How to File LLC Taxes in Tennessee? (Step by Step Guide)
Establishing a Tennessee LLC can be a fantastic way to bring your business vision to life, but understanding the Tennessee LLC tax landscape is crucial for ongoing success.
We teamed up with LLC experts with fifteen years of experience and conducted comprehensive research on the Tennessee Secretary of State's website to delve into the tax landscape.
This article explores the taxes your Tennessee LLC will encounter and provides insightful tips on navigating the complex world of state and federal taxes.
Quick Summary
- Tennessee limited liability companies may be subject to additional taxes, such as franchise and excise taxes, local income taxes, sales tax, withholding taxes, employer's state unemployment tax, and employer's federal unemployment tax.
- Foreign LLCs operating in Tennessee are obligated to register for local & state taxes, while the tax rate varies depending on type & structure.
- Tennessee LLCs may be required to file and pay local income taxes, depending on the specific regulations of the municipality in which they are located.
How Are LLCs Taxed in Tennessee?
LLCs in Tennessee are taxed based on their tax classification. By default, LLCs in Tennessee are taxed as pass-through entities.
Tennessee does not have a state income tax but has other tax obligations such as franchise and excise taxes.
The LLC's profits and losses are passed to the member's tax returns. The members are then taxed on their share of the profits or losses, regardless of whether they are distributed to them.
Federal Income Taxes
You’ll need to file Form 1040, which is the standard form for personal income tax returns, and report your business income on Schedule C.
You may also need to file additional forms, such as Form 1065, which is the partnership return, and Schedule K-1, which reports each partner’s distributive share of profits.
It’s essential to consult with a tax professional to ensure you’re meeting all the necessary federal income tax requirements and taking advantage of the deductions and credits available to your business.
Franchise and Excise Taxes for Tennessee LLCs
The state tax requirements for Tennessee LLCs depend on the number of members and the chosen taxation structure.
The Tennessee business tax is a mandatory tax imposed on most businesses operating in Tennessee, calculated based on annual gross receipts and specific business types.
Additionally, Tennessee LLCs may need to collect sales tax on certain goods and services [1].
The Tennessee excise tax is determined based on LLC net earnings or income for the tax year, with implications for ownership in disregarded entities affecting tax liability under Tennessee law.
1. Single-Member LLC
For federal income tax purposes, a single-member LLC (SMLLC) is categorized as a sole proprietorship, while a multi-member LLC is automatically categorized as a partnership.
While this simplifies the tax process for single-member LLCs, knowing your tax obligations is crucial in ensuring you accurately report your income.
Single-member LLC owners must file tax returns to report their income accurately.
You contribute to your future social safety net when you pay self-employment tax.
Just like traditional employees have a portion of their earnings withheld for these programs, you'll need to calculate and set aside a portion of your income to fulfill your self-employment tax obligations.
2. Multi-Member LLC
A limited liability company (LLC) can have multiple members; in such cases, these multi-member LLCs are taxed as partnerships.
Each member is held accountable for declaring their share of income and remitting taxes on their tax return.
Multi-member LLCs must also pay franchise tax based on the greater of their net worth or the book value of their property.
Each member must file a 1065 Partnership Return and report their distributive share of profits via a Schedule K-1 [2].
3. LLCs Taxed As S-Corp
An LLC can elect to be treated as an S Corporation for tax purposes, with its own benefits.
LLCs classified as S-corps benefit from LLC pass-through taxation and can divide income into salary and dividends, potentially reducing self-employment taxes.
LLCs taxed as S-Corps must pay a minimum franchise tax of \$100.
To elect S-corp taxation, LLCs must fulfill certain Internal Revenue Service (IRS) requirements and submit IRS Form 2553 [3].
Consider consulting with an accountant before making this election, as it may affect your federal income tax obligations.
4. LLCs Taxed As C-Corp
LLCs can also elect to be taxed as C-corporations, providing more tax deductions and making them attractive to investors. However, they are subject to annual franchise and sales/use taxes.
LLCs taxed as C-Corps must be aware of various business taxes, including franchise and excise taxes.
Tax-Deductible Expenses and How to File Tax Returns for an LLC in Tennessee
Tax-deductible expenses for Tennessee LLCs include:
- Business-related expenses, such as rent, utilities, office supplies, and employee salaries
- Cash discounts
- Trade-in amounts
- Payments to licensed subcontractors
- Sales of services
- Startup expenses
- Home office expenses
- Business use of a car
- Other business-related expenses
Consult with a tax professional or the Tennessee Department of Revenue to optimize your LLC taxes deductions and credits.
Related Articles:
- How to Set Up an LLC in Tennessee
- Top LLC Formation Services in Tennessee
- Premium Registered Agent Services in Tennessee
FAQs on Tennessee Sales Tax
How Much Is A Tax On A TN Business?
A tax on a TN business can vary depending on the type of tax and the specific business structure. Retailers typically incur a tax rate of 0.001 or 0.00025, while wholesalers are generally subject to a tax rate of 0.001 or 0.000375.
What Are The Penalties For Not Filing The Excise Tax Return For Tennessee LLCs?
The penalties for not filing the excise tax return for Tennessee LLCs can also be steep. The state can charge interest, late fees, and even administrative penalties.
What Is The City Business Tax In Tennessee?
The city business tax in Tennessee applies to businesses generating more than \$100,000 in gross revenue within a county or municipality. Businesses must register for this tax and follow the payment process, which is distinct from state-level taxes such as franchise and excise taxes.
