Labor Day

Quick Start for:

Franchise Tax
Frequently Asked Questions

Guidance on the Transition Provisions of House Bill 1207 and House Bill 3928, Section 35


Below you will find answers to numerous questions that we have been asked regarding the termination of partnerships before July 1, 2007.

In dealing with transition issues (i.e., changing from taxable capital and earned surplus to the margin calculation), we will look to the legal formation of an entity. The results below apply regardless of how the entity is treated (e.g. as a partnership or as a disregarded entity) for federal tax purposes. We will also continue to follow our policy that an entity converting into another entity will be a continuation of the original entity.

Example 1 - A limited partnership converts before July 1, 2007, into a new corporation or limited liability company.

Result - The post-conversion entity will file an annual report on May 15, 2008, using the margin calculation. The post-conversion entity will include in its calculation of margin the activity of both the pre-conversion and post-conversion entity for the period upon which the report is based. In other words, if the entity is a calendar year taxpayer for federal tax purposes then the activity for both the pre-conversion and post-conversion entity for the entire calendar year 2007 should be included on the 2008 annual report.

Example 2 - A limited partnership merges into a newly formed corporation or limited liability company before July 1, 2007.

Result - The limited partnership will not file a final franchise tax report. The newly formed corporation or limited liability company will be subject to franchise tax based on the margin calculation from the date of formation. It will file an initial franchise tax report as prescribed by Tax Code 171.1532.

Example 3 - A limited partnership merges before July 1, 2007, into an existing corporation or limited liability company where the surviving entity did not have nexus for Texas franchise tax prior to the merger.

Result - The limited partnership will not file a final franchise tax report. The corporation or limited liability company will be subject to franchise tax based on the margin calculation from its first date of business in Texas. It will file an initial franchise tax report as prescribed by Tax Code 171.1532.

Example 4 - A limited partnership merges before July 1, 2007, into an existing corporation or limited liability company and the surviving entity had nexus for Texas franchise tax prior to the merger.

Result - The limited partnership will not file a final franchise tax report. The surviving entity will not include in its calculation of margin the activity of the non-survivor for the period prior to the merger.

Example 5 - A limited partnership merges into a general partnership owned directly and entirely by natural persons before July 1, 2007.

Result - The general partnership will be considered a continuation of the limited partnership. However, since the general partnership is owned directly and entirely by natural persons, it is not a taxable entity. The limited partnership will not file a final franchise tax report. The general partnership does not file a 2008 franchise tax report as it is not a taxable entity.

Example 6 - A limited partnership owned by natural persons merges into a limited liability company newly formed by the partners of the limited partnership before July 1, 2007.

Result - The limited partnership will not file a final franchise tax report. The newly formed limited liability company will be subject to franchise tax based on the margin calculation from the date of formation. It will file an initial franchise tax report as prescribed by Tax Code 171.1532.

Example 7 - A limited partnership is owned by two corporations. The partnership and both partners are part of a combined group of affiliated taxpayers. Before July 1, 2007, the limited partnership merges into a newly formed limited liability company that is owned by a corporate member of the combined group.

Result - The limited partnership will not file a final franchise tax report. The activity of the limited partnership prior to the merger is not included in the combined group's 2008 franchise tax report.

Example 8 - A limited partnership is owned by two corporations. The partnership and both partners are part of a combined group of affiliated taxpayers. Before July 1, 2007, the general partner merges into the limited partner and immediately following the merger the partnership is liquidated into the limited partner.

Result - The limited partnership will not file a final franchise tax report. The activity of the limited partnership prior to the liquidation is not included in the combined group's 2008 franchise tax report.

Example 9 - A limited partnership owned by two partners merges into another limited partnership newly formed by the same partners before July 1, 2007.

Result - The surviving partnership will be considered a continuation. The non-survivor will not file a final franchise tax report. The surviving partnership will file an annual report on May 15, 2008, using the margin calculation. The surviving partnership will include in its calculation of margin the activity of both the non-survivor and the surviving partnership for the period upon which the report is based.

Account and Report Information - Questions and Answers

1. My business, a limited partnership, is now subject to the franchise tax. How do I get a taxpayer number?
All "newly taxable entities" that are registered with the Texas Secretary of State's office, such as limited partnerships, limited liability partnerships, and professional associations, have been added to the Comptroller's records. A taxpayer number was assigned at that time and mailed to the address on file with the Secretary of State. You can search our records by entity name, tax ID number or Secretary of State file number at http://ecpa.cpa.state.tx.us/coa/Index.html.

Taxable entities that are not registered with the Texas Secretary of State, such as general partnerships, should complete the Texas Business Questionnaire (for Texas entities) or the Texas Nexus Questionnaire (for non-Texas entities.) A taxpayer number will be included with our response. (Updated 04/23/08)

2. When are the first reports due under the revised franchise tax?
To accommodate implementation of the new computer system that is needed for the revised franchise tax, taxpayers with initial reports originally due from January 1 through April 30 were automatically extended to May 1, 2008. These taxpayers will not have the option of filing the initial report electronically.

However, the original due date of the initial report should be used to determine the accounting period on which the report is based. The accounting period end date on an initial report must be at least 60 days before the original due date. For example, assume a corporation formed on October 20, 2006, has an initial report originally due on January 17, 2008. The due date for this initial report is extended to May 1, 2008. If the corporation has a December 31 accounting year end, the corporation uses December 31, 2006, as the ending date for the report, since December 31, 2007, is not 60 days before the original date of January 17, 2008.

3. What form does a non-Texas corporation or LLC use to file a final report if it ended its existence in its home state prior to 11/02/07?
A final report is due 60 days after the entity ceases doing business in Texas. For a final report due prior to January 1, 2008, as is the case in this situation, you must use the Final Texas Franchise Tax Report Form 05-139.
4. What are the rules for an entity, such as a limited partnership, that would have become subject to the franchise tax on 1/1/08 but ended its existence before that date?
If the entity ended its existence after 06/30/07 but before 01/01/08, they must file a final report based on the margin calculation. The date the entity ceased to exist is the accounting period ending date. The entity should file the appropriate form - E-Z Calculation, No Tax Due, or Long Form - and write "Transition Final" at the top of the report. (Updated 03/31/08)
5. When can I file my franchise tax report electronically?
WebFile is available now for filing extensions, making extension payments and filing No Tax Due reports. The system will be expanded to allow electronic filing and payments for all franchise tax reports by May 1, 2008. (Updated 04/23/08)

Exemptions - Questions and Answers

1. Does an entity which is currently exempt from the franchise tax have to re-apply for exemption under the revised tax?
An organization that is currently exempt from the Texas franchise tax will continue to be exempt under the revised franchise tax. There is no need to re-apply for exemption. An organization currently exempt can verify its exemption online at http://window.state.tx.us/taxinfo/exempt/exempt_search.html. (Updated 3/18/08)

Extensions - Questions and Answers

1. Will entities being taxed for the first time be allowed to use the 100% of tax due option in requesting an extension?
The 100% of tax due option is only available to those entities that have previously filed franchise tax reports. As a result, newly taxable entities will be required to remit at least 90% of the tax that will be due on the 2008 report to have a valid extension of time to file.

Combined Reporting - Questions and Answers

1. If an entity is a member of a combined group 2008 report, does that change the filing requirements for a 2007 initial or annual report?
Initial and annual franchise tax reports originally due in 2007 under the prior franchise tax law should have been filed for each separate corporation and LLC, regardless of whether the entity is a member of a 2008 combined group report. The 2008 combined group report should not include the accounting period of a member that was previously reported on a 2007 franchise tax report.
Example: A member of a combined group filed its 2007 initial report, due September 28, 2007, based on the accounting period July 1, 2006 to March 31, 2007. The combined group's accounting period for the 2008 annual report is fiscal year October 1, 2006 through September 30, 2007. The combined group report should only include April 1, 2007 through September 30, 2007 for the member.

Credits - Questions and Answers

1. How do I preserve the right to take the Temporary Credit for Business Loss Carryforwards?
An eligible taxable entity must preserve its right to take the credit on or before the due date of its 2008 franchise tax report on a form prescribed by the Comptroller. The preservation form is available on our Web site (PDF, 102K).
2. How far back can a business go to claim a credit for the business loss carryforward?
The credit is based on business loss carryforwards that were created on the 2003 and subsequent franchise tax reports that were not exhausted or expired on a report due before January 1, 2008.
Required Plug-ins