Tax Insight

Tennessee expands family-owned entity exemption ownership rules for franchise and excise tax

Insight
5 minute read
May 19, 2026

What happened?

On April 6, SB1910 was enacted, which amended the definition of “family-owned” for purposes of the family-owned noncorporate entity (FONCE) exemption under Tenn. Code Ann. § 67-4-2008(a)(11). The change, which takes effect on July 1, 2026, broadens and clarifies which owners may be counted toward the 95% family-ownership threshold by expressly recognizing ownership held by qualifying relatives, trusts for their benefit, and estates of deceased qualifying relatives. It also updates the definition of “relative” to more clearly include certain spouse, former spouse, and lineal descendant relationships.

Why is it relevant?

The FONCE exemption can eliminate Tennessee franchise and excise tax for qualifying entities, which have gross receipts derived from passive investment income (such as rents from farm or residential property, royalties, dividends, or interest) or a combination of passive income and farming.

For closely held family limited liability companies (LLCs), limited partnerships (LPs), and limited liability partnerships (LLPs), eligibility often depends on technical ownership rules, and this amendment makes those rules more accommodating to common family succession and ownership structures. As a result, some entities may newly qualify, while others may be in a stronger position to maintain and substantiate exemption status. The change is especially important for entities that hold assets or generate income through trusts, estates, or more complex family relationships.

Actions to consider

Entities that currently claim, or may be eligible to claim, the exemption should review their ownership structure in light of the revised definition. That review should focus on whether interests held by trusts, estates, former spouses, or descendants connected through spouse or former-spouse relationships can now be counted toward the 95% family-ownership threshold.