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CCH Axcess Tax

Introduction to the Tennessee Franchise and Excise Tax Return

The Tennessee corporate return is prepared for calendar, fiscal and short year corporations. Using entries from the federal tax return and Tennessee input, the following forms are prepared for the Tennessee return:

• Form FAE 173, Application for Extension of Time to File Franchise, Excise Tax Return
• Form FAE 172, Quarterly Franchise, Excise Tax Declaration
• Form FAE 170, Franchise and Excise Tax Return
• Schedule M, Schedule of Nonbusiness Earnings
• Form IE-N, Intangible Expense - Notice of Deduction
• Schedules N, O, P & R Apportionment Schedules
• Schedule N, Apportionment - Captive REITS
• Schedule T, Industrial Machinery Tax Credit
• Schedule U, Loss Carryover
• Schedule V, Industrial Machinery Credit Carryover
• Schedule X, Franchise and Excise Jobs Tax Credit Computation
• Schedule 170NC/SF, Apportionment for Franchise Tax
• Consolidated Net Worth Election Registration Application
• 2220 Worksheet, Underpayment of Estimated Tax Penalty and Interest

It is no longer necessary to attach a copy of the federal return to the Tennessee return.

Generic Consolidated Return

A state consolidated tax return is processed for Tennessee corporations by submitting state input with the consolidating unit. The state consolidated tax return generated under this input scheme is also known as the state "generic" consolidated tax return because we process the return as if it's a regular corporation return except we use federal consolidated taxable income as the starting point. For those states which do not start with federal taxable income, items of income and deduction also carry from the federal consolidated return as they would for a regular non-consolidated return.

Detailed supporting statements are produced from entries on state input. In addition, detailed supporting statements are generated for the compensation of officers section, depreciation, gains (losses) on sale of assets, and passive activity losses for those states which recognize FS entries. However, detailed supporting statements for taxable income, balance sheet, Schedules M-1 and M-2, and state consolidated/combined statements showing company-by-company detail are not produced. Hence, a copy of the federal consolidated return may be attached to the state tax return as supporting documentation. Any state unique combined/consolidated forms are not produced. For states requiring such forms and which adopt the unitary principles of combined taxation, the return should be reviewed closely to ensure correctness and completeness.

Federal Interview Form Notes and Features

Depreciation

Tennessee follows federal depreciation with the exception that certain bonus depreciation is NOT allowed. For current year assets entered on the Income/Deductions category, Business worksheet, Deductions section, this adjustment will automatically be made. No further entries on your part are required. You may override this adjustment on Income/Deductions worksheet, Additions section, Depreciation deducted as a result of bonus field or Subtractions section, Depreciation under IRC Section 168 prior to bonus field. If federal Totals Only Depreciation input is used to enter depreciation, this automatic adjustment will not be made. In this case, an entry on Income/Deductions worksheet, Additions or Subtractions section is required.

For prior year assets entered on federal Income/Deductions category, Business worksheet, Deductions section, In general, no state entries on the federal state-if-different input are used to calculate Tennessee depreciation. However, an exception is made for certain bonus assets. For a prior year asset "0" should be entered on state-if-different depreciation input for bonus depreciation taken in the prior year. If your prior year return was processed by us this entry will automatically be created by our Pro Forma program. No entry is necessary for a current year asset. The computed adjustment may be suppressed using entries on federal General category, Depreciation Options and Depletion Overrides worksheet, Depreciation Options and Overrides section, Depreciation Options area.Other Income/Deductions worksheet, Other Adjustments and Overrides section, "Other federal bonus Additions" grid or "Other Bonus Basis Subtractions" grid may be used to make additional adjustments.

A state bonus adjustment detail report can be requested on federal General category, Depreciation Options and Depletion Overrides worksheet, Depreciation Options and Overrides section, Depreciation Options area.

FS Codes

Except as noted for municipal bond interest and net operating loss deduction, the use of FS codes are not required to prepare the Tennessee corporation return. All income and expenses included on federal input are carried to the Tennessee return. Generally, additions and subtractions to federal income are handled through entries on Tennessee input.

Information from Federal Return

The following items from the federal return are carried to the Tennessee return and do not require additional entries on state input:

• Interest on U.S. Obligations
• All State Municipal Bond Interest
• Contribution Carryover and Limitation
• Capital Gains Offset by Capital Loss Carryover
• Employment Credit Wage Reduction
• All State Taxes Based on Income
• State Tax Refund

U.S. Obligations

Interest on obligations of the United States entered on federal Income/Deductions category, Interest worksheet carry to Tennessee Schedule J as taxable interest income.

Municipal Bond Interest

Tennessee includes municipal bond interest from sources both inside and outside the state in Tennessee income. Interest entered as state and local obligations carries to Tennessee Schedule J as an addition to federal taxable income.

To override, use the "Interest on Obligations of States and Their Political Subdivisions" field on federal Income/Deductions category, Interest worksheet.

Be sure to indicate the source of municipal bond interest. Enter the source of interest in the "State" field on the federal Income/Deductions category, Interest worksheet, by pressing the detail button. The interest is considered to originate in the state entered on federal General category, Basic Data worksheet, General section for the home state return IF:

• 1. the "State" field on federal Income/Deductions category, Interest worksheet is blank.

Taxable Interest - Business Income

All interest is included in Tennessee income and is considered business income and therefore taxable, regardless of whether the interest is from U.S. government bonds or state municipal bonds. To exclude interest from Tennessee income, enter the excludable amount for "Schedule M - Nonbusiness Earnings" on federal Common State category, Allocation and Apportionment worksheet, Allocation section.

Employment Credit

Wages or salaries eligible for the federal Employment Credit which were not deducted on the federal return are carried to Tennessee Schedule J as subtractions from federal income.

Research Activities Credit

The federal election to reduce credit for qualified research expenses does not result in an automatic adjustment on Tennessee Schedule J. Refer to IRC Section 280(C)(c)(3), for more details.

Qualified Zone Academy Bond Credit

This credit (Form 8860), is not recognized in Tennessee. A credit amount is first added to Federal income and the excess credit over tax (carryover amount), is then deducted from Federal taxable income. These amounts will be reversed and adjusted on Tennessee Schedule J, line 20.

Net Operating Loss Deduction

Net operating loss (NOL) information carries to Tennessee Schedule U from entries on federal Income/Deductions category, NOL Carryover worksheet. Enter "S" in the F/S code field and "TN" in the state use code field before entering detail for the Tennessee NOL deduction.

Contributions

The total contributions entered on federal Income / Deductions category, Charitable Contributions worksheet is carried to Tennessee Schedule J. Tennessee allows all charitable contributions to be deducted for the year in which they are made. Therefore, prior year contribution carryovers entered on Income/Deductions category, NOL Carryover worksheet are added back to federal income and current year contributions subject to the federal limitation are deducted from federal income on Tennessee Schedule J.

Tax Accrual

State taxes only is carried to the federal return when a "State and City Tax Accrual Option" is selected. Taxes computed on the Tennessee return is carried to page 1 of the federal return if a "1" is entered in the "State and City Tax Accrual Option" box in the "Calculation Options" section of federal General category, Return Options worksheet. The tax also accrues to the appropriate sections of the federal balance sheet.

State Tax Accrual Option 2 carries state taxes computed on the Tennessee return to page 1 of the federal return but does not accrue them to the federal balance sheet. If required, a Schedule M-1 book/tax adjustment is made.

State Tax Accrual Option 3 accrues taxes to the balance sheet in the same manner as code "1," but tax expense carries to the rental schedule instead of Form 1120, Page 1.

State Tax Accrual Option 4 does NOT accrue taxes to the balance sheet, same as code "2," but tax expense carries to the rental schedule instead of Form 1120, Page 1.

If a State Tax Accrual Option is not elected, state taxes computed on the Tennessee return neither is carried to the federal return nor accrued to the balance sheet.

Schedule F - Net Worth

In general, information from the federal balance sheet is sufficient to complete Schedule F - Net Worth. However, if "Stock is Held in a Corporation(s) Doing Business in Tennessee" or there exists an "Indebtedness to a Parent or Affiliated Corporation," then it is also necessary to enter this information to properly complete Schedule F. Use Tennessee Other worksheet, Net Worth section to enter Schedule F information and overrides.