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 worksheets, 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
Form FAE 174, Franchise and Excise Financial Institution Tax Return
Form IE, Intangible Expense Disclosure
Schedule M, Nonbusiness Earnings
Schedules N, O, P, R & S Apportionment Schedules
Schedule T, Industrial Machinery Tax Credit
Schedule U, Loss Carryover
Schedule V, Industrial Machinery Credit Carryover
Schedule X, Franchise and Excise Tax Jobs Credit Computation
Schedule 170NC/SF/SC, Apportionment for Franchise Tax
Schedule 174SC/NC, Apportionment for Franchise Tax
Captive REIT Disclosure Form
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 the 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 federal Income / Deductions > Business > Other Depreciation and Amortization, this adjustment will automatically be made. No further entries on your part are required. You may override this adjustment on Tennessee > Income / Deductions > Additions > Depreciation deducted as a result of bonus depreciation or Tennessee > Income/Deductions > Subtractions > Depreciation under IRC Section 168 prior to bonus.If federal totals only depreciation entries are used to enter depreciation, this automatic adjustment will not be made. In this case, an entry on the previously listed Additions or Subtractions sections is required.
For prior year assets entered on federal Income / Deductions > Business > Other Depreciation and Amortization, an entry on the state-if-different depreciation column may be required. In general, no state entries on the federal state-if-different input are used to calculate Tennessee depreciation. However, an exception is made for bonus. For a prior year asset "0" should be entered on the 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 > Depreciation/Depletion Options and Overrides > Depreciation options and Overrides > Suppress all state bonus depreciation adjustments.Tennessee > Income / Deductions > Other Adjustments and Overrides > Other Federal Bonus Additions or Other Bonus Basis Subtractions may be used to make additional adjustments. A state bonus adjustment detail report can be requested on federal General > Depreciation/Depletion Options and Overrides > Depreciation Options and Overrides.
An entry on Tennessee Income / Deductions > Additions > Depreciation deducted as a result of bonus depreciation overrides the printing of the detail statement and carries to Form FAE 170 or Form FAE 174. This override also overrides the federal bonus depreciation for this line.
Enter income included in the federal taxable income and any other expense or depreciation that could have been deducted for "Safe Harbor" lease election on Tennessee Income / Deductions > Other Adjustments and Overrides > Other Bonus Subtractions to print a supporting statement for FAE 170 or FAE 174, or enter the amount on Tennessee Income / Deductions > Subtractions > Any income included for federal tax purposes and depreciation as a result of "safe harbor" lease elections to carry the total to Form FAE 170 or Form FAE 174 without a supporting statement.
Tennessee gain or loss bonus adjustments for automatic sales are computed from entries made on federal Income/Deductions > Business > Other Depreciation and Amortization, tied via sale number to federal Income/Deductions > Gains and Losses and/or Installment Sales. The computed gain or loss adjustment carries to Tennessee Form FAE 170 or FAE 174.
If the automatic sale feature is NOT used, the Tennessee gain or loss adjustments for bonus assets is computed with direct sale information entries on either federal federal Income/Deductions > Gains and Losses and/or Installment Sales. Enter a 'F' in the F/S code field to identify the federal sale and an 'S' in the F/S code field to identify the state sale. The difference between the computed federal gain or loss and the computed state gain or loss carries as an adjustment to Tennessee Form FAE 170 or FAE 174. If the state code field has a state code entry other than "TN" on federal Income/Deductions > Gains and Losses and/or Installment Sales for bonus assets, the Tennessee computed gain or loss adjustment for Tennessee is then the computed federal gain or loss amount, unless an additional sales entry is made on federal Income/Deductions > Gains and Losses and/or Installment Sales using 'S" in the F/S code field and "TN" in the state code field.
To identify the sale as a bonus asset, mark federal Income/Deductions > Gains and Losses > Asset is a HR-3090 asset. To identify the installment sale as a bonus asset mark federal Income/Deductions > Installment Sales > Property / Type Description > Asset is a HR-3090 property.
The Tennessee computed bonus adjustment may be overridden on Tennessee Income/Deductions > Subtractions > Any excess gain or loss resulting basis adjustment due to bonus.
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 > Interest carries 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 Tennessee Income / Deductions > Additions > Interest on obligations of states and their political subdivisions - override.
The interest is considered to originate in the state entered on federal General > Basic Data > General for the home state return IF:
The "State" field on federal Income / Deductions > Interest (1099-INT) 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 Common State/City > Allocation / Apportionment - State Specific Information > Allocation Miscellaneous.Use Tennessee Income / Deductions > Subtractions > Nonbusiness earnings - everywhere and Nonbusiness earnings allocated directly to Tennessee to override nonbusiness earnings.
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 a subtraction 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.
Net Operating Loss Deduction
Net operating loss (NOL) information carries to Tennessee Schedule U from entries on federal Income / Deductions > NOL Carryover / Carryback. 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 > Charitable Contributions is carried to Tennessee Schedule J4. Tennessee allows all charitable contributions to be deducted for the year in which they are made. Therefore, prior year contribution carryovers entered on federal Income / Deductions > Contribution Carryover are added back to federal income and current year contributions subject to the federal limitation are deducted from federal income on Tennessee Schedule J4. Overrides are available on Tennessee Income / Deductions > Additions > Contribution carryover from prior period(s) or Subtractions > Contributions in excess of amount allowed by federal government for contribution carryover and contributions in excess of limitation.
Tax Accrual
State taxes only are carried to the federal return when a "State and City Tax Accrual Option" is selected. Taxes computed on the Tennessee return are carried to page 1 of the federal return if a "1" is entered in federal General > Return Options > Calculation Options > State and city tax accrual option, 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 are 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 > Net Worth to enter Schedule F information and overrides.
General Questions
Q. Where is the federal return which should be attached to the Tennessee return?
A. Beginning in 1996, it is no longer necessary to attach a copy of the federal return to the Tennessee returns.
Q. What is the filing date for the Tennessee corporate return?
A. Tennessee corporation returns are due on or before the fifteenth day of the fourth month following the close of the fiscal year.
Q. How do I prorate the franchise tax if it is a short year return?
A. Select "days" or "months" on Tennessee General > Options > Method used to prorate franchise tax to prorate the franchise tax by days or months, respectively. Be sure to make an entry on either "Fiscal Year Dates" on federal General > Basic Data > General or "Beginning Date for Franchise Tax Proration" on Tennessee General > Options. Tennessee prefers a taxpayer prorate the franchise tax by number of days.
Q. Does Tennessee conform to federal bonus depreciation?
A. NO, Tennessee does not conform to federal bonus depreciation. The system will make automatic adjustments on Form FAE 170 Schedule J, lines 3, 13, and 14 or Form FAE 174, Schedule J, lines 6, 17 and 18. You may override these entries on Tennessee Income / Deductions > Additions > Depreciation deducted as a result of bonus depreciation - override and Tennessee Income / Deductions > Subtractions > Depreciation under IRC section 168 prior to bonus - override and Any excess gain or loss from resulting basis adjustment due to bonus depreciation - override.
Entries Tennessee > Income / Deductions > Other Adjustments and Overrides > Other Federal bonus Additions and Other Bonus Basis Subtractions may also be used to make detailed adjustments. A state bonus adjustment detail report can be requested on federal General > Depreciation Options and Depletion Overrides > Depreciation Options and Overrides.
Q. How do I produce a financial institution Form FAE 174 tax return?
A. Mark the entry called "Produce FAE 174 financial institution return" on Tennessee General > Options. Refer to the Tennessee Other and Other Returns worksheets for additional input applicable to FAE 174.