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Significant Changes Made In 2009 Tennessee Tax Legislation
On June 25, 2009 Governor Bredesen
signed into law the 2009 Technical Corrections Act. The 2009 Act contains numerous changes to the
state’s franchise and excise taxes, sales and use taxes and business taxes, as
well as various economic incentive benefits.
We have outlined some of the major changes below. Many of the changes go into effect on July 1,
2009. For further information on how
these changes will impact your tax liability please contact us.
FONCE Entities
A FONCE (family-owned non-corporate
entity) is an entity whose ownership is comprised of at least 95% family
members and whose gross income is substantially all (at least 66.67%) from
passive investment income. These
entities are exempt from paying franchise and excise taxes. The 2009 Act has changed the definition of
rents as a source of passive investment income to include only rents from
residential and farm property. The Act
further defines residential property as property leased for residential
purposes that includes not more than 4 residential units. Intentionally omitted from the definition of
rent are rents from commercial and industrial property. Any FONCE receiving rents from commercial or
industrial property should evaluate whether they still meet the “substantially
all” requirement under the new definition of rents as passive investment
income.
“Reasonable Rent” Limitation for
Affiliated Entities
The 2009 Act has limited the amount
of rent that can be paid by a lessee to an affiliate for industrial and
commercial property. Amounts paid in
excess of “reasonable rent” must be added back to the taxable income of the
lessee. Reasonable rent has been defined
as rent that does not exceed two percent (2%) per month of the appraised value
of the property.
Business Tax
The 2009 Act authorizes the state to
collect and administer the local business tax, which was previously
administered by the local county clerks.
The Act also requires that
contractors provide the name, address and business license number or
contractor’s license number of the subcontractor when taking the deduction for
“amounts paid to subcontractors”.
The credit against the business tax
for personal property taxes paid is now limited to 50% of the total tax liability.
Sales Tax
The 2009 Act clarifies the
definition and taxability of “computer software maintenance contracts”. Such contracts are taxable when sold in
connection with a sale of computer software that is subject to tax, when the
supported software is installed on computers located in this state, or when the
location of the software covered by the contract is unknown but the purchaser’s
address is in this state.
The Act clarifies that the sales tax
exemption for computer software created “in house” only applies to software
created by a “direct employee”. A
“direct employee” is one who the person is required to issue a W-2.
Electronic Payments
Business tax returns and payments
are now required to be remitted electronically for any business that is required
to file its sales and use tax electronically.
The threshold for required
electronic payment of sales and use taxes has been lowered to $1,000, it was
previously $2,500.
The Act also clarifies that
franchise and excise estimated tax payments should be made electronically if
the payment is $2,500 or more. @import 'compiled.css';
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