In order to qualify for the FONCE franchise and excise tax exemption, the entity must meet two criteria:
- at least 95% of the entity’s ownership must be directly held by family members, and
- substantially all (66.67%) of the activity of the entity is either the production of passive investment income or the combination of the production of passive investment income and farming.
Passive investment income is gross receipts derived from royalties, rents from residential property or farm property, dividends, interest, annuities, and the amount of any gain on the sale or exchange of stock or securities. Residential property can not have more than four residential units at any one location. Non-passive income is any other gross receipts that are not listed as passive investment income.
So that the department may verify that the qualifications for exemption have been met, an application for exemption form is required to be filed when a FONCE applies for the exemption and annual renewal thereafter.
Tax Webinar: Family Owned Non-corporate Entity (FONCE)