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:
-
General partnership
-
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:
-
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.