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Tennessee Tax Incentives and Credit Update

08/12/2015  |  By: Brian McCuller, JD, CPA, Shareholder, Practice Leader Tax, Mason Barrick, CPA, Senior Manager, State and Local Tax

The Governor’s Revenue Modernization Act (“RMA”) garnered much of the attention of taxpayers, practitioners and other interested parties during this legislative session.  There was, however, another administrative bill, Public Chapter No. 504, passed for the Department of Economic & Community Development (“ECD”) related to Tennessee’s tax incentives and credits.

The highlights of this legislation are summarized below:

  • Requires the Commissioner of ECD to periodically review all statutory credits for franchise, excise tax and sales tax and report to the Governor and the Legislature.  Such reports are due every 4 years starting January 15, 2017.
  • Adds “back office operations," such as administrative, legal and computer services, to the list of qualified business enterprises which are eligible for the job tax credit.
  • Adds equipment used for research and development to the definition of industrial machinery.  This impacts both the sales tax exemption for industrial machinery and the franchise, excise tax credit for industrial machinery.
  • Sunsets a number of tax credits which have been never or seldom utilized.  It allows any taxpayer who filed a business plan prior to July 1, 2015 to continue to be eligible for the credit
  • Eliminates “regional headquarters” from the definitions of qualified headquarters facility and headquarters related functions and services leaving international and national headquarters.  This may impact qualification of some entities for the sales tax credit for headquarters facilities and/or as a business enterprise for the job tax credit.  It allows any taxpayer who filed an application and business plan prior to July 1, 2015 to continue to be eligible for the credit.
  • This bill became effective July 1, 2015 and applies to tax years ending on or after July 1, 2015.

LBMC Perspective

The most significant change most likely is the qualification of research and development equipment as industrial machinery.  Manufacturers may benefit almost immediately with purchases of any such equipment being exempt form sales tax just like production machinery.  Industrial machinery credits for franchise, excise tax may also increase based on such purchases starting with tax years ending after July 1, 2015.

Entities who have qualified in the past for the job tax credit as regional headquarters will no longer be eligible for the credit on that basis after July 1, 2015.  Business plans filed prior to July 1, 2015 will still allow regional headquarters to qualify for the credit at least for the period of the plan.

Entities who primarily provide back office operations may now qualify for the job tax credit.  Tax professionals should take note.

There were a number of tax credits, such as the headquarters relocation credit, which were eliminated under this bill because they were seldom, if ever, utilized by taxpayers.  Taxpayers had until July 1, 2015 to file a business plan in order to qualify for the credit at least for the period covered by the plan.

Members of LBMC’s State & Local Tax Practice are up-to-date on the changes resulting from this legislation.  Please contact us if you have any questions and/or we can assist you in any way.