Filing (or not) Using the Tiered Partnership Election
There has been much confusion among taxpayers and practitioners concerning the Tiered Partnership Election. The Tiered Partnership Election circle should not be blackened merely because an entity owns an interest in another entity that is treated as a partnership or S corporation for federal income tax purposes.
The Tiered Partnership Election, as allowed under Texas Tax Code §171.1015, is not mandatory; it is a filing option for entities in a tiered partnership arrangement. A tiered partnership arrangement is an ownership structure in which any of the interests in one taxable entity treated as a partnership or an S corporation for federal income tax purposes (a "lower tier entity") are owned by one or more other taxable entities (an "upper tier entity").
The tiered partnership provision allows the lower tier entity to pass its total revenue to the upper tier entities. The upper tier entities then report this passed revenue with their own total revenue. It is important to note that this provision does not allow the lower tier entity to pass its deductions for cost of goods sold or compensation to the upper tier entities.
As discussed in Rule 3.587(c)(8), the requirements for filing under the tiered partnership provision are:
- All taxable entities involved in the Tiered Partnership Election must file a franchise tax report, a Public Information Report (Form 05-102) or Ownership Information Report (Form 05-167), and the Tiered Partnership Report (Form 05-175).
- Both the lower and the upper tier entities must blacken the Tiered Partnership Election circle on their tax reports.
- Total revenue may be passed only to upper tier entities that are subject to the Texas franchise tax.
- Total revenue must be passed to taxable entities based on ownership percentage.
- Deductions (cost of goods sold or compensation) may not be passed to upper tier entities.
- The upper tier entities may file a No Tax Due report (Form 05-163) only if the lower tier entity has less than $300,000 in annualized total revenue before total revenue is passed to the upper tier entities.
- The upper tier entities may use the E-Z Computation (Form 05-169) only if the lower tier entity has $10 million or less in annualized total revenue before total revenue is passed to the upper tier entities.
- The upper tier entities may not take a discount greater than the discount that is allowed for the lower tier entity before total revenue is passed to the upper tier entities.
The franchise tax report forms, as well as the instructions for completing 2009 franchise tax reports, can be found in the Texas Franchise Tax Forms section of our Web site.