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:
Limited partnership (LP)
Trust, other than a business trust
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:
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.
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