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Recent FONCE Exemption Limitations
June 30, 2009
By: W. King Copler
Governor Bredesen signed SB2318, also known as the “Technical Corrections Bill” for the current year. SB2318 was passed by the Tennessee legislature on June 19.
On June 25, 2009, Governor Bredesen signed SB2318, also known as the “Technical Corrections Bill” for the current year, which was passed by the Tennessee legislature on June 19. A last-minute amendment was tacked onto this bill to update the exception for the Tennessee franchise and excise (F&E) tax for family-owned non-corporate entities (FONCEs).
FONCEs are 95% family-owned entities that receive substantially all of their income from passive sources. Until recently, rents from essentially any source were included in the passive income requirement. However, with the passage of this new bill, rents received from farm property used primarily for recreational purposes, residential property that includes more than four residential units, industrial property, and commercial property are no longer included in the passive income requirement. Therefore, beginning July 1, 2009, many FONCEs that were collecting rents from these sources will no longer be exempt from the Tennessee F&E tax.
In order to preserve this exemption, FONCEs using rents to meet the passive income requirement may elect unlimited liability or apply for exemption under another applicable section. For advice on the consequences of this new tax bill on your FONCE, or for help changing or updating your F&E exempt status, please contact W. King Copler at (423) 757-0269 or kcopler@cbslawfirm.com.