Tuesday, July 6, 2010

Under What Circumstances are Texas Businesses Required to Pay Franchise Taxes?

A business that is considered a taxable entity is required to pay a state franchise tax if it is a partnership, limited liability partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, holding company, or other legal entity.

A business that is not considered a taxable entity does not have to pay a state franchise tax if it is a sole proprietorship, or a general partnership that is directly and solely owned by natural persons, unless it is a limited liability partnership. (A natural person is a human being as opposed to a legal entity, such as a corporation, limited liability company, partnership or trust.) Also, a business is not a taxable entity if it is an exempted or passive entity as defined by the Texas Tax Code. Exemptions from federal taxation may also be granted under Internal Revenue Code (IRC) Section 501(c) (2), (3), (4), (5), (6), (7), (8), (10), (16), (19) or (25). If your business has not received this federal exemption, it may still qualify for exemption from the franchise tax. For more information about whether your business is exempted, visit the Texas Comptroller of Public Accounts website. (http://www.window.state.tx.us/taxinfo/franchise/)

A business is a passive entity if it is a general or limited partnership, it does not receive more than 10 percent of its federal gross income from conducting an active trade or business, and at least 90% of the entity's federal gross income comes from specified passive sources such as dividends, interest, income from a limited liability company, distributive shares of partnership income, gains from the sale of property, commodities, and securities, and royalties, bonuses, or delay rental income from mineral properties and income from other non-operating mineral interests.

Trusts (except business trusts) and estates of natural persons are not considered taxable entities. More information, such as due dates, rates, discounts, forms, and other important details can be found at the Texas Comptroller of Public Accounts website listed above.

***This article was prepared by Sarah Raley,
and edited by Chloe Love.