Tennessee has no personal income tax — the Hall Tax on investment income was fully repealed effective 2021 — so sole proprietors reporting STR income on federal Schedule E take the full §168(k) deduction with zero state modification. However, Tennessee's Franchise & Excise (F&E) Tax under Tenn. Code Ann. Title 67, Chapter 4 applies to LLCs, LPs, LLPs, and corporations doing business in Tennessee. For F&E Tax purposes, Tennessee decouples from §168(k) — bonus depreciation must be added back and standard MACRS is taken over the property's normal life at the 6.5% Excise Tax rate. Compare Tennessee to every other jurisdiction in our all-50-states conformity guide.
Modeled on a $150,000 federal §168(k) deduction. Sole-prop figures apply to Schedule E filers.
Why Entity Structure Decides the Tennessee Answer
Tennessee's tax framework is unusual: it imposes no personal income tax on wages, investment income, or rental income for individuals — the Hall Tax on interest and dividends was fully repealed effective 2021, leaving Tennessee alongside Florida, Texas, and the other no-personal-income-tax states for sole proprietors. But Tennessee does levy a Franchise & Excise (F&E) Tax on formal business entities under Tenn. Code Ann. Title 67, Chapter 4.
That split creates a real decision point for STR investors: how you hold the property determines whether you take a state-level bonus depreciation add-back.
Sole proprietor holding on Schedule E — no F&E Tax, no state return, no add-back. Federal §168(k) preserved in full.
Single-member LLC (disregarded for federal, taxable entity for TN F&E) — subject to F&E Tax. Federal bonus depreciation must be added back on the Excise Tax return. Tennessee depreciation is taken over the property's normal MACRS life at the 6.5% Excise Tax rate.
Multi-member LLC, LP, LLP, S-corp, or C-corp — same F&E Tax treatment as the SMLLC. Add-back required.
This is functionally the same choice STR investors face in other decoupled entity-tax states, but Tennessee is unusual because the answer for individuals (Schedule E) is completely different from the answer for entities (F&E Tax). See how California or Iowa handle the same question — those states decouple universally at the individual level too.
How the Tennessee F&E Add-Back Works — Tenn. Code Ann. Title 67 Ch. 4
Tennessee's Excise Tax is a 6.5% tax on the net earnings of entities doing business in Tennessee. The starting point is federal taxable income; from that, Tennessee requires a series of adjustments including a mandatory add-back of federal §168(k) bonus depreciation. Tennessee depreciation is then taken over the property's standard 5/15/27.5-year MACRS life without bonus, functioning as a subtraction modification in each subsequent year.
Mechanically, the STR investor operating through an LLC claims the full federal §168(k) bonus on Schedule E of the federal return, then computes an Excise Tax adjustment on Tennessee Form FAE 170 that adds the bonus amount back and takes only the standard MACRS deduction. The Franchise Tax (separate from the Excise Tax, 0.25% on net worth or apportioned tangible property, whichever is greater) is not directly affected by depreciation but rides along on the same return.
The Tennessee Department of Revenue's FAE 170 instructions cover the mechanics. The add-back applies to all §168(k) bonus, including the 100% bonus restored under OBBBA (P.L. 119-21) for property placed in service after January 19, 2025.
Worked Example — $150,000 Federal Deduction on a Pigeon Forge Cabin
Assume an STR investor buys a fully-furnished 4-bedroom Pigeon Forge cabin with hot tub, game room, and mountain view deck, closes 2026, and identifies $150,000 in bonus-eligible 5-year and 15-year assets through a photo-analyzed cost-segregation report.
| Line | Federal | Sole Prop / Schedule E | Held in TN LLC |
|---|---|---|---|
| Year 1 §168(k) deduction | $150,000 | $150,000 (no state return) | $0 (100% add-back on FAE 170) |
| Year 1 state tax at TN 6.5% Excise | — | $0 | ~$9,750 additional Excise Tax owed |
| Year 1 total tax savings | $55,500 (federal @ 37%) | $55,500 | $45,750 net of TN F&E hit |
| Years 2 through end of MACRS life | — | — | Excise Tax subtractions reverse the timing hit |
The Year-1 delta between sole prop and LLC is ~$9,750 in Tennessee Excise Tax. That is a timing difference, not a permanent loss — Tennessee depreciation catches up to federal across the MACRS life. But for a Smokies STR investor deploying capital across a portfolio of cabins, the up-front Excise Tax hit compresses cash flow in Year 1 and should be modeled explicitly. Run the address on your specific property to see the exact bonus-eligible number under either structure.
Tennessee STR Markets Where Bonus Depreciation Compounds Fastest
Tennessee is home to one of the top three STR markets in the country, plus several fast-growing secondary markets. Bonus depreciation compounds fastest where personal-property and land-improvement share of purchase price is highest:
The Gatlinburg / Pigeon Forge / Sevierville / Wears Valley / Townsend corridor (Smoky Mountains) — this is the highest-density STR market in Tennessee and among the top three nationally. Purpose-built cabin properties with hot tubs, game rooms, home theaters, wraparound decks, mountain-view fire pits, and full FF&E commonly run 30–36% bonus-eligible on purchase price. A $650k Pigeon Forge cabin frequently produces a Year-1 write-off in the $195k–$234k range at the federal level.
Nashville (East Nashville, 12 South, Germantown, The Nations) — STR-permitted properties (Non-Owner-Occupied Type 2 permits) run 28–32% bonus-eligible when fully furnished. Land ratio in central Nashville is higher than in the Smokies, so pure land eats a bigger share of purchase price — modeling matters more here.
Chattanooga (Riverfront, North Shore, Southside) — 26–30% bonus-eligible on furnished properties. Growing STR permit availability but tighter regulation in downtown zones.
Norris Lake and Watts Bar Lake waterfront STRs — 30–34% bonus-eligible when the dock, boat lift, seawall, outdoor kitchen, and lakeside deck are included. The 15-year land-improvement bucket is unusually large on lake properties.
Knoxville (Old City, Downtown, Bearden) — 26–30% on furnished STRs, similar to Nashville's mid-range corridors.
Townsend, Cosby, and the Wears Valley overflow markets exhibit the same 30–35% pattern as the core Smokies corridor, at typically lower purchase prices. This is exactly the property profile where DepreciMax's photo-analyzed report catches the amenity-driven differences between an assumed 25% and an itemized 34% bonus-eligible share — often $50k–$100k of Year-1 write-off on a $900k Smokies purchase.
The Statute Explained
Tennessee's tax framework has two independent layers relevant to STR investors. Individual income was covered by the Hall Tax (Tenn. Code Ann. §67-2-101 et seq.) on interest and dividends, but that tax was phased out over six years and fully repealed effective January 1, 2021. Wage income, rental income, and gain on sale have never been subject to Tennessee individual income tax.
Entity-level income is taxed under the Franchise & Excise (F&E) Tax in Tenn. Code Ann. Title 67, Chapter 4. The Excise Tax component is 6.5% on net earnings; the Franchise Tax component is 0.25% on net worth or apportioned tangible property (whichever is greater), with a $100 minimum. F&E applies to corporations, LLCs, LPs, LLPs, LLLPs, business trusts, and REITs doing business in Tennessee. Sole proprietorships and general partnerships are not subject.
Tennessee's decoupling from §168(k) has been in place through every iteration of federal bonus depreciation since 2002. OBBBA (P.L. 119-21) restored 100% federal bonus for property placed in service after January 19, 2025, and Tennessee's F&E add-back applies to the restored deduction just as it applied to prior versions of §168(k).
How Tennessee Compares to Other Semi-Conforming States
Tennessee sits in an unusual middle position. On the individual side, Tennessee lines up with the eight other no-personal-income-tax states — the full federal §168(k) deduction flows through with zero state modification for anyone reporting rental income on Schedule E.
On the entity side, Tennessee's 6.5% F&E Tax add-back is functionally similar to Florida's 5.5% corporate income tax decoupling — both states let individuals off the hook but tax formal entities on a modified state depreciation schedule. Florida's C-corp add-back with a 7-year recovery is a slightly different mechanic than Tennessee's straight-through MACRS recovery, but the practical effect is similar: a timing hit that reverses across the asset lifetime.
Use the state conformity tool to run Tennessee side-by-side with any other state and compare the sole-prop vs LLC result under a specific bonus deduction amount.
What This Means for Your Tennessee STR Purchase Decision
For an STR investor evaluating a Pigeon Forge cabin, a Nashville East Side rowhouse, or a Norris Lake waterfront property, the Tennessee analysis depends on entity choice. Three takeaways:
First, the federal Year-1 bonus deduction is fully preserved regardless of entity choice. On a $150,000 federal bonus, you always keep the $55,500 federal Year-1 savings at 37%.
Second, entity choice materially affects the Year-1 state result. Sole proprietor: zero Tennessee tax. Held in an LLC: approximately $9,750 in Tennessee Excise Tax owed in Year 1 on the $150,000 add-back at the 6.5% rate. That is real cash out the door in Year 1, even though it reverses over the MACRS life.
Third, the tradeoff between sole prop and LLC is not purely tax-driven. LLCs provide asset protection, financing flexibility, and estate planning benefits that most STR investors intentionally pay for even with the Tennessee F&E cost. Your CPA can price the F&E cost as part of the entity decision — but knowing it exists lets you plan for it rather than get surprised.
Before writing an offer on any Tennessee STR placed in service after January 19, 2025, run the address to get a line-item breakdown of the bonus-eligible share — the difference matters for both the federal and the Tennessee F&E numbers.
Analyze a specific Tennessee property
Run any Tennessee STR listing through DepreciMax's $99 property report — line-item finish classification closely calibrated to a formal cost seg study, includes state-specific conformity math.
Frequently Asked Questions
Does Tennessee conform to federal §168(k) bonus depreciation?
Split answer. Tennessee has no wage income tax (the Hall Tax on investment income was fully repealed effective 2021). But Tennessee's Franchise & Excise (F&E) Tax under Tenn. Code Ann. Title 67, Chapter 4 does apply to LLCs, LPs, LLPs, corporations, and other formal entities doing business in Tennessee. For F&E Tax purposes, Tennessee decouples from §168(k) — bonus depreciation must be added back on the Excise Tax return and Tennessee depreciation is taken over the property's normal MACRS life without bonus.
If I hold my Pigeon Forge cabin as a sole proprietor, do I owe Tennessee state tax on bonus depreciation?
No. Sole proprietors reporting STR income on federal Schedule E are not subject to Tennessee F&E Tax, and Tennessee has no personal income tax on wages or rental income. The federal §168(k) deduction flows through with zero state modification. Only STR properties held in a formal entity — single-member LLC, multi-member LLC, partnership, S-corp, or C-corp — trigger the F&E Tax add-back.
Does the Tennessee F&E Tax add-back apply to my single-member LLC?
Yes. Even though a single-member LLC is disregarded for federal tax purposes, Tennessee treats an LLC as a separate taxable entity for F&E Tax. That means an individual who forms an LLC to hold a Gatlinburg or Nashville STR will file the F&E Tax return, add back federal §168(k) bonus, and take Tennessee depreciation without bonus at the 6.5% Excise Tax rate.
What's the Year-1 F&E Tax cost of the §168(k) add-back on a $150,000 deduction?
Approximately $9,750 in additional Tennessee Excise Tax owed in Year 1 (6.5% × $150,000 add-back). This is a timing difference, not a permanent loss — Tennessee allows standard MACRS depreciation over the 5, 15, and 27.5-year property lives, so the add-back reverses across the asset lifetime.
Which Tennessee STR markets benefit most from the 100% bonus restored under OBBBA?
The Gatlinburg / Pigeon Forge / Sevierville / Townsend / Wears Valley corridor is the largest STR market in the state and one of the top three nationally. Purpose-built cabin properties commonly run 30–36% bonus-eligible on purchase price. Nashville's furnished East Nashville and 12 South STR corridors run 28–32%. Chattanooga runs 26–30%. Norris Lake and Watts Bar Lake waterfront STRs run 30–34% when the dock, boat lift, and outdoor entertainment areas are included.
What's the Year-1 write-off on a $650,000 Pigeon Forge cabin under OBBBA?
Expect a federal Year-1 write-off of roughly $195,000 to $234,000 on a fully-furnished Smoky Mountains cabin at $650,000 purchase price, assuming a 30–36% bonus-eligible share. At a 37% federal marginal rate that is $72,000 to $87,000 in Year-1 cash tax savings federally. If held in a Tennessee LLC, the same investor faces a ~$12,700 to $15,200 Tennessee Excise Tax timing hit that reverses across the MACRS life.
Should I hold my Tennessee STR as a sole proprietor to avoid the F&E Tax?
The sole-proprietor structure avoids the F&E Tax add-back but sacrifices asset protection and can complicate insurance, financing, and estate planning. Most STR investors intentionally use an LLC despite the F&E Tax cost because the liability shield and lender preference outweigh a modest Year-1 timing difference. The best answer depends on your CPA's read of your specific situation.
Every state's §168(k) position, in one place
Interactive map, sortable table, and deep-dive guide for each of the 51 jurisdictions — post-OBBBA verified.
See the 50-state map →Tennessee authority: Tenn. Code Ann. Title 67, Chapter 4 (Franchise & Excise Tax); Tenn. Code Ann. §67-2-101 et seq. (Hall Tax, fully repealed effective 2021); Tenn. Comp. R. & Regs. 1320-06-01 (Excise Tax rules on depreciation adjustments); Tennessee Department of Revenue Franchise & Excise Tax guidance (tn.gov/revenue). Federal authority: IRC §168(k), as amended by the One Big Beautiful Bill Act (P.L. 119-21) restoring 100% bonus depreciation for property acquired and placed in service after January 19, 2025. Nothing in this article is tax advice. Consult a CPA who specializes in real estate before making investment decisions based on state-conformity projections.