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. 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 excess rent amount reported on Schedule J, is $36,000 [$3,000 x 12].
A penalty may be assessed for failure to report the required add-back. The reasonable rent limitation does not apply to personal property rents or rents paid to nonaffiliated parties.
Reference: Tenn. Code Ann. §§ 67-4-2004(1); 67-4-2006(b)(1)(N).