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This is for someone familiar with Tennessee state and fed…

This is for someone familiar...
This is for someone familiar with Tennessee state and fed taxation.
I am an EA and have a potential client in Tennessee. The potential client thinks that there is no advantage in making his partnership/LLC into an S Corp as Tennessee has a special excise tax on corporations. I reviewed the data briefly, and it seems like he is mistaken. Any partnership, LLC, or S Corp will pay no state corporate income tax as the tax will flow through to his personal return automatically. If he takes part of his income as a wage that is fair and reasonable for his field, and is an S-Corp (or an LLC that is elected to be treated as an S Corp), his dividends will be shielded from Soc Sec and medicare taxes. Just wanted to confirm my understanding, and to double check if there is any peculiarity about Tennessee taxes that negates this.
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Answered in 9 minutes by:
11/26/2016
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,894
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi Dave,

...

Distributions to Tennessee shareholders from S corporations, which are also pass-through entities, are treated by Tennessee as taxable dividend income.

...

Tennessee’s excise tax, which effectively is an income tax, is a flat 6.5% tax on net earnings from doing business in the state.

...

Generally speaking, only general partnerships and sole proprietorships are exempt from the excise tax.

...

There's also a Franchise Tax.

...

Tennessee’s franchise tax is based on the greater of a business’:

  • net worth; or
  • book value of real and tangible property owned or used in Tennessee.

...

And in Tennessee corporations are subject to both the excise tax and the franchise tax. And although in most states S corporations are pass-through entities,Tennessee, however, is different: it does not recognize the federal “S” election, and instead treats S corporations like traditional corporations, including requiring them to pay the same taxes as traditional corporations.

...

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Finally, the offset there, however, and should be looked at in the analysis is that SALARY paid to an S-Corp shareholder employee is NOT taxed, as there is no personal income tax on wages in Tennessee.

...

Please Let me know if you have ANY questions, before rating me.

But if this HAS helped, and you don’t have more questions on this, … I would appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

Otherwise I won’t be compensated for the work here.

Thank you!

Lane

I have a Law degree with concentration in Tax , Estate & Corporate Law, … an MBA, with specialization in finance … a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

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Also did you see my response on the other question?

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Customer reply replied 1 year ago
Boy, sounds like a bad state to incorporate in. The only income they tax is dividends.I would like to double check one point. Below is a quote form some site I had searched earlier."In general, all businesses operating in Tennessee which are not registered as a flow-through entity (like a sole proprietorship, a partnership, or an S-Corporation) must report their income and pay both Tennessee and Federal corporate income taxes on their earnings. The most commonly used business structure that is subject to corporate taxes is a C-Corporation."It sound like from what you are saying this is incorrect. Or am I mis-understanding something here.I will check now the answer to my other question.

What it appears is being missed above (although the way it's written, as a double negative makes it unclear) is that the S-Corp is not treated as a flow through by Tennessee, becasue they don't recognize the S-election. they are treated as a corporation for the franchise AND excise purposes.

...

But AGAIN, if they take a large salary and no distributions or dividends, that cna make some sense ... but of course the offset to that is less savings on SS & Medicare at the federal level.

...

This is how TN raises tax revenue without a personal income tax on earned income.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,894
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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