Tennessee Rejects Federal Changes to Interest Tax Deduction

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Andrew M. Ballard

Gov. Bill Haslam (R) has signed legislation that will decouple Tennessee from new federal interest deduction changes.

The state won’t follow federal tax provisions that set new limits on business interest tax deductions beginning in 2020 under a bill ( S.B. 2119) Haslam signed May 21. The new law also decouples from provisions that would tax certain state economic development grants.

Business groups had urged lawmakers and the governor to decouple the state from recent changes in federal law that could boost state tax collections from corporations. Tennessee doesn’t have a traditional income tax, so state taxpayers aren’t as affected by the 2017 federal tax act ( Pub. L. No. 115-97) as those in some other states.

Business Relief

However, Tennessee’s franchise and excise tax liability is calculated from a federal tax base, which was expanded through the 2017 changes.

Decoupling from interest limitations will save Tennessee businesses about $103.1 million in 2020, an amount that increases in subsequent years, said Bradley Jackson, president of the Tennessee Chamber of Commerce and Industry. The provision impacts a range of business sectors, including manufacturers, health care companies, and “anybody that has a lot of capital on their books,” he told Bloomberg Tax after the Legislature approved the bill in late April.

Georgia and Wisconsin are among the states that already have decoupled from the federal interest deduction provisions, and others are considering doing the same.

The federal changes related to taxing capital contributions and tax incentives would cost Tennessee companies about $200,000 during the current fiscal year and some $800,000 in subsequent years, Jackson said.

Haslam also recently signed into law a separate bill ( S.B. 2076) clarifying that aged whiskey barrels are exempt under the Tennessee Constitution as an article “manufactured of the produce of this state.”

To contact the reporter on this story: Andrew M. Ballard in Raleigh, N.C. at aballard@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

For More Information

Text of S.B. 2119 is at http://src.bna.com/yZD

The barrel tax exemption measure is at http://src.bna.com/ye8

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