Tennessee Franchise & Excise Tax – Part II

This blog is a continuation of discussion (Part 1 posted on 8.30.21) on the various exemptions available under Tennessee Franchise and Excise tax law. The exemptions discussed in this blog are listed below.

Farming/Personal Residence

Entity Types:

To qualify for the Farming/Personal Residence exemption, the entity is required to be formed as a Limited Liability Company (LLC), Limited Partnership (LP), or Limited Liability Partnership (LLP). Corporations (either under subchapter “C” or “S”) do not qualify for this exemption.

Income Test:

(1) Farming – Gross receipts from farming must equal or exceed 66.67% of total gross receipts of the activity and 66.67% of assets are used by the owner or the owner’s lessee for farming. Farming is defined as the growing of crops, nursery products, timber or fibers, such as cotton, for human or animal use or consumption; the keeping of horses, cattle, sheep, goats, chickens or other animals for human or animal use or consumption; or the keeping of animals that produce products, such as milk, eggs, wool or hides for human or animal use or consumption; or the leasing of the land to be used for the purposes described above.

(2) Personal Residence – To qualify, at least 66.67% of the activity is the holding of one or more personal residences where one or more of the members/partners reside. A personal residence is a dwelling unit occupied by either members or partners for personal use more days than it is rented to non-partners or non-members. This is exclusive to the partners and members; not their related parties (i.e., rental to a related party does not qualify for the exemption).

Ownership Test:

At least 95% of the voting rights, capital interest or profits are owned by natural persons who are relatives of one another or by trusts for their benefit. Natural persons are considered “relatives” by blood or adoption if they are descended from a common ancestor and their relationship with each other is that of a first cousin or closer than that of a first cousin, or if they are spouses of one another.

Obligated Member Entity (“OME”)

An Obligated Member Entity (“OME”) is an entity where all members or partners are fully liable for the debts, obligations, and liabilities of the entity.

Entity Types:

To be an OME, the entity must be an LLC, LP, or LLP.  Corporations (either under subchapter “C” or “S”) generally do not qualify for this exemption. Interestingly, in Tennessee Revenue Ruling #08-20, OME status was available to a limited liability company that was the surviving entity in a tax-free “A” reorganization under federal income tax law that had elected to be treated as a corporation for federal income tax purposes.

Exemption Qualification:

All members or partners of the entity make an election to be fully liable for the debts, obligations, and liabilities of the entity.  Documentation must also be filed with the Tennessee Secretary of State. All qualifications must be met in order to receive the exemption.

Entities will have limited exclusion if any of the members themselves have liability protection. For example, corporations may be members of an OME. However, corporations themselves provide liability protection. The Tennessee tax exclusion will be limited to the extent that the corporation (or another liability protected entity) has equity and income in the OME. This creates a partial exemption from Tennessee tax.

Other entities, such as estates, trusts who are not taxpayers, non-profits, or any other entity already exempt from franchise and excise taxes, do not provide liability protection to their members and therefore, qualifies them for the full OME exemption.

Timing of Application:

Application with the secretary of state for OME designation must be completed on or before the first day of the tax period. This exemption is not prorated if the application was not timely filed. The exemption will simply be applied to the following tax period.

Filing of Tennessee Form FAE 183 or FAE 170

For the exemptions discussed above, the entity will need to file FAE 183 with the Tennessee Department of Revenue when applying for a new exemption or renewing an exemption. The renewal filing is done annually.  Entities that have an extension for federal income tax are automatically granted an extension for the FAE 183.

If the entity does not meet the exemption requirements in any given year, it is taxable on all activities for that year.  A completed franchise and excise tax return (FAE170) must be filed electronically with payment of any taxes due by the 15th day of the fourth month following the close of the tax year.

Please look for our next blog, which will discuss the F&E tax exemptions for venture capital funds and diversified holding funds.