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Not recognized for entity tax

S-corp election in Tennessee

In short

Tennessee franchise and excise tax, owed in full by S corporations: excise tax at 6.5% of Tennessee taxable income (after a $50,000 standard deduction from net earnings) plus franchise tax at 0.25% of Tennessee net worth, minimum $100.

Does Tennessee recognize the federal S election?

Tennessee does not recognize the federal S election for entity-level tax purposes, and this is the most consequential fact for any Tennessee customer. Tennessee has no general individual income tax (the Hall income tax on interest and dividends was fully repealed for tax years beginning January 1, 2021), so there is no state individual income tax for pass-through treatment to reduce. Meanwhile, Tennessee taxes the entity itself: "If you are a corporation, limited partnership, limited liability company, or business trust chartered, qualified, or registered in Tennessee or doing business in this state, then you must register for and pay franchise and excise taxes." The S corporation's net earnings are subject to the 6.5% excise tax at the entity level regardless of the federal election, and its net worth is subject to the 0.25% franchise tax with a $100 minimum. There is no Tennessee S election to make and no Tennessee benefit from having made the federal one.

Tax the entity still owes

Excise tax: "6.5% of Tennessee taxable income," based "on the taxpayer's net earnings or income for the tax year." A standard deduction applies — Tennessee DOR Notice 23-04 (May 2023), implementing the Tennessee Works Tax Act, creates "a new $50,000 standard deduction from net earnings" for excise tax purposes "for tax years ending on or after December 31, 2024." It applies to "pre-apportioned, net earnings as calculated under Tenn. Code Ann. § 67-4-2006 ('adjusted net earnings')," and critically "the deduction cannot create or increase a net operating loss" — so a taxpayer with $50,000 or less of pre-apportioned adjusted net earnings is reduced to $0 but no further. Franchise tax: "0.25% of Tennessee net worth," where net worth is "the difference between the taxpayer's total assets less its total liabilities." The minimum is "$100 and is payable if you are incorporated, domesticated, qualified, or otherwise registered through the Secretary of State to do business in Tennessee." MAJOR RECENT CHANGE: the alternative property measure (Schedule G) of the franchise tax was repealed by Public Chapter 950 (2024), signed May 10, 2024 — "Public Chapter 950 (2024), which eliminates the property measure from the franchise tax calculation" — for tax years ending on or after January 1, 2024, with a one-time refund claim window that closed November 30, 2024. Franchise tax is now computed on the net worth measure only. Separately, Tennessee imposes a gross-receipts BUSINESS TAX: "if you conduct business within any county and/or incorporated municipality in Tennessee, and your business grosses $100,000 or more, then you should register for and remit business tax," and "Business tax consists of two separate taxes: the state business tax and the city business tax." The $100,000 threshold (up from $10,000) came from Public Chapter 377 (2023) and applies to tax years beginning on or after December 31, 2023.

Registering for payroll

There is NO Tennessee state income tax withholding account — Tennessee does not withhold state income tax from wages, so the owner's W-2 has no Tennessee withholding. Registrations required once the owner starts paying themselves: (1) Tennessee Department of Labor & Workforce Development, Division of Employment Security — unemployment insurance. "Every employer in Tennessee is required to complete an online registration." Quarterly premium and wage reports follow. (2) Tennessee Department of Revenue franchise and excise tax account (registered through TNTAP) — this is not payroll per se, but it is the entity registration the S corp must have. (3) County and/or municipal business tax registration and a standard business license from the county and/or municipal clerk if gross receipts reach $100,000 in that jurisdiction.

Annual filings

Form FAE170 (Franchise and Excise Tax Return) — due the "15th day of the fourth month following the close of your books and records," i.e., April 15 for calendar-year filers. A seven-month extension is available (Form FAE173). Quarterly estimated payments are required if the combined franchise and excise tax liability is $5,000 or more in both the prior and current years, due the "15th day of the fourth, sixth, and ninth months of the current tax year and the 15th day of the first month of the next succeeding tax year." Business tax return (state and city) annually if gross receipts in a jurisdiction reach $100,000, filed with the Department of Revenue; a final business tax return must be filed "within 15 days of closing." Tennessee Secretary of State annual report — due the first day of the fourth month following the fiscal year end (April 1 for calendar-year filers), $20 for for-profit corporations (see caveats). Quarterly unemployment insurance premium reports to the Department of Labor & Workforce Development. No state withholding returns and no state W-2 reconciliation.

Pass-through entity tax

No. Tennessee has no pass-through entity tax and no need for one — a PTET is a workaround for the federal SALT cap on state INDIVIDUAL income taxes, and Tennessee imposes no general individual income tax. Note that Tennessee franchise and excise taxes paid by the entity are ordinary business deductions on the federal 1120S and are not subject to the individual SALT cap in the first place. Do not offer a Tennessee PTET option in the product.

The mistake owners make most often in Tennessee

Being sold an S corporation on the promise of "state tax savings" when the S election in Tennessee produces zero state income tax benefit and actively creates state tax exposure. A Tennessee sole proprietor operating without an entity pays no Tennessee franchise or excise tax at all. The moment they form an LLC or corporation and elect S status, the entity becomes subject to franchise and excise tax: 6.5% excise on net earnings above the $50,000 standard deduction, plus 0.25% franchise tax on net worth with a $100 annual minimum, plus an FAE170 return, plus possible business tax registration at $100,000 of gross receipts. Because Tennessee has no individual income tax, the S election's only real benefit is federal self-employment tax reduction — and for a business earning, say, $200,000 of net earnings, the new Tennessee excise tax on the $150,000 above the standard deduction ($9,750) can consume a large share of, or exceed, the federal SE-tax savings. Any Tennessee-facing calculator that ignores franchise and excise tax will materially overstate the benefit. Second gotcha: Tennessee's excise tax base is computed as though the entity were a C corporation, so distributions to the owner are NOT deductible — only the reasonable W-2 salary is.

Important

Filing your federal Form 2553

Businesses operating in Tennessee send Form 2553 to the IRS Kansas City service center — fax 855-887-7734. Full address and filing checklist for Tennessee.

Frequently asked questions

Does Tennessee require a separate S-corporation election?

No. Tennessee does not require a separate state election. Tennessee does not recognize the federal S election for entity-level tax purposes, and this is the most consequential fact for any Tennessee customer.

What tax does an S corporation pay in Tennessee?

Tennessee franchise and excise tax, owed in full by S corporations: excise tax at 6.5% of Tennessee taxable income (after a $50,000 standard deduction from net earnings) plus franchise tax at 0.25% of Tennessee net worth, minimum $100.

Where do I file Form 2553 from Tennessee?

With the IRS Kansas City service center. Fax 855-887-7734, or mail to Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999.

What is the most common S-corp mistake in Tennessee?

Being sold an S corporation on the promise of "state tax savings" when the S election in Tennessee produces zero state income tax benefit and actively creates state tax exposure. A Tennessee sole proprietor operating without an entity pays no Tennessee franchise or excise tax at all. The moment they form an LLC or corporation and elect S status, the entity becomes subject to franchise and excise tax: 6.5% excise on net earnings above the $50,000 standard deduction, plus 0.25% franchise tax on net worth with a $100 annual minimum, plus an FAE170 return, plus possible business tax registration at $100,000 of gross receipts. Because Tennessee has no individual income tax, the S election's only real benefit is federal self-employment tax reduction — and for a business earning, say, $200,000 of net earnings, the new Tennessee excise tax on the $150,000 above the standard deduction ($9,750) can consume a large share of, or exceed, the federal SE-tax savings. Any Tennessee-facing calculator that ignores franchise and excise tax will materially overstate the benefit. Second gotcha: Tennessee's excise tax base is computed as though the entity were a C corporation, so distributions to the owner are NOT deductible — only the reasonable W-2 salary is.

Compare with other states: Texas, Utah, Vermont, Virginia, Washington, West Virginia.

Sources

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Researched from official Tennessee sources and verified July 30, 2026. State tax rules change. This is general information, not tax advice — confirm with the state or a CPA before you rely on it.