Texas Comptroller of Public Accounts    STAR System


9803219R 



STAR SUPERSEDED WITHOUT SUMMARY 

Accession No.(s): 9803219R

Document superseded on: 08/15/2013 



STATE OF TEXAS 
COMPTROLLER OF PUBLIC ACCOUNTS 
FRANCHISE TAX 


Section 3.555.  Earned Surplus:  Computation.  (Tax Code, sec. 171.001 et. 
seq.).

(a) Effective date.  The provisions of this section apply to franchise tax 
reports originally due after January 1, 1992. 

(b) Definitions.  The following words and terms, when used in this section, 
shall have the following meanings, unless the context clearly indicates 
otherwise. 

(1) Business loss-A negative amount after apportionment and allocation but 
before any deductions for solar energy devices under the Tax Code, sec. 
171.107, or investment in an enterprise zone under the Tax Code, sec. 171.1015. 

(2) Corporation-An entity subject to franchise tax under the Tax Code, Chapter 
171. 

(3) Dividends from a subsidiary, associate, or affiliate that does not transact 
a substantial portion of its business or maintain a substantial portion of its 
assets in the United States-Dividends treated as gross income from sources 
without the United States under the Internal Revenue Code, sec. 862, and 
dividends received from United States corporations that would satisfy the 80% 
foreign business requirements of Internal Revenue Code, sec. 861(c)(1). 

(4) Internal Revenue Code-

(A) For reports originally due on or after January 1,1998, the Internal Revenue 
Code (IRC) of 1986 in effect for the tax year beginning on or after January 1, 
1996, and before January 1, 1997.

(B) For reports originally due on or after January 1, 1996 and before January 
1, 1998, the Internal Revenue Code of 1986 in effect for the tax year beginning 
on or after January 1, 1994, and before January 1, 1995.

(C) For reports originally due on or after January 1, 1992, and before January 
1, 1996, the Internal Revenue Code of 1986 in effect for the tax year beginning 
on or after January 1, 1990, and before January 1, 1991 (1990 IRC). 

(D) The franchise tax law requires that the 1990 IRC be used for reports 
originally due prior to January 1, 1996.  Because of this requirement, there 
may be differences between federal taxable income reported for federal income 
tax purposes and reportable federal taxable income for franchise tax purposes 
for franchise tax reports originally due prior to 1996.  To the extent that 
such differences exist, the 1990 IRC must be used to report the differences for 
reports originally due on or after January 1, 1996.  For example, if a 
corporation was denied any portion of an IRC sec. 179 deduction on an asset in 
computing taxable earned surplus on a franchise tax report due prior to January 
1, 1996 (because the sec. 179 deduction exceeded the $10,000 limit allowed 
under the 1990 IRC), the corporation will be allowed to compute depreciation on 
the asset based on the 1990 IRC (i.e., the corporation may depreciate the asset 
based on the $10,000 sec. 179 deduction allowed under the 1990 IRC) for reports 
originally due on or after January 1, 1996. 

(5) Schedule C special deductions-The special deductions allowed in computing 
federal taxable income as listed in column (c) of Form 1120 of the Department 
of the Treasury Internal Revenue Service.  Any limitations on Schedule C 
deductions imposed for federal income tax purposes will apply in computing such 
deductions for earned surplus. 

(c) Accounting methods.  In computing earned surplus, a corporation is deemed 
to have made an election to use the same methods used in filing its federal 
income tax return. 

(d) Jobs and other credits.  A corporation required to reduce or forego 
deductions in order to claim credits for federal income tax purposes cannot 
deduct any amount from reportable federal taxable income based on the reduced 
or foregone deductions.  For example: 

(1) if a corporation, in computing federal taxable income, reduces the 
deduction for salaries and wages in order to claim a federal jobs credit, 
reportable federal taxable income is computed without adjustment of the federal 
deduction for salaries and wages; 

(2) if a corporation elects, for federal income tax purposes, to take a foreign 
tax credit instead of a deduction for foreign income or profits taxes, 
reportable federal taxable income is computed without a deduction for such 
taxes. 

(e) Consolidated income tax returns.  For the purposes of this section, if a 
corporation joins in filing a consolidated federal income tax return, the 
corporation must compute its earned surplus as though no consolidated federal 
income tax return were filed.  Therefore, taxable income, compensation, and 
other items must be computed as though a separate federal income tax return had 
been filed by the corporation.  For example, the corporation must eliminate all 
dividends received from members of the consolidated group with which the 
corporation filed a consolidated federal income tax return.  No special or 
overt election is required for purposes of this dividend elimination.  If the 
comptroller determines that transactions between members of a controlled group 
of corporations are not entered into on an arm's-length basis, the comptroller 
may distribute or allocate income and deductions as necessary to prevent 
franchise tax avoidance provided such adjustments are authorized by applying 
the principles in Internal Revenue Code, sec. 482, and regulations thereunder. 

(f) Deductions.  In computing earned surplus for each reporting period, a 
corporation may take Schedule C deductions, deductions under the Internal 
Revenue Code, sec. 78 or 951-964, and other items deducted in computing earned 
surplus only to the extent each item is included in computing reportable 
federal taxable income. 

(g) Business losses. 

(1) A business loss which is carried forward to a report year must be deducted 
from apportioned plus allocated taxable earned surplus after any allowable 
deductions for enterprise zone projects or solar energy devices. 

(2) A business loss which is carried forward to a successive year must be 
applied to the extent of apportioned plus allocated taxable earned surplus in 
that succeeding year. 

(3) A corporation may not convey, assign, or transfer a business loss to 
another entity including, but not limited to, by merger. 

(h) Deductions for solar energy devices, investments in enterprise zones, and 
investments in defense economic readjustment zones. 

(1) A corporation that elects to take a deduction from apportioned earned 
surplus for solar energy devices under the Tax Code, sec. 171.107, a deduction 
for investments in enterprise zones under the Tax Code, sec. 171.1015, or a 
deduction for investments in defense economic readjustment zones, may not claim 
a deduction from taxable capital for such item. 

(2) A deduction from apportioned earned surplus for solar energy devices, 
investments in enterprise zones, or investments in defense economic 
readjustment zones may not reduce apportioned earned surplus below zero.  Any 
unused deductions may not be carried over to a subsequent report. 

(i) Officer and director compensation.  Regarding the add-back of compensation 
of officers or directors of corporations, managers of limited liability 
companies, and directors and executive officers of banking corporations see 
sec. 3.558 of this title (relating to Earned Surplus: Officer and Director 
Compensation). 

(j) Temporary credit on net taxable earned surplus. 

(1) A corporation which qualifies and properly elects a temporary credit from 
net taxable earned surplus under the Tax Code, sec. 171.111, may take the 
credit as a reduction of the tax due on earned surplus. See sec. 3.559 of this 
title (relating to Earned Surplus: Temporary Credit). 

(2) If the temporary credit is elected on a report, the corporation must pay an 
additional tax of 0.2% of net taxable capital in addition to the franchise tax 
due under the Tax Code, sec. 171.002.  This additional tax is added to tax 
otherwise due before the provisions of the Tax Code, sec. 171.002(d), are 
applied.  In other words, if the amount of tax due after adding this additional 
tax is less than $100, then no tax is owed for the reporting period. 

(k) Federal obligations. 

(1) Dividends and interest received from federal obligations are not included 
in earned surplus or gross receipts for earned surplus purposes. 

(2) For purposes of this subsection, the term "federal obligations" means: 

(A) stocks and other direct obligations of, and obligations unconditionally 
guaranteed by, the United States government and United States government 
agencies; and 

(B) direct obligations of United States government-sponsored agencies. 

(3) The following words and terms, when used in this subsection, shall have the 
following meanings, unless the context clearly indicates otherwise. 

(A) Obligation-Any bond, debenture, security, mortgage-backed security, 
pass-through certificate, or other evidence of indebtedness of the issuing 
entity.  The term "obligation" does not include a deposit, a repurchase 
agreement, a loan, a lease, a participation in a loan or pool of loans, a loan 
collateralized by an obligation of an agency of the United States government or 
a loan guaranteed by an agency of the United States government. 

(B) United States government-Any department and ministry of the federal 
government including the 12 Federal Reserve Banks.  The definition of United 
States government does not include state or local governments or commercial 
enterprises owned in whole or in part by the United States government.  In 
addition, the term does not include local government entities or commercial 
enterprises whose obligations are guaranteed by the United States government. 

(C) United States government agency-An instrumentality of the United States 
government whose obligations are fully and explicitly guaranteed as to the 
timely payment of principal and interest by the full faith and credit of the 
United States government.  These agencies include the Government National 
Mortgage Association (GNMA), the Veterans Administration (VA), the Federal 
Housing Administration (FHA), the Farmers Home Administration (FmHA), the 
Export-Import Bank (Exim Bank), the Overseas Private Investment Corporation 
(OPIC), the Commodity Credit Corporation (CCC), and the Small Business 
Administration (SBA). 

(D) United States government-sponsored agency-Agencies originally established 
or chartered by the United States government to serve public purposes specified 
by the United States Congress but whose obligations are not explicitly 
guaranteed by the full faith and credit of the United States government.  These 
agencies include the Federal Home Loan Mortgage Corporation (FHLMC), the 
Federal National Mortgage Association (FNMA), the Farm Credit System, the 
Federal Home Loan Bank System, and the Student Loan Marketing Association 
(SLMA). 

(l) 52-53 week accounting year end.  A corporation which uses a 52-53 week 
accounting year end and has an accounting year ending the first four days of 
January of the year during which the annual report is originally due may use 
the preceding December 31 as the date through which taxable earned surplus is 
computed. 

(m) Allocated taxable earned surplus.  See the Tax Code, sec. 171.1061, 
regarding the allocation of certain taxable earned surplus to this state.


Effective Date:  March 29, 1998
Filed with Secretary of State:  March 9, 1998







ACCESSION NUMBER: 9803219R  
SUPERSEDED: Y 
DOCUMENT TYPE: R 
DATE: 03/29/1998
TAX TYPE: FRANCHISE