Tennessee Governor Bill Lee introduced the single largest tax cut in state history with the signing of the Tennessee Works Tax Act (“the Act”) last week. The Act proposes to provide more than $400 million in savings for Tennessee families and businesses through substantial changes to the business tax, franchise and excise tax, and sales and use tax.
Currently, taxpayers are allowed to apportion net earnings to Tennessee using a three-factor formula that uses the taxpayer's property factor, plus the payroll factor, and three times the sales factor. Manufacturers have had the option since 2017 to utilize a single sales factor (SSF) for apportionment purposes. Under the Act, an SSF apportionment formula would be mandatory for all taxpayers (with few exceptions) for tax years ending on or after December 31, 2025. During the transition to the mandatory SSF, the apportionment formula for the 2024 tax year would be the property factor, plus the payroll factor, plus five times the sales factor, divided by seven; and for the 2025 tax year, the formula would be the property factor, plus the payroll factor, plus 11 times the sales factor, divided by 13.
There are two exceptions to mandatory SSF:
- One exception provides that if the apportionment requirements during a transition year or during a mandatory SSF year result in a lower apportionment ratio than under the application of the apportionment method as applied for years ending before December 31, 2023, then a taxpayer may annually elect to use the apportionment method as it applied to tax years ending before December 31, 2023. This election is available only if the taxpayer has net earnings, rather than a net loss, for that tax year.
- Another exception is provided for taxpayers principally engaged in the telecommunications industry, which must use the current apportionment formula of the property factor, plus the payroll factor, plus three times the receipts factor, divided by five.
Currently, Tennessee does not allow bonus depreciation on assets acquired in computing net earnings or net loss. The Act allows bonus depreciation for assets purchased on or after January 1, 2023. The bonus depreciation is calculated on a sliding scale, with the bonus depreciation rate for tax year 2023 calculated at 80%. Under the Act, this bonus depreciation benefit ultimately sunsets in 2027.
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