Texas Comptroller of Public Accounts    STAR System


9805404R 



STAR SUPERSEDED WITHOUT SUMMARY 

Accession No.(s): 9805404R

Document superseded on: 08/15/2013 



STATE OF TEXAS
COMPTROLLER OF PUBLIC ACCOUNTS
FRANCHISE TAX


Section 3.556.  Earned Surplus: S Corporations.  (Tax Code, sec. 171.001 et. 
seq.).

(a) 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) C corporation-A corporation defined in Internal Revenue Code, sec. 
1361(a)(2). 

(2) 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. 

 (3) Qualified Subchapter S Subsidiary-A corporation as described in the 
Internal Revenue Code, sec. 1361(b)(3)(B).

(4) S corporation-A corporation as described in the Internal Revenue Code, sec. 
1361. 

(5) Tax reporting period-For the purposes of this section, the period upon 
which the tax is based under the Tax Code, sec. 171.1532 or sec. 171.0011. 

(c) A corporation shall be treated as an S corporation to the extent the 
corporation qualifies for such treatment during the tax reporting period. See 
sec. 3.558 of this title (relating to Earned Surplus: Officer and Director 
Compensation) regarding compensation used in computing earned surplus of an S 
corporation. 

(d) Where and to the extent an S corporation allocates income and deductions to 
shareholders, such items will be treated as income and deductions of the S 
corporation as though the corporation were taxed as a C corporation for federal 
income tax purposes. 

(1) Federal income tax requirements or limitations imposed on the S corporation 
apply for the purposes of this section. 

(2) Unless otherwise provided, federal income tax limitations or other 
restrictions imposed on the shareholders of the S corporation with regard to 
claiming losses, deductions, and other items are ignored in determining taxable 
earned surplus of the S corporation. 

(e) Treatment of specific items reported to S corporation shareholders in 
computing reportable federal taxable income. 

(1) No deduction or reduction is allowed for excess net passive income tax, 
built-in gains taxes, capital gains taxes, the federal tax on fuels, or similar 
taxes imposed on the S corporation. 

(2) Ordinary income from trade or business activities is included while 
ordinary losses from such activities are deducted. 

(3) Net income from rental activities is included and net losses are deducted. 

(4) Dividend income received by an S corporation is included except for: 

(A) amounts reportable under the Internal Revenue Code, sec. 78 or secs. 
951-964; 

(B) dividends from a subsidiary, associate, or affiliate that does not transact 
a substantial portion of its business in the United States.  If 80% or more of 
a corporate payor's gross receipts (as computed for earned surplus) are 
attributable to business outside the United States, the corporate payor is not 
doing a substantial portion of its business within the United States.  The 
payor's gross receipts are measured based on the period upon which the 
recipient's tax is based under the Tax Code, sec. 171.0011 or sec. 171.1532; 

(C) dividends from a subsidiary, associate, or affiliate that does not maintain 
a substantial portion of its assets in the United States.  If 80% or more of a 
corporate payor's tangible assets (based on original cost) are situated outside 
the United States, the corporate payor does not maintain a substantial portion 
of its assets within the United States.  The payor's assets are valued at the 
end of the tax reporting period upon which the recipient's tax is based under 
the Tax Code, sec. 171.0011 or sec. 171.1532; and

(D) dividends which qualify for exclusion under the provisions of sec. 3.555(k) 
of this title (relating to Earned Surplus: Computation).

(5) Royalty income is included. 

(6) Taxable interest is included unless the interest qualifies for exclusion 
under the provisions of sec. 3.555(k) of this title (relating to Earned 
Surplus: Computation).  Interest income which is exempt from federal income 
taxes is not included and expenses related to such income are not deductible in 
computing reportable federal taxable income. 

(7) Salaries and wages used in computing ordinary income or loss are allowed in 
computing reportable federal taxable income after reduction for any jobs credit 
claimed on the federal income tax return for the S corporation.  Other expenses 
which are reduced for credits claimed on the return similarly are allowed net 
of such credits. 

(8) Deductions for charitable contributions are allowed. 

(9) Capital losses in excess of capital gains may be deducted. 

(10) If deductions for oil and gas depletion or intangible drilling costs are 
allowed to shareholders of an S corporation rather than to the entity itself, 
the S corporation must compute such deductions as though the entity were taxed 
as a C corporation for federal income tax purposes. 

(11) The corporation is allowed to deduct Internal Revenue Code, sec. 179, 
amounts reported to shareholders subject to limitations imposed on the S 
corporation at the corporate level. 

(12) An S corporation may deduct foreign income taxes reported to shareholders 
unless the taxes are otherwise deducted in computing taxable items reported to 
shareholders. 

(13) The corporation is not allowed to deduct amounts reported to shareholders 
which are personal in nature even though such items may qualify as itemized 
deductions on the shareholder's income tax return. 

(f) Unless otherwise provided under the Tax Code, sec. 171, this section, or 
the rules applicable to the Tax Code, sec. 171, S corporations are treated the 
same as any other corporation in computing earned surplus.

(g) Qualified Subchapter S Subsidiary (QSSS) -

(1) A QSSS may not file a consolidated or combined franchise tax report with 
its parent S corporation.

(2) Except as otherwise provided in this paragraph, the earned surplus of the 
QSSS and parent S corporation will be computed as though the parent S 
corporation and QSSS had filed separate S corporation returns for federal 
income tax purposes.  That is, the QSSS will be treated as an S corporation for 
earned surplus computation purposes.  For example, sales between the parent S 
corporation and QSSS must be used in computing earned surplus even though the 
parent S corporation and QSSS are treated as one corporation for federal income 
tax purposes.

(3) The parent S corporation's share of the items of income or loss of the QSSS 
is not included in the parent S corporation's taxable earned surplus or gross 
receipts to the extent the items would be reportable by the QSSS if a separate 
S corporation return were filed.

(4) Distributions from the QSSS to the parent S corporation will not be 
included in taxable earned surplus or receipts of the parent S corporation if 
such amounts would be excluded from reportable federal taxable income of the 
parent S corporation if the QSSS was an S corporation (not qualifying as a 
QSSS) and the parent S corporation were an individual shareholder in that 
corporation.


Effective Date:  May 4, 1998
Filed with Secretary of State:  April 14, 1998


  
Comptroller of Public Accounts




ACCESSION NUMBER: 9805404R   
SUPERSEDED: Y 
DOCUMENT TYPE: R 
DATE: 05/04/1998
TAX TYPE: FRANCHISE