Tex. Tax Code § 171.0004 – Definition of Conducting Active Trade or Business

(a) The definition in this section applies only to Section 171.0003.
(b) An entity conducts an active trade or business if:
1. (1) the activities being carried on by the entity include one or more active operations that form a part of the process of earning income or profit; and
2. (2) the entity performs active management and operational functions.
(c) Activities performed by the entity include activities performed by persons outside the entity, including independent contractors, to the extent the persons perform services on behalf of the entity and those services constitute all or part of the entity's trade or business.
(d) An entity conducts an active trade or business if assets, including royalties, patents, trademarks, and other intangible assets, held by the entity are used in the active trade or business of one or more related entities.
(e) For purposes of this section:
1. (1) the ownership of a royalty interest or a nonoperating working interest in mineral rights does not constitute conduct of an active trade or business;
2. (2) payment of compensation to employees or independent contractors for financial or legal services reasonably necessary for the operation of the entity does not constitute conduct of an active trade or business; and
3. (3) holding a seat on the board of directors of an entity does not by itself constitute conduct of an active trade or business.
  Acts 2006, 79th Leg., 3rd C.S., Ch. 1 (H.B. 3), Sec. 2, eff. January 1, 2008.
  Acts 2007, 80th Leg., R.S., Ch. 1282 (H.B. 3928), Sec. 4, eff. January 1, 2008.