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Texas State Comptroller Issues Guidance On Franchise Tax Transition Rules: A Potential Opportunity for Limited Partnerships

June 18, 2007

June 30th Deadline Requires Immediate Action

This week, the Texas State Comptroller’s office issued further guidance regarding the franchise-tax transition rules passed by the state legislature in May 2007. This updated information clarifies state policy on the application of the franchise tax rules to limited partnerships that terminate before July 1, 2007.


In 2006, the Texas legislature updated the franchise tax law, resulting in the imposition of the franchise tax on all limited partnerships doing business in the state. Specifically, any limited partnerships that receive Texas-sourced income, and are still in existence and still doing business on January 1, 2008, will be subject to the franchise tax.

Limited partnerships that fit this description — including registered limited liability partnerships, family limited partnerships and certain general partnerships and non-business trusts — will be required to begin making franchise-tax payments in 2008. Further, if the limited partnership was doing business throughout 2007, the franchise tax for 2008 will include the tax obligation for all Texas-sourced income from 2007.

An Opportunity To Minimize The Franchise Tax

On May 28th, 2007, the Texas legislature passed a bill that creates new transition rules affecting limited partnerships. A key element of this bill makes clear that any limited partnership that is not doing business in Texas on January 1, 2008, but did conduct business in Texas after June 30, 2007, must pay a special franchise tax covering the period beginning on January 1, 2007.

Therefore, a limited partnership that terminates its business and ceases to exist by June 30, 2007 may not be liable for the Texas franchise tax for the period beginning on January 1, 2007 and ending on the date of its termination. Limited partnerships have several possible options that may enable them to take advantage of this opportunity, including merging into a newly formed limited liability company (LLC) or corporation, or transferring its assets and obligations to a new LLC or corporation.

Answers to specific questions regarding the franchise tax can be found at the website of the Texas State Comptroller, at http://www.window.state.tx.us/taxinfo/franchise/tranfaq.html.


The deadline to act on this opportunity is June 30, 2007