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Taxes on Business Income in Tennessee

Filed under State Taxes. Fact checked on May 24, 2012.

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Tennesse has a 6.5 percent corporate income tax that is imposed on Tennessee-related income. Tennessee differs from most states in that it imposed entity-level tax upon S corporations and limited liability companies. If you operate your business as a sole proprietorship or partnership you must report your business income from interest and dividends on your personal tax return. The personal income tax is determined solely upon on interest and dividends received.

In Tennessee, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

Corporations Subject to Business Income Tax

Domestic corporations (corporations organized in Tennessee) and foreign corporations (corporations organized in a state other than Tennessee) are subject to a Tennessee income tax. The regular corporate income tax is computed at 6.5 percent of Tennessee taxable income.

S Corporations Subject to Business Income Tax

If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders for federal tax purposes.. This means that your business will not pay any federal corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.

Tennessee does not extend this favorable tax treatment to state corporate income tax liability. In Tennessee your S corporation will be subject to the same taxes as a regular corporation. Also, the dividends that are distributed out of your S corporation will be taxable to you individually as dividend income.

Partnerships Pass Through Income to Partners

If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Tennessee taxable adjusted gross income their distributive share of partnership income that is taxable on the personal income tax level.

Taxation of LLCs Based Upon Federal Election

Tennessee law recognizes businesses operating as limited liability companies (LLCs). LLCs with Tennessee taxable income are subject to the franchise and excise taxes, but not the regular corporate income tax.

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