Tennessee is best known for having no personal income tax, but its business taxes are more substantial than that reputation suggests. Most businesses, including LLCs, pay a 6.5% excise tax on net earnings and a 0.25% franchise tax on net worth. A separate business tax applies to gross receipts, and the sales tax averages more than 9.5%, among the highest in the country.
This guide covers Tennessee's business taxes for 2026, with worked examples and comparisons with its eight neighbors.
Tennessee business taxes at a glance
A Tennessee corporation or LLC pays 6.5% on net earnings and 0.25% of net worth, with a $100 minimum franchise tax. Owners pay no personal income tax on wages or distributions. Most businesses also pay the state and local business tax on gross receipts, at small fractions of a percent. Customers pay a combined sales tax averaging 9.61%. LLCs pay at least $300 to form and $300 a year for annual reports, among the highest LLC fees in the country. Sole proprietors and general partnerships avoid franchise and excise taxes altogether.
Excise and franchise taxes
| Tax | Rate | Base |
|---|---|---|
| Excise tax | 6.5% | Net earnings apportioned to Tennessee |
| Franchise tax | 0.25% ($100 minimum) | Net worth apportioned to Tennessee |
- Who pays: Corporations, LLCs, limited partnerships, LLPs and business trusts. Single-member LLCs owned by a corporation are included in the parent's return; other single-member LLCs pay their own.
- Exemptions: Sole proprietorships, general partnerships and some family-owned noncorporate entities whose income is mostly passive.
- Property measure repealed: From 2024, the franchise tax is based only on net worth. The previous minimum measure based on real and tangible property was repealed, and the state issued refunds for prior years.
- Apportionment: Single sales factor phased in for most taxpayers by 2025.
- Returns: Form FAE 170 is due on the 15th day of the fourth month after year-end.
Personal income tax
Tennessee has no personal income tax. Wages, salaries and business distributions are not taxed at the state level, and the Hall income tax on interest and dividends ended in 2021.
- Sole proprietors pay no state income tax on profit.
- LLC members pay no personal income tax, but the LLC itself pays excise tax.
- S corporation shareholders pay no personal tax, but the S corporation pays franchise and excise taxes.
Business tax
| Classification | Typical state rate |
|---|---|
| Retailers and some services | 0.1% to 0.1875% |
| Wholesalers | 0.0375% to 0.1% |
| Contractors and service providers | Up to 0.3% |
Cities and counties levy the business tax at similar rates. Businesses with less than $100,000 of gross receipts in a jurisdiction are exempt, and those with $3,000 to $100,000 buy a minimal activity license.
Sales and use tax
| Component | Rate |
|---|---|
| State sales tax | 7% |
| Groceries | 4% state |
| Local taxes | Up to 2.75% |
| Average combined rate | About 9.61% |
- Single-article cap: Local tax applies only to the first $1,600 of a single item, and an additional state single-article tax of 2.75% applies to the portion of the price from $1,600.01 to $3,200.
- Services: Some services, including repair, installation and telecommunications, are taxable.
- Remote sellers with more than $100,000 of Tennessee sales must collect.
Payroll and property taxes
- Unemployment insurance: Employers pay on the first $7,000 of each employee's wages.
- Property tax: Commercial and industrial real property is assessed at 40% of value, and business tangible personal property at 30%. Rates are set by counties and cities.
Forming a business in Tennessee: fees and ongoing costs
| Item | LLC | Corporation |
|---|---|---|
| Formation filing fee | $50 per member ($300 min, $3,000 max) | $100 |
| Annual report | $50 per member ($300 min, $3,000 max) | $20 |
| Franchise tax minimum | $100 | $100 |
| Registered agent | Required | Required |
Worked example: $500,000 of profit
| Step | Amount |
|---|---|
| Taxable income | $500,000 |
| Tennessee excise tax at 6.5% | $32,500 |
| Federal tax at 21% on $467,500 | $98,175 |
| Total income tax | $130,675 (26.1%) |
A business with $400,000 of net worth would add $1,000 of franchise tax. For an LLC owner with $150,000 of profit, the owner pays no personal income tax, but the LLC itself pays about $9,750 of excise tax plus franchise tax. A sole proprietor with the same profit would pay neither.
How Tennessee compares with its neighbors
| State | Corporate rate | Top personal rate | State sales tax |
|---|---|---|---|
| Tennessee | 6.5% excise | None | 7% |
| Kentucky | 5% | 3.5% | 6% |
| Virginia | 6% | 5.75% | 5.3% |
| North Carolina | 2% | 3.99% | 4.75% |
| Georgia | 4.99% | 4.99% | 4% |
| Alabama | 6.5% | 5% | 4% |
| Mississippi | 5% | 4% | 7% |
| Arkansas | 4.3% | 3.9% | 6.5% |
| Missouri | 4% | 4.7% | 4.225% |
Tennessee's lack of a wage tax makes it attractive for high earners and employees. For LLCs, though, the 6.5% excise tax is higher than the personal income tax many owners would pay in neighboring states. Tennessee's sales tax is also the highest in the region.
Choosing an entity in Tennessee
- Sole proprietorship or general partnership: No franchise or excise taxes and no personal income tax, but no liability protection.
- LLC: Liability protection, but subject to 6.5% excise tax, franchise tax and high annual fees.
- S corporation: Pays franchise and excise taxes despite being a pass-through federally.
- C corporation: Same 6.5% plus 21% federally.
Tennessee is one of the few states where the choice between a sole proprietorship and an LLC has a large state tax cost. A general partnership with LLP-style insurance or an umbrella policy can be cheaper, but owners should weigh liability exposure carefully.
Tennessee taxes by business type
Remote employees and executives. Because wages are untaxed, Tennessee is attractive for employees and executives. A company headquartered elsewhere that hires Tennessee residents doesn't need to withhold state income tax for them.
Small LLCs. A two-member LLC pays at least $300 a year in annual report fees plus the $100 minimum franchise tax, even with little income. Over several years, that's significantly more than in most states.
Retailers. Retailers collect the highest average sales tax in the country and pay the business tax on gross receipts. Groceries are taxed at a reduced rate, but still taxed.
Music and entertainment. Nashville's music industry benefits from no wage tax for artists and employees, and the state offers film and television incentives through grants.
Doing business across Tennessee
Nashville is the state's fastest-growing metro area, with health care, music, technology and corporate relocations. Memphis is a major logistics hub, home to FedEx's global headquarters, and Knoxville and Chattanooga have strong manufacturing and energy sectors, including automotive plants. Bristol and Clarksville border Virginia and Kentucky, where residents commuting into Tennessee pay their home state's income tax.
Tax planning tips for Tennessee businesses
Consider the entity choice carefully. If liability risk is low, a sole proprietorship or general partnership avoids franchise and excise taxes. For higher-risk businesses, the LLC's protection is usually worth the tax.
Check the family-owned noncorporate exemption. Entities that are at least 95% family-owned and earn at least 66.67% passive income, such as rental real estate holding companies, can be exempt.
Claim job tax credits. Tennessee offers credits against franchise and excise taxes for businesses that create jobs and make qualified investments, with enhanced credits in economically distressed counties.
Recent changes for 2025 and 2026
- Franchise tax property measure repealed from 2024, with refunds issued for open tax years.
- Single sales factor apportionment phased in for most businesses.
- Grocery sales tax holidays have been used in recent years.
Is Tennessee a good state for business?
Advantages
- No personal income tax on wages or business income
- Strong logistics, health care and manufacturing sectors
- Franchise tax simplified with the property measure repealed
Drawbacks
- 6.5% excise tax applies to LLCs
- Among the highest sales taxes in the country
- High LLC filing and annual report fees
- Gross receipts business tax
Compliance checklist
- File Articles of Organization or Incorporation with the Secretary of State.
- Register with the Department of Revenue through TNTAP for franchise and excise, sales and business taxes.
- Register with the Department of Labor and Workforce Development for unemployment insurance if you hire.
- File the annual report each year.
- File Form FAE 170 and business tax returns each year.
Compare Tennessee with its neighbors below or estimate your taxes in the United States calculator. See LLC taxes for more.