Tennessee Department of Revenue Clarifies Treatment of SMLLCs

Firm Alert

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The Tennessee Department of Revenue has issued Notice 13-16 to clarify the tax treatment of SMLLCs owned by entities checking the box to be treated as corporations for federal tax purposes.

Tennessee is a separate return state, but Tennessee Code Annotated Section 67-4-2003 provides that “limited liability companies owned 100% by corporations” are disregarded for Tennessee franchise and excise tax purpose. There has been some debate as to whether a limited liability company that “checked the box” to be treated as a corporation was a “corporation” for purposes of § 67-4-2003. The Department was advising some taxpayers that only LLCs owned by corporations formed under state law were disregarded for franchise and excise tax purposes, but other taxpayers were receiving conflicting guidance from the department that an LLC owned by another LLC that checked the box to be treated as a corporation for federal tax purposes was also disregarded for Tennessee franchise and excise tax purposes.

The department originally clarified its position and concluded that LLCs checking the box to be treated as “corporations” for federal tax purposes were not “corporations” under state law, thereby requiring a separate return for the owned LLC in the scenario referenced above.

Notice 13-16 reverses this prior guidance and provides that federal tax law will govern how an LLC is treated for purposes of § 67-4-2003. Thus, if an LLC is owned 100% by an LLC that is treated as a corporation for federal tax purposes, then the owned LLC will be disregarded under Tennessee franchise and excise tax law.

Taxpayers that filed a return for an entity that should have been disregarded should consider whether amended returns should be filed to claim a refund of franchise and excise tax paid. If the filing of a separate return resulted in less franchise and excise tax due, then amended returns are not required. However, the department has indicated that it will issue refunds if entities should have been disregarded under the revised guidance.