Reasonable real estate rent expense deducted for federal income tax purposes is likewise deductible for the Tennessee excise tax. Reasonable rent does not exceed 2% per month of the appraised value of the property. Federally deducted rent in excess of reasonable rent is reported as an add-back on excise Schedule J, Line 13.
For example, rent of $13,000 per month ($156,000 per year) is deducted on a federal income tax return. If the property’s appraised value for property tax purposes is $500,000, only $120,000 would be deductible for excise tax purposes. Reasonable rent per month is $10,000 [$500,000 x 2%], and the monthly amount in excess of reasonable rent is $3,000 [$13,000 - $10,000]. The amount reported on Schedule J, Line 13 is $36,000 [$3,000 x 12].