Texas Comptroller of Public Accounts STAR System
STAR SUPERSEDED WITHOUT SUMMARY
Accession No.(s): 9803219R
Document superseded on: 08/15/2013
STATE OF TEXAS
COMPTROLLER OF PUBLIC ACCOUNTS
Section 3.555. Earned Surplus: Computation. (Tax Code, sec. 171.001 et.
(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
(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
(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
(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
(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
(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
(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
(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
(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
DOCUMENT TYPE: R
TAX TYPE: FRANCHISE