When should an upper-tier partnership file a final return in a state, what must happen first, and what does filing final too early or too late cost?

The duty to file follows the partnership's own in-state income, not the sale

The lower tier's sale ends the lower tier's property in a state. It does not end the upper tier's connection to the state, and each state ties the filing duty to something that can outlast the sale.

• California. The Franchise Tax Board (FTB) states in its Form 565 booklet that a partnership "that engages in a trade or business in California or has income from a California source must file Form 565." A limited partnership (LP) or limited liability partnership (LLP) with a certificate on file or a registration with the Secretary of State also files and pays the $800 annual tax, whether or not it does business in California. The booklet names no resident-partner trigger. A taxpayer's "sales, property, and payroll" include its "pro rata or distributive share of pass-through entities" (Cal. Rev. and Tax. Code section 23101(d)). Pass-through entities are entities, such as partnerships, whose income is taxed to their owners. A distributive share is a partner's allocated portion of the partnership's income.
• New York. New York Tax Law section 658(c)(1) requires a return from "Every partnership having a resident partner or having any income derived from New York sources," and the Form IT-204 instructions limit the resident test to an individual, estate or trust partner. Under 20 NYCRR 137.6, an item that reaches a nonresident partner through an upper tier "retains the source and character determined at the level of the lower tier partnership." The instructions give an example of a partnership (partnership A) that "was not engaged in a trade or business in New York" but "had New York source income from the distributive shares it received from partnership B."
• New Jersey. N.J.S.A. 54A:8-6(b)(1) requires a return from an entity classified as a partnership "having a resident owner of an interest in the entity or having any income derived from New Jersey sources." No instruction read says in terms that a partnership whose only New Jersey income arrives through a lower tier must file. The direction that tiered partnerships complete Schedule A assumes that it must, and this article follows that reading.
• Georgia. O.C.G.A. section 48-7-53(b) requires a return from "Every partnership, including but not limited to a foreign partnership, the individual members of which are subject to taxation under this chapter." The Georgia Department of Revenue's Form 700 booklet reaches a partnership "engaged in business or owns property located in Georgia or has members domiciled in Georgia or has income from Georgia sources."
• Pennsylvania. The 2025 PA-20S/PA-65 instructions require a return from a partnership with gross taxable income allocable to Pennsylvania and from one that had a Pennsylvania resident individual, estate or trust as a partner at year end. No Department text read says in terms that an upper tier whose only Pennsylvania income arrives through a lower tier must file. The return does ask "Does the entity filing as a partnership have other partnerships as partners?"
• Texas. The franchise tax is an entity tax, and a "taxable entity" does not include "a passive entity as defined by Section 171.0003." Passive entity status, explained below, therefore comes first.

The federal rule matters for timing. Under Internal Revenue Code (IRC) section 708(b)(1), a partnership is considered terminated "only if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership," and Treasury Regulation section 1.708-1(b)(3)(i) dates the termination from the completion of winding up. A partnership with a holdback or escrow still to be paid may still be winding up; the regulation does not decide that case. Whether a holdback belongs to the sale year or the year of release is a federal reporting question this article does not settle, so the worked example assumes the later year and says so.

What ends the duty in each of six states

Each state ends the duty differently. The paragraphs below give the points that decide when a final return is correct and what else must happen.

California. The duty to file a return ends when the tests above are no longer met. The annual tax does not end then. An LP pays the tax "for each taxable year, or part thereof, until a certificate of cancellation is filed" with the Secretary of State (Cal. Rev. and Tax. Code section 17935(b)(1)), and a limited liability company (LLC) pays until "a certificate of cancellation of registration or of articles of organization is filed" (section 17941(b)(1)). A return designated final does not stop the tax: the FTB must notify the taxpayer that the tax "is due annually until a certificate of cancellation is filed with the Secretary of State" (section 17935(b)(2)).

Section 17947(a) gives an LLC relief for a taxable year if three conditions are met. The LLC files a timely final annual tax return for the preceding year. It does no business in California after that year. It files a certificate of dissolution or cancellation "before the end of the 12-month period beginning with the date the final annual tax return was filed." For an LP or LLP, no parallel in section 17935 was read, but the FTB's Form 565 booklet states the same three conditions. It adds that the effective date of Form LP-4/7, an LP's certificate of cancellation, "will stop the assessment of the $800 annual tax for future taxable years," while a later filing may require "a subsequent year's return and an additional $800 tax." An LLP uses Form LLP-4. That relief is the FTB's published instruction and goes beyond the statute text read. In the booklet's example, an LP files a timely 2025 return marked final on March 15, 2026 and its termination documents before March 15, 2027, and owes no tax for 2026.

The LP tax is due on "the date the return is required to be filed" (section 17935(c)), and the LLC tax "on or before the 15th day of the fourth month of the taxable year" (section 17941(c)). The booklet requires a short-period return if the partnership is "created or terminated within the taxable year." An LLC's certificate of cancellation recites that a final return "has been or will be filed with the Franchise Tax Board" (Cal. Corp. Code sections 17707.08(b)(2)(B) and 17708.06(a)(2)).

New York. Form IT-204 is due "on or before the fifteenth day of the third month following the close of each taxable year" (Tax Law section 658(c)(1)). A partnership "terminated and completely liquidated during its normal tax year" files for the shortened period, due "the 15th day of the third month after the end of the accounting period." The filing fee is paid on a separate return, Form IT-204-LL. That form has a final box and directs a registered LLC or LLP to contact the New York Department of State to terminate its registration. "There is no extension of time to file Form IT-204-LL or pay the annual fee." A partnership other than an LLP "with less than one million dollars in New York source gross income" is exempt from the fee (section 658(c)(3)(B)). The instructions also tell a tiered partnership to leave out of the fee worksheet income from any partnership in which it is a partner. On the instructions' terms, an upper tier whose only New York item is the lower tier's share therefore has no fee base.

New Jersey. The NJ-1065 has a Final Return box. When it is checked, the instructions direct that the installment payment be entered as zero. They set that installment at 50 percent of the current year's filing fee. They do not define the box or limit it to a year in which the partnership has finished its business. A partnership that has completely liquidated also completes Schedule L. The filing fee is "$150 for each owner of an interest in the entity, up to a maximum of $250,000," for a partnership with New Jersey source income and more than two owners (N.J.S.A. 54A:8-6(b)(2)(A)). The New Jersey Division of Revenue's table of business endings answers its column "Tax Clearance Certificate Required?" with "No" for an LLC's dissolution and for an LP's cancellation.

Texas. The tests run in order: first whether the entity is a taxable entity, then whether it has nexus, meaning a connection to Texas strong enough to be taxed. A general or limited partnership is a passive entity only if two conditions are met. First, at least 90 percent of its federal gross income is listed income, including "distributive shares of partnership income to the extent that those distributive shares of income are greater than zero" and capital gains from the sale of real property. Second, it does "not receive more than 10 percent of its federal gross income from conducting an active trade or business" (Tex. Tax Code section 171.0003(a)). Listed income "may not be treated as income from conducting an active trade or business" (subsection (a-1)). A passive entity is outside the definition of taxable entity (section 171.0002(b)(3)). The additional tax is imposed on "a taxable entity that for any reason becomes no longer subject to the tax," so a passive upper tier has no additional tax, no final report and no nexus question.

For a taxable entity, the additional tax and any report "are due on the 60th day after the date the taxable entity becomes no longer subject to the tax" (section 171.0011(c)). Nexus is determined "on an individual taxable entity level," and a foreign limited partner "does not have physical presence in Texas, if that is the limited partner's only connection with Texas" (34 Tex. Admin. Code section 3.586). A taxable-entity upper tier linked to Texas only through a limited partner's interest may therefore never have had nexus. Where it did have nexus, the Texas Comptroller of Public Accounts (Comptroller) follows this sequence: the final report, then the request for a certificate of account status on Form 05-359, then the certificate on Form 05-305 filed with the Secretary of State. Business Organizations Code section 9.011(c) conditions the certificate on the entity being "a taxable entity under Chapter 171"; whether a registered passive partnership obtains one is for the Comptroller to say.

Georgia. The Department of Revenue's page for closing a partnership tells it to check the final-return box, attach a written explanation and file dissolution documents with the Secretary of State's office, and it links a request for a tax clearance letter. The booklet text read does not mention a final-return box. An upper tier that never registered in Georgia has nothing to withdraw.

The entity-level tax is narrow. Individuals in partnership "shall be liable for income tax only in their individual capacity" (O.C.G.A. section 48-7-23(a)). Unless the partnership makes the annual election in section 48-7-23(b)(2), it therefore owes no income tax of its own, and the booklet's penalty on tax not paid has no tax to apply to. The exposure is withholding, any composite return (one return filed for the nonresident members together) and the partners' own returns. No source read imposes an annual tax or fee on a partnership for Georgia income tax purposes.

Section 48-7-129(a)(1) subjects any partnership, Subchapter S corporation or limited liability company "which owns property or does business within this state" to withholding from a nonresident member's share "whether distributed or not," at 4 percent (section 48-7-129(a)(2)).

Rule 560-7-8-.34(4)(a) requires withholding only by an entity that does business or owns property in Georgia "on its own and not as a result of being a member," so a tier connected to Georgia only as a member does not withhold under that paragraph. Under paragraph (4)(b), the withholding "may be passed through each tier by attaching the G-2-A" with an allocation schedule, and "Failure to include this documentation will result in the disallowance of the withholding credit" (paragraph (4)(b)). No withholding is required for a nonresident member whose "aggregate annual" share of Georgia-sourced income is under $1,000 (paragraph (2)(c)). An entity may also elect a composite return in lieu of withholding (paragraph (3)(a)). A companion article covers tiered withholding credits.

Pennsylvania. The PA-65 has an oval to fill in "if the PA S corporation or partnership went out of business during its taxable year." Pennsylvania also conditions certain filings with its Department of State on tax clearance. Under 15 Pa.C.S. section 139(a), clearance certificates "from the Department of Revenue and the Department of Labor and Industry" must be delivered with "Articles of dissolution, a certificate of dissolution or termination or a statement of revival of a domestic association" and with "An application for termination of registration, statement of withdrawal or similar document by a registered foreign association." An association includes "a partnership" and "a limited liability company" (section 102(a)). Subsection (c) lists filings that need no certificates, including a certificate of dissolution under section 8482(b)(2)(i), a certificate of termination under section 8681.1 (voluntary termination by partners), a certificate of dissolution under section 8872(b)(2)(i) and a certificate of termination under section 8878. Subsection (d) excuses the certificates where the surviving foreign association registers in Pennsylvania at the same time.

The Department of State's forms state the requirement without those exceptions. Its form for a domestic LLC says the company "may not file a Certificate of Termination unless the document is accompanied by tax clearance certificates," and its form for a registered foreign association says the same of a statement of withdrawal, with one exception for a merger survivor. Which filing falls under subsection (a) and which under (c) depends on the entity and the Title 15 section under which it files, and this article does not resolve it. The application for the certificates is Form REV-181, written for corporations and associations and submitted to both departments.

The tiered twist: the gain is in the final year

The error to avoid is treating the upper tier as finished because the lower tier filed. The gain on the lower tier's in-state property is an in-state item of the sale year, and it reaches the upper tier as its distributive share (its allocated portion of the lower tier's income) of that year. Georgia's statute, for example, reaches a nonresident's income from "the sale, exchange, or other disposition of tangible or intangible property having a situs in this state" (O.C.G.A. section 48-7-30(a)). The upper tier's return for the sale year is therefore usually the return that reports the most income, and the withholding or composite-return exposure for its partners sits in that year. Filing no return, or an empty one, in the year of the gain is the costly error. A companion article covers how a lower tier's factors flow up to an upper tier.

Order of operations

A workable order, consistent with the authorities above, follows.

1. Federal timing: settle first the position on when the lower tier and the upper tier terminate, and when each receipt belongs.
2. Last withholding: where a state requires it, withhold on the last distributions of in-state source income at the tier the state names. In Georgia that tier is the entity that does business or owns property in the state on its own. It withholds 4 percent of each nonresident member's share, and the credit is passed up on Form G-2-A. Companion articles cover withholding on distributions, and the last distribution is still subject to those rules.
3. Final returns: file the final Schedules K-1 and the state returns marked final, only after the first step confirms that no later receipt is expected.
4. Last annual tax or fee: pay California's $800 annual tax and, for an LLC, the fee under section 17942. Pay New York's Form IT-204-LL fee, with no extension, and New Jersey's per-owner fee.
5. Clearance, where one exists: in Texas, a taxable entity makes the Form 05-359 request and obtains the certificate of account status. In Pennsylvania, the entity obtains the certificates section 139(a) names. The New Jersey Division of Revenue's table shows none for these entities, and the Georgia Department's page links a request for a clearance letter.
6. Secretary of State filings, for an entity organized or registered in the state. These are California's certificate of cancellation, New York's contact with the Department of State, New Jersey's cancellation or dissolution, Texas's termination or withdrawal, Pennsylvania's termination or withdrawal and Georgia's dissolution documents. An unregistered entity has nothing to file or withdraw.

In California, the order matters because relief has a deadline, 12 months from the date the final return was filed. In Texas, a statutory clock of 60 days runs from nexus. Local accounts such as the Los Angeles and San Francisco business tax accounts are covered in companion articles.

Filing final too early

A return marked final tells the state that no later return is expected. It carries three costs.

• The tax continues where it is tied to registration. California's annual tax accrues until the certificate of cancellation is filed, and the FTB's notice says so. An LLC that does not cancel within 12 months of a timely final return loses the section 17947 relief, and an LP or LLP that misses the booklet's conditions loses the FTB's published relief. The booklet also states, as the FTB's position, a penalty on an unpaid $800 of "5% of the unpaid tax, plus 0.5% for each month or part of a month (not to exceed 40 months)," which "cannot exceed 25% of the unpaid tax."
• A later receipt reopens the filing. If a lower-tier holdback pays out two years later, the upper tier has a distributive share in that later year. A return marked final in the sale year does not cover it, and the later return is a new original return with its own due date.
• Late-return penalties run from the new due date. The amounts differ by state.

The late-return amounts, illustrated for an upper tier with ten partners:

• California: $18 per partner for each month or fraction of a month, up to 12 months (Cal. Rev. and Tax. Code section 19172), or $2,160 at the maximum.
• New York: $50 per partner for each month or fraction, up to five months, counting partners "subject to tax under this article" (Tax Law section 685(h)(2)), or $2,500 at the maximum if all ten were subject to New York tax.
• New Jersey: a penalty of $100 for each month or part of a month for a late return, and 5 percent of the outstanding tax balance for late payment.
• Georgia: the booklet's 5 percent per month on tax not paid runs on entity-level tax, which is zero absent the section 48-7-23(b)(2) election.
• Texas, for a taxable entity: a penalty of 5 percent of the tax due and a further 5 percent after 30 days (Tex. Tax Code section 171.362(a) and (b)), plus $50 for failure to file a report, assessed "without regard to whether the taxable entity subsequently files the report or whether any taxes were due" (section 171.362(f)).
• Pennsylvania: $250 for failure to file, plus $250 for each missing RK-1, NRK-1 and Schedule H-Corp.

Filing silent too long

A missing return leaves open the assessment period, which is the time within which a state may assess tax. The period protects different things in different states.

• California. A notice of proposed deficiency assessment must be mailed "within four years after the return was filed" (Cal. Rev. and Tax. Code section 19057(a)). If a taxpayer fails to file, the FTB, "at any time," may require a return or estimate the net income and propose an assessment (section 19087(a)). The statute excludes from the meaning of "return" "a return of any person from whom the taxpayer has received an item," so a partnership's return does not start the period for its partners' own returns.
• New York. Three years after the return was filed, "whether or not such return was filed on or after the date prescribed," and "at any time" if "no return is filed" (Tax Law section 683(a) and (c)(1)(A)).
• New Jersey. Three years for the gross income tax, and "at any time" if "No return is filed" (N.J.S.A. 54A:9-4(a) and (c)(1)(A)). Under N.J.S.A. 54:49-6(b), no assessment "after the expiration of more than four years from the date of the filing of a return," except that for a "failure to file a return" the tax "may be assessed at any time."
• Texas. No tax may be assessed "after four years from the date that the tax becomes due and payable" (Tex. Tax Code section 111.201), and the Comptroller may assess "at any time" if "no report for the tax has been filed" (section 111.205(a)(2)).
• Georgia. Three years after the return or report was filed, and "at any time" for "a failure to file a return or report" (O.C.G.A. section 48-2-49(b) and (c)).
• Pennsylvania. Three years after the return is filed, six years if more than 25 percent of the income stated is omitted, and "at any time" where no return is filed (72 P.S. section 7348(a), (b) and (c)).

The common statement that a filed return starts the period overstates the point for a partnership that owes no tax of its own. Georgia's period runs on "any tax imposed by this title" and Pennsylvania's on "any tax imposed by this article," and individuals in partnership are liable for Georgia income tax "only in their individual capacity" (O.C.G.A. section 48-7-23(a)). On that reading, the partners' periods run from their own returns, as the California definition of "return" shows for California. A filed return starts a period for the partnership itself only for a charge that attaches to it, such as a penalty or an entity-level tax, and the period for a partnership penalty was not located in the Georgia or Pennsylvania sources read.

Law that changed or may change

• California. Sections 17935 and 17941 were amended in 2026 and now set a $400 tax for a first taxable year beginning on or after January 1, 2027 and before January 1, 2030 (sections 17935(f)(2) and 17941(g)(2)), so the $800 figures in this article apply to other years.
• Federal. IRC section 708(b)(1) now carries a single termination test; the former rule under which a sale or exchange of 50 percent or more of partnership interests within 12 months ended a partnership was repealed by Pub. L. 115-97.
• Georgia. Rule 560-7-8-.34 was amended effective June 11, 2026, and O.C.G.A. section 48-7-129 carries a 2026 amendment effective July 1, 2026 that changed the wording of two sentences. The rule text quoted here is from compilations current through June 2025, so the rule paragraphs should be checked against the amended rule before they are relied on.
• Open on the sources read. Whether a registered passive partnership obtains a Texas certificate of account status, which Pennsylvania clearance exceptions apply to a particular entity, and when a holdback belongs to the sale year.

Worked example

The facts are invented. An upper-tier limited partnership organized in Delaware (the upper tier) has ten equal individual partners, none resident in a state discussed in this article, and a calendar year. It owns 40 percent of a lower-tier limited partnership (the lower tier) that owned a warehouse in Texas and an apartment property in Georgia. On June 30, 2025 the lower tier sells both, with gain of $5,000,000 on the Texas property and $3,000,000 on the Georgia property, and distributes the proceeds in July 2025 except a $100,000 holdback released from escrow and distributed in February 2027. The lower tier is a Delaware limited partnership managed from outside both states, and it owned the Georgia property on its own. The upper tier is managed from outside both states and has no property, employees or registration in either. It has no income other than its distributive share from the lower tier. It has made no entity-level election under O.C.G.A. section 48-7-23(b)(2). The ten partners are nonresident individuals of Georgia. The example makes two assumptions. First, the holdback arises from the Georgia sale and is Georgia-source gain recognized in 2027, in addition to the $3,000,000. Second, the 2027 receipt is a 2027 item, a federal question noted above. The example gives no sale price, so withholding at the closing under O.C.G.A. section 48-7-128 cannot be computed.

Shares.

• Texas gain: 40 percent of $5,000,000 is $2,000,000, or $200,000 for each of the ten partners.
• Georgia gain: 40 percent of $3,000,000 is $1,200,000, or $120,000 for each partner.
• Holdback: 40 percent of $100,000 is $40,000, or $4,000 for each partner.

Georgia. The upper tier has Georgia-source income in 2025, the $1,200,000 share, and files a 2025 Form 700 due Monday, March 16, 2026. March 15 is a Sunday, and the booklet provides that a return falling due on a weekend or holiday "is due on the next day that is not a weekend or holiday." The lower tier owned the property on its own, and the upper tier is connected to it only as a member of the lower tier. Under rule 560-7-8-.34(4)(a), the upper tier therefore withholds on nobody. The lower tier withholds 4 percent of the upper tier's share, "whether distributed or not". The amount is $48,000 for 2025, which the Form G-2-A schedule carries to the partners at $4,800 each, and $1,600 for 2027, or $160 each. The upper tier's aggregate annual share, $1,200,000 for 2025 and $40,000 for 2027, is above the $1,000 level each year. The partners report $120,000 each for 2025 and $4,000 each for 2027 on Georgia nonresident returns, unless they are included in a composite return on Form IT-CR.

Section 48-7-128 requires a buyer to withhold 3 percent of the price paid by a nonresident seller, unless a partnership seller certifies that a composite return is being filed. If the buyer withheld at the closing under that section, rule paragraph (2)(d) provides that income "subject to withholding under other provisions of Georgia law" is not also subject to withholding under section 48-7-129, so the $48,000 is not additional to it. The example does not say whether that withholding applied. The upper tier made no entity-level election and owes no Georgia income tax of its own. It cannot mark 2025 final while the holdback is unpaid, because it will have a Georgia-source distributive share in 2027, and a 2025 return marked final would leave that share with no return to carry it. It never registered in Georgia and has nothing to withdraw.

Texas. The first test is passive entity status. The upper tier is a limited partnership whose only federal gross income is a distributive share of partnership income greater than zero, which is listed income, so it meets the 90 percent and 10 percent tests of section 171.0003(a). It is not a taxable entity, so no Texas report is required, there is no account to end, and the 60-day clock never starts. A variant changes the facts: if the upper tier were an LLC taxed as a partnership, it would not be a passive entity, because the statute reaches a general or limited partnership or a trust. Its nexus would be tested under 34 Tex. Admin. Code section 3.586. As a limited partner with no Texas connection other than the lower-tier interest, it would have no physical presence in Texas. If it instead had nexus that ended on June 30, 2025, the additional tax and final report would be due on the 60th day after that date, Friday, August 29, 2025 (31 days in July plus 29 in August), followed by the request for a certificate of account status and the Secretary of State termination.

A correct calendar. The upper tier files a 2025 Form 700 reporting the gain and does not mark it final. The lower tier withholds and passes the credit up on Form G-2-A. The upper tier makes no Secretary of State filing in Georgia or Texas, because it never registered, and files a 2027 Form 700 marked final after the escrow release, once winding up is complete. If the holdback is instead part of the 2025 amount realized as a federal matter, 2025 is the final year and the 2027 receipt is not an item for state returns; that choice is federal and should be documented.

What the example shows. The gain sits in the sale-year return, a holdback keeps the entity alive for state purposes, Georgia withholding sits on the tier that owns the property on its own and is measured on the share, and Texas may require nothing because of passive entity status. What it leaves out: California, New York, New Jersey and Pennsylvania, the closing withholding amount, the lower tier's own Georgia and Texas filings, and the partners' resident-state returns.

Practice notes

Map every state where the lower tier had property or activity, and ask separately whether the upper tier files in its own right and on what connection. Calendar every holdback, escrow, earn-out and refund of the lower tier before marking any upper-tier return final, and keep the final-year Schedules K-1 consistent with the state returns.

In California, file the final return on time, designate it final, and file the certificate of cancellation, or Form LP-4/7 or Form LLP-4, within 12 months of the return; the $800 accrues until cancellation. In Texas, test passive entity status first and nexus entity by entity second, and calendar the 60th day and the request for a certificate of account status for a taxable entity. In Georgia, identify which tier owns the property on its own, check whether the buyer withheld at the sale, and decide whether a composite return will be filed. In Pennsylvania, ask the Department of State what its form requires for the entity at hand, and apply for the clearance certificates before filing. Keep copies of every return and withholding statement for the limitation periods above, because a missing return keeps the period open. G&G State Tax Group advises partnerships and their owners on final state returns, entity exits and multistate procedure alongside its state and local tax practice.