Tennessee Franchise & Excise Tax Exemptions

Tennessee has 17 different  exemptions from franchise and excise tax (FAE). Tennessee FAE exemptions fall into one of two categories when applying for the exemption: (1) the entity is automatically granted an exemption based on the entity’s activity (e.g., federal and state credit unions, insurance companies, masonic lodges, and industrial development corporations), or (2) the entity must file an application for exemption on Tennessee Form FAE 183 in the initial year, followed by annual renewals via Form FAE 183 (e.g., FONCE, OME, and Venture Capital Funds). FONCEs and Faming/Personal Residence LLCs and LPs are required to disclose their activity on page 3 of Form FAE 183. For a complete list of the 17 exemptions and their  application and/or renewal requirements,  please visit https://www.tn.gov/revenue/taxes/franchise---excise-tax/exemptions/exempt-entities.html. This article addresses exemptions that are frequently used including: Family-Owned Non-Corporate Entities (FONCE), Venture Capital Fund, Farming/Personal Residence, and Obligated Member Entity (OME).

Family-Owned Non-Corporate Entities (FONCE) Exemption

The FONCE exemption is available for limited partnerships, limited liability partnerships, and limited liability companies. Family members must own 95% of the entity and 66.67% of the activity must originate from either farming, the production of passive investment income, or the combination of farming with the production of passive income. Family members include lineal descendants and ascendants, spouses, former spouses, trusts, or estates of a deceased individual (with a family member living), and legally adopted children. Siblings do not qualify as family members for purposes of qualifying for a FONCE. The entity must be directly owned by the family members. Series LLCs are not eligible for the FONCE registration and are considered separate entities for TN filing requirements (the Master LLC would be eligible for the FONCE exemption). FONCEs must file an initial application followed by an annual Form FAE 183 to certify that the entity is still exempt. A disclosure of activities is required for this exemption type.

Venture Capital Fund Exemption

The Venture Capital Fund exemption is available for business trusts, limited partnerships, limited liability partnerships, and limited liability companies. Operations must be for the exclusive purpose of buying, holding, and/or selling securities on the entity’s behalf (more than 50% of the securities must be in non-publicly traded companies). If the company is operating as a broker, it will not qualify for the exemption. Venture Capital Funds must file an initial application followed by an annual Form FAE 183 to certify that the entity is still exempt. A disclosure of activities is not required for this exemption type.

Farming/Personal Residence Exemption

The Farming/Personal Residence exemption is available for limited partnerships, limited liability partnerships, and limited liability companies. Entities are eligible for this exemption if 66.67% of the activity is in farming and 66.67% of the assets are used by the owner for farming or at least 66.67% of the activity is holding of one or more personal residences where one or more of the members/partners reside. The ownership of the entity must be owned directly by individuals or by trusts, similar to a FONCE. The ownership requirement is also 95%, like a FONCE.

Obligated Member Entity Exemption

The Obligated Member Entity (OME) exemption is available for limited partnerships, limited liability partnerships, and limited liability companies. The application for exemption must be filed by the 15th day of the fourth month following the close of the entity’s taxable year. All members of the entity are fully liable for the entity’s debts, obligations, and liabilities. The entity must file documentation with the Tennessee Secretary of State (S.O.S.) as an Obligated Member Entity. The status of the entity with the Tennessee S.O.S can be checked here: https://tncab.tnsos.gov/business-entity-search. The Tennessee S.O.S. requires documentation be submitted for entities filing as an Obligated Member Entity. The specific documentation differs depending on entity type. The same documentation filed with the Tennessee S.O.S. to become registered as an OME must be submitted as an attachment to Form FAE 183.