IMPORTANT TENNESSEE TAX CHANGES THAT MAY IMPACT YOU! By Michael T. Odom, CPA Tax Partner, Fouts & Morgan, CPAs
The Tennessee 106th General Assembly passed the Administration's tax legislation during the final days of its session in June 2009. Governor Bredesen signed the bill into law on June 25, 2009, which is the date most of its provisions go into effect. We have summarized below the most significant changes that impact our clients. If you have questions concerning these changes, need assistance in implementing them, or would like to discuss possible ways to minimize their impact on you or your business, please contact our office at (901) 761-2110. Business Tax • For contractors (categorized in Classification 4) there are new reporting requirements for claiming the deduction for amounts paid to subcontractors. For a contractor to be eligible to claim the deduction for amounts paid to subcontractors, the contractor must provide with the report the name, address, and business license or contractor's license number of the subcontractor and the amount subcontracted. Also, the contractor must maintain in its records a copy of the subcontractor's business license or license issued by the board for licensing contractors. This requirement applies to all new contracts issued 60 days after July 1, 2009. Action item: General contractors need to begin now to get copies of these licenses for your files and put in place procedures to get this for all new contracts in the future. In addition, since business licenses must be renewed annually and Tennessee contractor licenses must be renewed biennially, you must have a procedure in place to monitor expiration dates of these licenses to ensure you maintain copies of the most current license issued. Subcontractors should automatically provide a copy of both licenses to the general contractors with your next pay request, upon receipt of the renewed license, and with any bid materials submitted.
A business will now be classified based on its dominant business activity as either a "retailer" (at least 50% of taxable gross sales) or a "wholesaler" (more than 50% of taxable gross sales). Action item: Review the new definitions of "wholesale sale" to determine if your classification should be changed as the tax rates are generally lower for wholesalers than for retailers.
Transfer the administration, collection, examination, and enforcement of the tax from the local county clerk or city official to the state Commissioner of Revenue. Why the change? Budget estimates indicate that up to $40 million in new state and local taxes can be generated by centralizing the administration of the tax since the state will be able to match business tax records against sales tax, franchise tax, other state taxes, and IRS records better than local officials.
Application for a new business license will still be made at the local county/municipal office. The local official will then register the new business with the commissioner. The local official will continue to issue renewal business licenses upon notification from the state of receipt of the business tax report and payment. Preliminary time frame for filing with and paying the state is January 1, 2010. Current reports for periods ending in June and September 2009 should still be filed and payments made to local officials. We will continue to monitor the transition.
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For contractors, separate reports must still be filed with each county and municipality that has enacted the business tax. Consolidated reporting is not allowed. Any taxpayer required to file its sales and use tax returns electronically is likewise required to file business tax returns electronically and remit the tax electronically. The minimum tax has been increased to $22. The credit for prior year minimum tax has been repealed. The collecting and recording fee has also been repealed. The credit for personal property taxes paid is now limited to 50% of the business tax liability. Action item: Review current compliance with the business tax! If you have delinquent unpaid taxes, pay them now before the state takes over collections. Consider a Voluntary Disclosure Agreement (VDA) for any unpaid or underpaid business tax since January 1, 2006. A VAD allows you to anonymously offer to pay the tax and interest and avoid penalties and also limits the period of liability to three years.
Sales Tax • Electronic payment and filing has been lowered from $2,500 to $1,000. • The effective date for Streamlined Sales Tax legislation has been delayed until July 1, 2011. • Makes many changes to various issues related to software maintenance contracts, software developed "inhouse" by employees or contract labor, software developed by affiliated company, software repair services and other services between affiliated companies. Contact our office if any of these items apply to you. • Clarifies sales tax applies to final artwork and advertising materials but does not apply to preliminary artwork used solely to convey concepts or ideas by the advertising agency.
Franchise and Excise Tax • Family-Owned Noncorporate Entities (FONCE) A Family-Owned Noncorporate Entity (such as single member or multi-member LLCs) is one of fourteen types of entities that may be exempt from Tennessee franchise and excise taxes. Over the last couple of years, the Department of Revenue has been studying the impact of this exemption and auditing entities to verify their exempt status. To qualify, an entity must be at least 95% family owned and at least 66.67% of its activity consists of either the production of passive investment income or a combination of passive investment income and farming. o The definition of "rents" included in passive investment income has been narrowed. "Rents" now is defined as coming from "residential property or farm property." These two terms are defined the same way as they are used for the classification and assessment of property taxes with certain modifications. Residential property includes real property which is used, or held for use, for dwelling purposes and which contains not more than four (4) rental units. Farm property includes all real property which is used, or held for use, in agriculture but excludes acreage used for recreational purposes by clubs, including golf course playing hole improvements. o An entity may convert to an "obligated member entity" and retain its exemption if it files the required paperwork with the Secretary of State on or before October 1, 2009. This applies to entities with fiscal years beginning on or after July 1, 2008 but before October 1, 2009 (which includes calendar years ending December 31, 2009). An obligated member entity is an entity (i.e. LLC, LLP or LP) in which all members are personally liable for the debts and obligations of the entity the same as a general partner is in a general partnership. Action item: You should review your status as a FONCE under the new rules as rent income received after June 30, 2009 may not qualify as passive investment income, thus causing you not to pass the 66.67% income test. Failure to pass the test will subject the entity to franchise and excise tax for 2009. If your combined tax will be at least $5,000, you are required to make quarterly estimated tax payments or you will have to pay a penalty. In addition, if these payments will be $2,500 or more, you will have to remit the payment electronically.
If you have formed a new entity and it qualifies for any of the exemptions, you must file an application for exemption within 60 days of the beginning of the first tax year for which the exemption applies. You cannot wait until the following April 15 to file the exemption. Failure to file the application timely will result in a $1,000 penalty as well as subject you to franchise and excise taxes for that period prior to approval of your exempt status. Please contact us immediately upon creating a new entity to determine if an application should be filed. If you have previously filed an application for exemption, you must file annually an application for renewal of exemption on or before the 15th day of the fourth month following your year end. Provides a new add back to excise tax base for the amount in excess of "reasonable rent" paid, accrued, or incurred for the use of industrial and commercial property owned by an affiliate. Failure to make the adjustment results in a penalty equal to 50% of the required adjustment. "Reasonable rent" equals 2% per month of the appraised value of the property for property tax purposes. The 2% limitation is based on the gross receipts transferred between the two entities and includes payments made in lieu of rents such as taxes, insurance, and maintenance. An affiliate is an entity in which one has more than a 50% direct or indirect ownership interest. This provision is effective for payments made on or after July 1, 2009 regardless of the entity's fiscal year end. Quarterly estimated franchise and excise tax payments of $2,500 or more are now required to be made electronically.
Other Miscellaneous Items • Economic incentives have been revised related to the standard jobs credit, the amount of the job credit that can offset franchise and excise tax, and the required capital investment and number of jobs created in Tennessee. • The prohibition on use of dyed diesel fuel on public highways does not apply to agricultural vehicles used solely to transport harvested crops from the field to a storage facility less than five miles away. • The professional privilege tax now applies to all NBA and NHL players on the roster for games played in Tennessee and equals $2,500 per game (instead of $400) with a three game annual cap.
There is an automatic 12 month extension for filing the inheritance tax return and for paying the tax due if a request is made with the Commissioner or a copy of the federal extension is attached to the return. Interest is due on the unpaid tax but no penalties will be due unless no valid extension is made.