 6.5%.
- No throwback provision – sales outside of Tennessee are not taxed.
- All capital losses are claimed in the year incurred.
- Net operating losses can be carried forward for 15 years.
- Net operating losses for projects of more than $100 million may be extended beyond 15 years.
Sales and Use Tax:
7% state sales tax plus the applicable local rate (1.50%-2.75%) on any person or company who manufactures, distributes or sells tangible personal property within the state.
No sales tax is levied on:
- Purchases, installation and repairs of qualified industrial machinery.
- Raw materials for processing.
- Certified pollution control equipment for manufacturers.
- Machinery and equipment used for the production of electricity using clean energy technology including geothermal, hydrogen, solar and wind sources.
- Material handling and racking systems for qualified warehouse and distribution facilities purchased during the 3 year investment period.
- Computer equipment, peripheral devices and software purchased for a qualified data center with an investment of $250 million during the investment period.
- Reduced sales tax rates for manufacturers’ use of energy fuel and water (1.5% vs. 7%).
- Qualified industrial supplies.
- Items purchased for resale.
- Containers, packaging and wrapping materials.
- Additional exemptions or credits may be available.
Property Tax:
Attractive depreciation schedules.
No property tax on:
- Goods-in-progress.
- Finished goods inventories in hands of manufacturers.
- Inventories of merchandise for sale.
- Goods-in-transit (free port).
Personal Income Tax:
- No statewide personal income tax.
- Consistently one of the lowest per capita taxed states in the nation.
Business Tax Credits
- Jobs Tax Credit
- Rural Opportunity Initiative Enhanced Job Tax
- Industrial Machinery
- Data Center Tax Credit
- Integrated Supplier and Integrated Customer
- Headquarters
- Sales and Use
Jobs Tax Credit
Tennessee allows “qualified business enterprises” a credit against their franchise and excise taxes based on their capital investment and the number of jobs created. The amount of the credit and the period of time during which it can be used varies according to the size of the investment.
A company investing $500,000 and creating 25 net new jobs in a 36 month period can claim a Job Tax Credit of $4,500 per job to offset up to 50% of the combined F&E tax. Any unused Job Tax Credit may be carried forward for up to 15 years. The approval process for the Job Tax Credit requires a Job Tax Credit Business Plan be filed with the Department of Revenue prior to taking the credit.
A qualified business locating or expanding in a Tier 2 county may take 3 years to create 25 jobs, and business locating or expanding in a Tier 3 county may take 5 years to create 25 jobs. The credit may not be taken until the year the 25 job threshold is met unless the business has requested and received a waiver from the Commissioner of Economic and Community Development and Commissioner of Revenue.
In 2010 Tennessee amended the statutory requirements to allow the Commissioner of Economic and Community Development and Commissioner of Revenue to waive the minimum job requirement of 25 net new jobs if the company has made the necessary $500,000 investment in a 12 month period and the jobs are high-skill, high-wage jobs in high technology areas, emerging occupations or skilled manufacturing. A company must request and receive a waiver before claiming the Job Tax Credit.
For example, if a qualified business enterprise meets the capital investment and job creation requirements in any Tennessee county @ $4,500 per job.
| Jobs Created | Amount of Credit |
|---|---|
|
25
|
$112,500
|
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100
|
$450,000
|
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500
|
$2,250,000
|
|
999
|
$4,495,500
|
|
1,000
|
$4,500,000
|
Qualified business enterprises can include:
- Manufacturing
- Warehousing and distribution
- Processing tangible personal property
- Research and development
- Computer services
- Call centers
- Qualified data centers
- Headquarters facilities
- Convention or trade show facilities
- Repair service facilities for aircraft owned by unrelated commercial, foreign or government persons
Rural Opportunity Initiative Enhanced Job Tax Credit:
Tennessee’s focus on creating job opportunities in rural areas of Tennessee presents unique hurdles and yet tremendous opportunity. Whether because of limited road access, lack of public infrastructure or difficulty in matching labor skills to job requirements, a different approach is needed. That’s why the state of Tennessee offers a program aimed at addressing this challenge called the Rural Opportunity Initiative, or ROI. The ROI provides for Enhanced Job Tax Credits to businesses locating or expanding in certain Tennessee counties considered Tier 2 or Tier 3 Enhancement Counties.
The Enhanced Job Tax Credit was created to promote new industry locations and expansions in more rural areas of the state. On July 1 of each year, the Commissioner of Economic and Community Development may determine that a county qualifies as an Enhancement County if the county experiences substantial characteristics of economic distress. Upon determining that a county qualifies as an Enhancement County, the Department of Economic and Community Development shall designate the county as a Tier 1, Tier 2 or Tier 3 Enhancement County based on unemployment, per capita income and poverty levels of all Tennessee counties using statistical data prepared by an agency of state or federal government. A list of all Tier 1, Tier 2 and Tier 3 Enhancement Counties is published annually by the Department of Economic and Community Development.
If a qualified business enterprise locates or expands in a Tier 2 or Tier 3 Enhancement County, the company will be eligible for an annual Enhanced Job Tax Credit of $4,500 for each qualified job, provided that the job remains filled during the year in which the credit is being taken. The annual credit may be used to offset up to 100% of the company’s total franchise and excise (F&E) tax liability each year for a three-year period in Tier 2 counties and a five-year period in Tier 3 counties. The Enhanced Job Tax Credit for Tier 2 and Tier 3 Enhancement Counties is in addition to the regular Job Tax Credit and cannot be carried forward.
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Tier 1 Enhancement Counties: $4,500 jobs tax credit with 15 year carry forward. |
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Tier 2 Enhancement Counties: $4,500 jobs tax credit with 15 year carry forward plus additional 3 years at $4,500 per year with no carry forward. |
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Tier 3 Enhancement Counties: $4,500 jobs tax credit with 15 year carry forward plus additional 5 years at $4,500 per year with no carry forward.
NOTE: Jobs Tax Credit may be applied against a company’s franchise and/or excise tax liability. To qualify for the Job Tax Credit a company must create 25 net new full-time jobs and increase capital investment by $500,000 in a qualified business enterprise within a 36 month period.
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Industrial Machinery Tax Credit
For capital investments in industrial machinery, Tennessee offers businesses an Industrial Machinery Tax Credit that may be used to offset up to 50% of the company’s F&E tax liability. To qualify for this credit, companies are not required to create new jobs. The credit applies to the purchase, installation and repair of industrial machinery as defined in T.C.A. 67-6-102. The credit also applies to the purchase and installation of computer, computer software and certain peripheral devices purchased in order to meet the capital investment thresholds of the Job Tax Credit.
Any unused Industrial Machinery Tax Credit may be carried forward for up to 15 years. The percentage of Industrial Machinery Credit allowed is dependent upon the investment made during the investment period as follows
| Capital Investment | Percentage of Credit |
|---|---|
|
Less than $100,000,000
|
1%
|
|
$100,000,000
|
3%
|
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$250,000,000
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5%
|
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$500,000,000
|
7%
|
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$1,000,000,000
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10%
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The investment period for the Industrial Machinery Credit is 3 years, but may be expanded to 5 years for businesses investing less than $1 billion and to 7 years for businesses investing $1 billion or more.
Data Center Tax Credit
Companies may obtain tax credits for the purchase of materials related to the construction of a qualified data center, which is defined as a building or buildings housing high technology computer systems and related equipment in which the taxpayers had made a minimum capital investment of $250 million and has created 25 new jobs paying at least 150% of the state’s average occupational wage.
- Investments must be made during a 3 year period, but can be extended to 7 years at the discretion of the Commissioner of Economic and Community Development.
- The purchase of computers, computer systems, computer software and repair parts for a qualified data center are considered purchases of industrial machinery and qualify for a minimum 5% Industrial Machinery Tax Credit against F&E liability.
- Computers, computer systems, computer software and repair parts used in qualified data centers are classified as industrial machinery and exempt from sales and use taxes.
- Qualified data centers also pay reduced sales taxes on the purchase of electricity (1.5% vs. the previous rate of 7%).
- A taxpayer must submit an application for the Data Center Tax Credits to the Department of Revenue with a plan describing the investment to be made before claiming the credits.
Integrated Supplier and Integrated Customer Tax Credit
Tennessee extends certain tax credits to businesses qualified as an “integrated supplier” or “integrated customer” located within the footprint of a project meeting the $1 billion investment threshold and creating 500 or more occupational wage jobs. The purpose of the Integrated Supplier and Integrated Customer Tax Credit is to expand the impact of large “anchor” projects by encouraging co-location of suppliers and customers. An integrated supplier or integrated customer locating within the footprint of such a project will qualify for a Job Tax Super Credit equal to $5,000 per qualified job with a 15 year carry-forward, plus an additional $5,000 per job each year for 6 years.
The Integrated Supplier Tax Credit applies regardless of capital investment or number of jobs created. To qualify for this credit a supplier or customer must first be certified as “integrated” by the Commissioner of Revenue and Commissioner of Economic and Community Development.
Headquarters Tax Credit
In order to encourage companies to locate and expand their regional, national or international corporate headquarters in Tennessee, the state offers a suite of enhanced tax credits to companies that establish or expand a qualified headquarters facility. A “qualified headquarters facility” means a regional, national or international headquarters facility where the taxpayer has made a minimum investment of either.
- Located its headquarters facility in a Central Business District or Economic Recovery Zone and received approval from the Commissioner of Revenue as a “qualified headquarters facility.”
- $50 million in a headquarters building or buildings, newly constructed, expanded or remodeled during the investment period, or.
- $10 million in a headquarters facility and the creation of 100 new full-time jobs paying at least 150% of Tennessee’s average occupational wage during the investment period.
Super Jobs Tax Credit for Qualified Headquarters
If a taxpayer meets the $10 million capital investment and creates the minimum 100 headquarters jobs paying 150% of the average occupational wage in establishing or expanding a qualified headquarters facility, the taxpayer will also qualify for a Super Credit of $5,000 per job that can be used to offset up to 100% of the taxpayer’s F&E liability each year for 3 years with no carry forward.
- The Commissioner of Revenue may lower the wage requirement and investment criteria for a qualified headquarters facility if the headquarters locates in a Central Business District or Economic Recovery Zone.
- The investment period for the Super Job Tax Credit is 3 years, but may be expanded to 5 years with approval from the Commissioner of Economic and Community Development.
- The taxpayer must file and receive approval of the Qualified Headquarters Business Plan and the Job Tax Credit Business plan before taking the Super Job Tax Credit.
Sales and Use Tax Credit for Qualified Headquarters
- For taxpayers meeting the minimum investments for a qualified headquarters facility in Tennessee, the State provides for a credit of 6.5% of the 7% state sales and use tax paid on qualified tangible personal property purchased for the headquarters during the investment period.
- The investment period for the sales and use tax credit begins one year prior to construction or expansion and ends one year after construction or expansion is substantially complete and cannot exceed 6 years.
- The taxpayer must file and receive approval of the Qualified Headquarters Business Plan with the Department of Revenue before taking the sales and use tax credits.
Headquarters Relocation Expense Credit
- Companies establishing a qualified headquarters facility may also qualify for credits against their F&E tax liability based on the amount of qualified relocation expenses incurred in the establishment of a headquarters facility. This is a fully refundable tax credit.
- “Qualified headquarters relocation expenses” are those expenses that both the Commissioner of Revenue and Commissioner of Economic and Community Development determine, in their sole discretion, are necessary to relocate headquarters staff employees to a qualified headquarters facility in conjunction with the initial establishment of such facility.
- The taxpayer must file and receive approval of the Qualified Headquarters Business Plan with the Department of Revenue before claiming the Headquarters Relocation Expense Credit.
The total budget for the Relocation Expense Credit is determined and calculated by the number of existing qualified headquarters positions relocated to Tennessee as follows:
| Headquater Jobs Relocated | Amount Per Position |
|---|---|
|
100-249 jobs
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$10,000 per position
|
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250-499 jobs
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$20,000 per position
|
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500-749 jobs
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$30,000 per position
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750 or more
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$40,000 per position
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$1 billion investment
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$100,000 per position
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- Relocation Expense Credits are limited to the qualified expenses actually incurred. The Company may start to take Relocation Expense Credits in the first year it incurs qualified relocation expenses up to the amount allowed as a Relocation Expense Credit for that year.
Additional Tax Incentives for Qualified Headquarters
- Companies with a regional, national or international qualified headquarters facility in Tennessee may, with approval from the Commissioner of Revenue and the Commissioner of Economic and Community Development, convert unused net operating losses (NOL) to a credit against F&E tax liability.
- The NOL credit is available only if the company is unable to use the NOL to offset net income during the current tax year.
Sales and Use Tax Credit for Qualified Facility to Support an Emerging Industry
- Tennessee law makes a sales and use tax credit available to taxpayers that establish a qualified facility to support an emerging industry in Tennessee with a minimum capital investment of $100 million and the creation of at least 50 new full-time jobs paying 150% of Tennessee’s average occupational wage. The credit is equal to 6.5% of the 7% state sales and use tax paid to Tennessee on the sale or use of qualified tangible personal property.
- An emerging industry is one that promotes high-skill, high-wage jobs in high-technology areas, emerging occupations, or clean energy technology, including, but not limited to clean energy technology research and development and installation, as determined by the Commissioner of Revenue and the Commissioner of Economic and Community Development.