Complete Guide to Tennessee LLC Taxes in 2025
Tennessee is one of the few states with no individual income tax, making it an attractive destination for business owners. However, the Volunteer State's tax picture for LLCs is more nuanced than it appears. While LLC members pay no state income tax on their business earnings, multi-member LLCs face franchise tax (0.25% of net worth) and excise tax (6.5% of net income) at the entity level. Combined with a $300 minimum annual report fee, Tennessee's true tax burden depends heavily on your LLC's structure.
How Tennessee Taxes LLCs
Tennessee's LLC tax structure has two key components:
- No Individual Income Tax: LLC members pay $0 in state income tax on their share of business earnings
- Entity-Level Taxes (multi-member LLCs): Franchise tax (0.25% of net worth or tangible property, minimum $100) and excise tax (6.5% of net earnings)
Single-member LLCs owned by individuals (disregarded entities) are generally exempt from both franchise and excise taxes, making Tennessee essentially tax-free for sole proprietors.
Key Point: The franchise and excise tax distinction between single-member and multi-member LLCs is critical in Tennessee. A single-member LLC pays no state tax at all, while a multi-member LLC pays 6.5% excise tax on net income plus franchise tax. This can significantly affect your choice of LLC structure.
Tennessee Franchise and Excise Tax
| Tax Type | Rate | Base | Minimum |
|---|---|---|---|
| Excise Tax | 6.5% | Net earnings | $0 |
| Franchise Tax | 0.25% | Greater of net worth or real/tangible property | $100 |
| Annual Report | $300/member | Number of members | $300 |
The excise tax at 6.5% on net earnings is essentially Tennessee's replacement for an income tax at the business level. For multi-member LLCs with significant net income, this can be a substantial obligation. However, it allows for business deductions (unlike a gross receipts tax), so the effective rate depends on profitability.
Federal Taxes for TN LLC Owners
- Self-Employment Tax (15.3%): Standard federal rates apply
- Federal Income Tax: 10% to 37% for 2025
- QBI Deduction: Up to 20% under Section 199A
Tax Tip: For single-member LLC owners, Tennessee is essentially a zero-state-tax environment, making federal optimization the primary focus. S-Corp election can save thousands on SE tax. For multi-member LLCs, evaluate whether the 6.5% excise tax makes S-Corp election or restructuring worthwhile. Use our S-Corp Tax Calculator to compare.
Tennessee LLC Annual Report
The annual report fee is $300 per member (minimum $300). A two-member LLC pays $600, a three-member LLC pays $900, etc. This is one of the more expensive annual report fees in the US, particularly for multi-member LLCs.
TN LLC Filing Deadlines
| Filing Type | Deadline | Extension |
|---|---|---|
| Franchise & Excise (FAE170) | April 15 (calendar year) | 7 months with extension |
| Annual Report | 1st day of 4th month after FY end | None |
| Federal Estimated Payments | Apr 15, Jun 15, Sep 15, Jan 15 | None |
TN LLC Formation Costs
- Articles of Organization: $300 per member (minimum $300)
- Registered Agent: Required; $50-$150/year
- Annual Report: $300 per member/year
- EIN: Free from the IRS
Tennessee vs. Other No-Income-Tax States
| State | Income Tax | Annual Fee | Entity Taxes |
|---|---|---|---|
| Tennessee | 0% | $300 min | Excise 6.5% + franchise 0.25% |
| South Dakota | 0% | $50 | None |
| Wyoming | 0% | $60 min | None |
| Texas | 0% | $0 | Franchise 0.375-0.75% |
| Florida | 0% | $138.75 | None |
| Nevada | 0% | $350 | Commerce tax |
Common Tennessee LLC Tax Mistakes
- Assuming Tennessee is completely tax-free: Multi-member LLCs owe franchise + excise taxes at the entity level
- Not considering single-member structure: Single-member LLCs owned by individuals are exempt from franchise and excise
- Underestimating annual report costs: At $300 per member, multi-member LLCs face significant annual fees
- Forgetting federal obligations: No state tax doesn't eliminate federal SE and income tax
- Not filing franchise/excise return: Even if you owe no excise tax, the return may still be required
- Ignoring local taxes: Some Tennessee cities have local business taxes
Tennessee Planning Note: The single-member vs. multi-member distinction is the most important tax planning decision for Tennessee LLCs. If possible, structuring as a single-member LLC (owned by an individual) eliminates franchise and excise tax entirely while maintaining zero state income tax.
Understanding Tennessee's Unique LLC Tax Structure
Tennessee's approach to LLC taxation is one of the most distinctive in the nation. While the state proudly touts its zero individual income tax, the franchise and excise tax system creates a meaningful entity-level tax burden for multi-member LLCs that is often overlooked in headline comparisons. Understanding this nuance is critical for LLC owners choosing Tennessee as their state of formation.
The excise tax at 6.5% of net earnings is effectively an entity-level income tax. For a multi-member LLC earning $200,000 in net profit, the excise tax alone would be $13,000. Add the franchise tax (0.25% of net worth or tangible property, minimum $100) and the annual report fee ($300 per member), and the entity-level tax burden becomes substantial.
However, the critical exemption for single-member LLCs changes the calculus entirely. A sole proprietor operating through a single-member LLC in Tennessee pays no state income tax and no franchise or excise tax. This makes Tennessee one of the most tax-friendly states in the nation for solo LLC owners, while being moderately expensive for partnerships.
Tennessee Franchise Tax Calculation Details
The franchise tax is calculated as 0.25% of the greater of:
- The LLC's net worth (total equity as reported on the balance sheet), or
- The book value of real and tangible property owned or used in Tennessee
The minimum franchise tax is $100. For many service-based LLCs with minimal tangible assets, the franchise tax liability is relatively small. A consulting LLC with $200,000 in net worth would owe $500 in franchise tax ($200,000 x 0.25%). However, for capital-intensive businesses with significant real estate, equipment, or inventory, the franchise tax can be substantial.
Important planning note: the franchise tax applies to the greater of net worth or tangible property. This means that even if your LLC has negative net worth (common in early years when loans exceed assets), you may still owe franchise tax based on the tangible property calculation. Conversely, an asset-light business with high net worth (retained earnings) pays franchise tax on that net worth even if it has minimal physical assets.
Tennessee Excise Tax Deductions and Credits
The 6.5% excise tax applies to net earnings, which means business deductions reduce the excise tax base. Common deductions include all ordinary and necessary business expenses, depreciation, interest on business loans, compensation paid to employees, and rent for business premises.
Tennessee also offers several excise tax credits that can reduce the liability:
- Job Tax Credit: Credits for new job creation, particularly in enhanced counties (economically distressed areas). Credits range from $4,500 to $9,000 per new full-time job.
- Industrial Machinery Credit: A credit for investment in industrial machinery used in Tennessee manufacturing.
- Community Investment Tax Credit: Credits for investments in qualified community development organizations.
- Research and Development Credit: A credit for qualifying R&D expenditures in Tennessee.
Single-Member vs. Multi-Member LLC Decision in Tennessee
The franchise and excise tax exemption for single-member LLCs creates a unique strategic planning opportunity in Tennessee. For business owners who might otherwise form a multi-member LLC (perhaps with a spouse or partner), the tax implications of this choice are significant:
| Factor | Single-Member LLC | Multi-Member LLC |
|---|---|---|
| TN Income Tax | $0 | $0 |
| Excise Tax (6.5%) | Exempt | Applies to net earnings |
| Franchise Tax (0.25%) | Exempt | Applies to net worth/property |
| Annual Report Fee | $300 | $300 per member |
| Federal SE Tax | Standard (15.3%) | Standard (15.3%) |
For a multi-member LLC earning $200,000 with two members, the additional entity-level taxes (excise + franchise + extra annual report fee) could easily total $13,000-$15,000 per year compared to the single-member structure. This substantial difference means that LLC owners should carefully consider whether multi-member status is truly necessary or whether the business objectives can be achieved through a single-member LLC with contractual arrangements.
Tennessee LLC Formation and Annual Compliance
Tennessee's LLC formation process is straightforward but more expensive than many states due to the per-member fee structure:
- Articles of Organization: $300 per member (minimum $300). A three-member LLC pays $900 to form.
- Annual Report: $300 per member (minimum $300), due on the first day of the fourth month after the LLC's fiscal year end.
- Registered Agent: Required. Must have a physical Tennessee address.
- Franchise and Excise Tax Return (FAE170): Due April 15 for calendar-year filers (multi-member LLCs only, unless exempt).
The per-member fee structure is unique to Tennessee and can make multi-member LLCs significantly more expensive. A 10-member LLC would pay $3,000 to form and $3,000 annually just for the report, before any tax obligations are considered.
Tennessee Sales Tax Considerations
Tennessee has a 7% state sales tax rate plus local additions that can bring the combined rate up to 9.75% -- one of the highest combined rates in the nation. For LLCs selling taxable goods, this requires registration, collection, and regular remittance. Tennessee exempts food and food ingredients at the state level (reduced to 4% state rate), but local taxes still apply to food purchases.
Professional services are generally not subject to Tennessee sales tax, which benefits service-based LLCs. However, computer software, digital products, and certain specified services are taxable. As with many states, the rules are evolving, particularly for digital products and SaaS.
S-Corp Election Strategy in Tennessee
The S-Corp election decision in Tennessee is more complex than in most states due to the franchise and excise tax implications. Key considerations include:
- Single-member LLC converting to S-Corp: You gain SE tax savings but may lose the franchise and excise tax exemption (since the entity is now taxed as a corporation). The net benefit depends on whether the SE tax savings exceed the new franchise and excise tax liability.
- Multi-member LLC electing S-Corp: Since you already owe franchise and excise tax, S-Corp election primarily adds federal SE tax savings. However, the S-Corp corporate tax framework in TN may differ from the partnership framework -- consult a TN CPA.
- Break-even analysis: For single-member LLCs, the break-even point where S-Corp election makes sense is typically higher in Tennessee than in other states because you must offset the new franchise and excise tax liability with SE tax savings.
This complexity makes professional tax advice particularly valuable for Tennessee LLC owners evaluating S-Corp election. A CPA familiar with Tennessee's specific rules can model the scenarios and determine the optimal structure for your situation.
Tennessee Business Incentives
Tennessee offers competitive economic incentives that can offset the franchise and excise tax burden for qualifying businesses:
- FastTrack Economic Development Fund: Grants for job creation, job training, and infrastructure development
- Enhanced Job Tax Credit: Up to $9,000 per job in economically distressed counties
- Sales Tax Exemption for Industrial Machinery: Significant savings for manufacturing operations
- Headquarters Facility Tax Credit: Credits for businesses establishing or expanding headquarters in Tennessee
- Green Energy Tax Credit: Credits for renewable energy installations and energy efficiency improvements
These incentives, combined with Tennessee's zero individual income tax and relatively low cost of living, continue to attract businesses from higher-tax states, particularly in the healthcare, automotive, and technology sectors.