Texas House Bill HB2611

Texas 2019 - 86th Regular

Caption

Relating to the treatment of certain limited liability companies as passive entities for purposes of the franchise tax.

Impact

The passage of HB 2611 would generate significant implications for how LLCs in Texas are taxed under the franchise tax system. By clearly defining what constitutes a passive entity, the law aims to reduce ambiguity for business owners and tax administrators alike. This restructuring is expected to have a positive effect on LLCs that predominantly earn income through passive means, potentially lowering their tax burden. Furthermore, it aligns Texas’s tax policies with a growing trend of recognizing the specific financial activities of businesses when determining tax liabilities.

Summary

House Bill 2611 seeks to amend the Tax Code of Texas regarding the classification of certain limited liability companies (LLCs) as passive entities for franchise tax purposes. The bill establishes criteria under which an LLC can be considered passive, primarily based on the composition of its federal gross income. To be classified as passive, at least 90% of the LLC's federal gross income must come from specific types of income, such as dividends, interest, and capital gains, with the stipulation that no more than 10% can be derived from active trade or business. This change is designed to clarify the tax responsibilities of LLCs within the state, promoting fairness and consistency in the tax system.

Sentiment

Opinions on HB 2611 showed a general sentiment of support from lawmakers and business communities who viewed the bill as a beneficial revision of existing tax law. Proponents argued that by delineating the characteristics of passive entities, the bill would facilitate a better understanding of tax obligations and should prevent unintended penalties for businesses that generate passive income. Conversely, some dissenters raised concerns about the potential for abuse of the passive classification, fearing that it could allow entities to unduly reduce their tax payments, thus impacting state revenue.

Contention

The discussions around HB 2611 highlighted notable points of contention regarding the balance between tax fairness and revenue generation for the state. While supporters emphasized the need for clarity and ease of compliance for LLCs, critics feared the classification criteria could be manipulated. This debate pitted the interests of businesses striving for equitable tax treatment against the state's need for stable revenue sources, with advocates on both sides presenting strong arguments as to the potential long-term consequences of the bill.