Update on Rule Changes for the Texas Passive
Entity Exemption
Summary
On December 25, 2009, the Texas Comptroller of Public Accounts adopted final amendments to Rule 3.582 (34 Tex. Admin. Code § 3.582). These amendments did not include certain proposed changes that would have restricted taxpayers’ ability to qualify for passive entity treatment. With these lingering uncertainties resolved, taxpayers may now implement passive entity planning with increased confidence (at least until the next legislative session). By properly utilizing the passive entity exemption, taxpayers may be able to significantly reduce their Texas franchise tax liability.
Passive entities, as defined by Tex. Tax Code § 171.0003, are not subject to Texas franchise tax. In general, an entity qualifies as a passive entity if (1) the entity is a partnership or trust (other than a business trust); (2) at least 90 percent of the entity’s federal gross income for the tax period includes certain types of passive income (e.g., dividends, interest, distributive shares of partnership income, gain from the sale of securities); and (3) not more than 10 percent of the entity’s federal gross income is derived from conducting an active trade or business.
To read the entire update, please click here.
IRS Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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