Tennessee Tax Alert

New legislation that took effect on July 1, 2009, may affect the following businesses:

  1. Family-owned, noncorporate entities (FONCEs) that own commercial or industrial real estate, and
  2. Limited liability companies (LLCs) and limited partnerships (LPs) that have been exempt from Tennessee franchise and excise tax.

On June 25, 2009, Governor Bredesen signed legislation that effectively changed the classification of industrial and commercial rental income. Such rental income received or accrued after July 1, 2009, will now be treated as non-passive income for purposes of determining whether the entity qualifies for the FONCE exemption.

Therefore, if a family-owned LLC’s or LP’s gross income is more than 1/3 from commercial or industrial rent, the entity is no longer eligible for the FONCE exemption. Unless the requirements of another exemption are met, these entities will now be subject to the Tennessee franchise and excise tax. The franchise tax is 0.25% of the greater of net worth or net asset value at the end of the tax year, and the excise tax is 6.5% of net income.

A family-owned LLC or LP may convert to an “obligated member entity” (OME), which is exempt from Tennessee franchise and excise tax. However, OMEs are offered no liability protection, thereby subjecting all owners of the entity to personal liability. This exposure may be minimized through insurance.

All LLCs and LPs affected by this legislation should consult with their tax and legal advisors to determine the best course of action. The deadline for making the OME election for the 2009 tax year is October 1, 2009.

To comply with the requirements of IRS Circular 230, we must inform you that the information discussed above is not intended or written to be used, and cannot be used by the recipient or any other taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or to promote, market or recommend to another party any transaction, entity, investment plan, arrangement or other matter.