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What Is a Passive Entity in Texas?

Texas Franchise Tax Exemptions

Many Texas business owners get stumped by this qualification question on the No Tax Due Report form: “Is this a passive entity as defined in Chapter 171 of the Texas Tax Code?” What does Texas law consider a passive entity? A passive entity is a partnership or trust that earns at least 90% of its income from certain passive sources.

Passive entities are exempt from paying Texas franchise tax and can file a No Tax Due Report. Businesses that earn less than $1.23 million a year in total revenue also file the No Tax Due Report, whether or not they qualify as passive entities. Passive entities also don’t need to file a Public Information Report or Ownership Information Report with the Comptroller. Below, we cover the requirements for passive entities in Texas.

What Qualifies as a Passive Entity?

Here are the qualifications for a passive entity, according to Texas tax law (34 Tex. Admin. Code §3.582):

1. Must be one of the following entity types:

2. At least 90% of federal gross income must come from these sources:

  • Dividends, interest, foreign currency exchange gain, option premiums, payments from a notional principal contract (NPC), cash settlements, or termination payments.

  • Income from a limited liability company (LLC).

  • Distributive shares of partnership income.

  • Net capital gains for the sale of real property.

  • Net gains from the sale of commodities traded on the commodities exchange or from the sale of securities.

  • Royalties, bonuses or income from mineral interests.

Income that does not qualify includes:

  • Rental income.

  • Income from running an active business.

Can an LLC be a passive entity in Texas?

No. LLCs don’t qualify as passive entities under Texas law. However, if an LLC converts to a limited partnership and meets the income requirements, it can qualify as a passive entity once it has been a partnership for an entire tax year.

Learn how to form a limited partnership in Texas.

Tax and Reporting Requirements for Passive Entities

A passive entity doesn’t have to pay Texas franchise tax. However, limited partnerships and limited liability partnerships that qualify as passive entities still need to submit a No Tax Due Report. To file the No Tax Due Report, you’ll need to log into your Webfile account (or create an account if you don’t have one) and select “File a No Tax Due Information Report.” This report must be filed online.

Passive entities aren’t required to file a Public Information Report or Ownership Information Report with the Comptroller. But if you have a limited partnership, you’ll still need to file a Periodic Report with the Secretary of State.

Want help with your Texas Franchise Tax Report? Sign up for a free account and get access to our entire legal forms library, including all the state forms for doing business in Texas you’ll ever need. Plus, our expert Corporate Guides® are there to answer your questions or file your report for you for a fee.

This entry was posted in Opinion.