Trust and Estate Counsel

Tennessee Estate Planning Law

Insight and commentary on estate planning issues impacting affluent residents of Tennessee

Increased Tennessee Taxes for Family LLCs and Limited Partnerships

Your family LLC or limited partnership might be hit with a large tax bill from the Tennessee Department of Revenue for 2009 and future years. The law was recently changed to remove the exemption from Franchise and Excise taxes for certain family LLCs and limited partnerships that own commercial real estate.

Under prior law, rent income from commercial properties was defined as passive, which allowed family-owned entities to avoid paying the tax. The new law changes the definition of passive income to exclude rental income from commercial properties and residential properties containing more than four units.

The result of this change is to make entities owning such property subject to franchise tax on the value of the entity’s property ($2,500 per million dollars of value) and an excise tax of 6.5% on the net income earned by the entity.

If the owners of the entity do not want to pay the tax, they can waive liability protection prior to October 1, 2009. This means that if the entity suffers a judgment that exceeds the value of the entity's assets, the owners would be personally liable for the judgment. A lot of my clients are choosing this option and purchasing additional liability insurance.

Another change concerns the registration requirements for all entities that claim an exemption from Tennessee Franchise and Excise taxes. Each such entity must notify the Tennessee Department of Revenue of its exemption within sixty (60) days after creation and then each following year no later than April 15. If you are late, the Department of Revenue will either eliminate your exemption or charge you a $1,000 penalty.

Questions and answers regarding franchise and excise taxes.