Finis Cowan, Attorney - CPA

Taxable Entities

Rule 3.581

1. What entities are subject to the franchise tax?

The revised franchise tax applies to partnerships (general, limited and limited liability), corporations, LLCs, business trusts, professional associations, business associations, joint ventures,  bankruptcy estates, and other legal entities. TTC 171.0002.

2. What entities are not subject to the revised franchise tax?

The revised franchise tax does not apply to:

• sole proprietorships (except the tax does apply to single member LLCs filing as a sole proprietor for federal income tax purposes);
• general partnerships directly and solely owned by natural persons (except the tax does apply to all limited liability partnerships);
• entities exempt under Subchapter B of Chapter 171; and
• passive entities (as defined under TTC 171.0003).

3. What is a passive entity?

An entity is considered passive if it is a general, limited or limited liability partnership, or a non-business trust and the entity's federal gross income during the period on which margin is based consists of at least 90% of the following income:

• dividends, interest, foreign currency exchange gain, periodic and nonperiodic payments with respect to notional principal contracts, option premiums, cash settlement or termination payments with respect to a financial instrument, and income from a limited liability company;
• distributive shares of partnership income to the extent that those distributive shares of income are greater than zero;
• net capital gains from the sale of real property, net gains from the sale of commodities traded on a commodities exchange, and net gains from the sale of securities; and
• royalties from mineral properties, bonuses from mineral properties, delay rental income from mineral properties and income from other non-operating mineral interests. TTC 171.0003(a)(2).

Rent is not considered passive income for the Texas franchise tax. TTC 171.0003(b). However, if an entity meets the criteria as a passive entity, the entity may qualify as passive even if the entity has some rental income. TTC 171.0003(b).

4. Can a limited liability partnership qualify as a passive entity?

Yes. General, limited and limited liability partnerships may qualify as a passive entity. TTC 171.0003(a)(1).

5. Can a limited liability company qualify as a passive entity?

No, only partnerships and trusts, other than a business trust, can qualify as a passive entity. TTC 171.0003(a)(1).

6. Is a passive entity the same for franchise tax as it is for federal tax?

No, the determination of a passive entity for franchise tax is not the same as that under the IRC.