Texas Comptroller of Public Accounts STAR System
STAR SUPERSEDED WITHOUT SUMMARY
Accession No.(s): 9211546R
Document superseded on: 08/15/2013
STATE OF TEXAS
COMPTROLLER OF PUBLIC ACCOUNTS
Rule 3.551. Taxable Capital: Surplus.
(a) Effective date. The provisions of this rule apply to franchise tax reports
originally due on or after January 1, 1988.
(b) Date upon which based. A corporation filing an annual report must report
surplus based on its last accounting period ending date in the previous
calendar year, or, if there is no accounting period ending in the previous
calendar year, then as of December 31 of the previous calendar year.
(1) Amortization - The accounting process of allocating the cost of assets to
expense in a systematic and rational manner over the period expected to benefit
from the use of the assets.
(2) Depletion - The accounting process of allocating the cost of natural
resources to expense in a systematic and rational manner over the period during
which the natural resources are consumed.
(3) Depreciation - The accounting process of allocating the cost of tangible
assets to expense in a systematic and rational manner over the period expected
to benefit from the use of the assets.
(4) Investee - An enterprise which issues voting stock held by an investor.
(5) Tax effect - Any change in cumulative federal income tax liability which
results from the different accounting treatment of a transaction for franchise
tax purposes than that accorded for federal income tax purposes.
(6) Unrealized, estimated, or contingent loss or obligation - An appropriation
of retained earnings for any purpose or an account established to record a loss
or obligation anticipated to occur and the amount of which is estimated as of
the date on which the tax is based (e.g., self-insurance, warranty,
(7) Write-down of assets - Any reduction or offset of the cost of an asset
through use of a valuation, allowance, reserve or contra-asset account, or
through direct write-off of the asset (except a write-off to reflect the
asset's permanent decline in value).
(d) General rules of application.
(1) Accounting methods.
(A) Installment sales. In reporting sales made on an installment basis, the
installment sales method of accounting is acceptable for franchise tax purposes
only when GAAP (as defined in Rule 3.547 concerning Accounting Methods) allows
(B) Partnerships/joint ventures. In reporting an investment in a partnership or
joint venture, the equity method of accounting must be used.
(C) Oil and gas corporations. Corporations with $1 million or more of taxable
capital must report all oil and gas exploration and production activities
according to the successful efforts or the full cost methods of accounting.
Acceptable oil and gas reserve estimating methods to be used in amortizing
intangible drilling costs are listed in Rule 3.553 concerning Methods for
Estimating Oil and Gas Reserves. Corporations with less than $1 million of
taxable capital, as determined in accordance with the Tax Code, 171.109(c), may
report their oil and gas exploration and production activities using the same
method selected to compute their federal income tax.
(D) Other. For more information on methods of accounting for franchise tax
purposes, see Rule 3.547 concerning Accounting Methods.
(2) Tax effect. A surplus adjustment will be reported net of any applicable tax
(3) Intercompany tax accounts. A liability account for income taxes owed by one
member of a consolidated group to a second member of the group is excluded from
the surplus of the first member only if the related receivable account is
included in the surplus of the second member. Intercompany tax accounts must be
reported on a consistent basis among members of the same consolidated group.
(4) S corporations. An S corporation must calculate its franchise tax in the
same manner as any other corporation. For example, accumulated and other
adjustment accounts are included in surplus, as are previously taxed income,
accumulated earnings and profits, and all other amounts included in the surplus
of any other corporation. For more information on an S corporation utilizing
the method of accounting used on its federal income tax return, see Rule 3.548
concerning Close and S Corporations.
(e) Specific rules. Specific rules of application include, but are not limited
to, the following.
(1) Amortization of goodwill. The amortization of goodwill is excluded from
surplus except when goodwill is included in the parent's cost of a subsidiary
investment. Investments in subsidiary corporations or other investee's must
reflect the cost method of accounting in accordance with the Tax Code,
(2) Deferred investment tax credit. For reports due on or after January 1,
1992, deferred investment tax credit is included in surplus. For reports due
between January 1, 1988, and December 31, 1991, deferred investment tax credit
may be excluded from surplus.
(3) Foreign currency transactions. Realized gains, unrealized gains, and
unrealized losses resulting from foreign currency transactions are included in
surplus. Realized losses are excluded from surplus.
(4) Foreign currency translations. Foreign currency translations are
disregarded when computing surplus. Unrealized gains resulting from foreign
currency translations are not included in surplus. Unrealized losses from
foreign currency translations are not allowable reductions to surplus.
(5) Income taxes payable. Amounts accrued in excess of actual liability for
income taxes relating to current or prior periods (e.g., amounts accrued which
relate to a period under IRS audit which has not been agreed to by the
corporation) are included in surplus.
(6) Deferred income taxes. For reports due on or after January 1, 1992,
deferred income taxes are included in surplus. For reports due prior to January
1, 1992, deferred income taxes may be excluded from surplus to the extent they
are recognized under generally accepted accounting principles.
(7) Employee benefits. Liabilities for employee compensation and benefits
(e.g., pensions, bonuses, vacations, retirement, medical, insurance, post
retirement, and other similar benefits) are included in surplus to the extent
they are not debt as of the accounting year end upon which the return is based.
(8) Public utility corporations. Revenue from temporary or bonded rate
increases of a public utility company is included in surplus.
(9) Treasury stock. The amount paid for treasury shares is excluded from
surplus. See also Rule 3.550 concerning Stated Capital.
(10) Write-off of assets. A direct write-off of all or a portion of the cost of an
asset to reflect a permanent decline in the asset's value, the direct cause of
which is a specifically identifiable event, is excluded from surplus.
(11) Redeemable preferred stock. Redeemable preferred stock is not included in
surplus if it is debt.
(12) Surplus deficit. A surplus deficit can be subtracted from stated capital.
(13) Dividends. Dividends that are not paid within one year from the date of
declaration will be included in surplus.
Effective Date: November 10, 1992
Filed with Secretary of State: October 20, 1992
Comptroller of Public Accounts
ACCESSION NUMBER: 9211546R
DOCUMENT TYPE: R
TAX TYPE: FRANCHISE