Texas Comptroller of Public Accounts STAR System
STAR SUPERSEDED WITHOUT SUMMARY
Accession No.(s): 9503883R
Document superseded on: 08/15/2013
STATE OF TEXAS
COMPTROLLER OF PUBLIC ACCOUNTS
Section 3.547. Taxable Capital: Accounting Methods. (Tax Code sec. 171.109 et
(a) Effective date. The provisions of this section apply to franchise tax
reports originally due on or after January 1, 1988.
(b) Taxable capital application. The provisions of this section apply to the
determination of gross receipts and surplus for taxable capital.
(c) General rules. The provisions of this subsection apply to both the
generally accepted accounting principles (GAAP) and federal income tax methods.
(1) A corporation is required to use the same accounting method in computing
gross receipts as it uses in computing surplus. Accounting method is the method
of allocating the cost, benefit, or expense of an asset or liability to
(2) Regardless of any requirements or allowances under GAAP or the Internal
Revenue Code, the calculation of franchise tax shall be performed in accordance
with all applicable provisions of the Tax Code, Chapter 171, and related rules
of this title.
(3) The financial condition as of the date required by the Tax Code, sec.
171.153, must be determined by GAAP or other methods required by the Tax Code,
Chapter 171, and related rules of this title, for all transactions through such
(4) A corporation's eligibility to report under the federal income tax method
will determine whether it can change from the GAAP method to the federal income
tax method, or vice versa, in a subsequent reporting period. Unless otherwise
specified in this paragraph, a corporation cannot change accounting methods
more often than once every four years without the written consent of the
(A) A corporation that is eligible to report under the federal income tax
method may change from the GAAP method to the federal income tax method once
every four years. The corporation shall revert to the GAAP method within the
next four years only if it loses its eligibility to use the federal income tax
(B) A corporation eligible to report under the federal income tax method may
change from the federal income tax method to the GAAP method once every four
years. The corporation cannot change back to the federal income tax method
during the next four years.
(C) A corporation that loses its eligibility to report under the federal income
tax method and has to report under the GAAP method may revert to the federal
income tax method in a subsequent reporting period if it regains its
eligibility to use that method.
(5) A corporation may not amend its franchise tax report after the due date of
that report except as indicated in this paragraph. These provisions apply to
those returns not barred by the statute of limitations.
(A) An amended report may be filed to correct an accounting error. An
accounting error results from a mathematical mistake, a mistake in the
application of accounting principles in effect on the date on which the tax is
based, or an oversight or unintentional misuse of facts that existed on the
date on which the tax is based. Subsequent events (i.e., events or transactions
occurring after the date on which the report is based) will not be considered,
even if the subsequent event provides additional evidence with respect to
conditions that existed on the date upon which the tax is based.
(B) If the courts invalidate a statutory provision, rule, or agency policy, or
if the comptroller invalidates a rule or agency policy, a corporation may amend
reports in accordance with the court or administrative decision. Amendments
filed under this subparagraph would not be restricted by any other provisions
of this section.
(6) The cost method of accounting must be used for investments in other
corporations. Cost is the original valuation of the investment under GAAP,
without reduction for amortization of goodwill or any other write-downs.
Beginning May 1, 1989, of any tax period, the investor's share of the
pre-acquisition retained earnings of a subsidiary or investee may not be
excluded from the investment cost of that subsidiary or investee. Retained
earnings represent the accumulated gains and losses of a corporation to date,
reduced by any dividend distributed to shareholders and any amounts transferred
to either capital stock or paid-in capital. The cost of an investee may be
reduced by legally declared dividends of the investee to the extent that such
dividends exceed the investee's post-acquisition earnings as determined under
(7) Transfers of assets must be reported at the transferor's basis, as
determined under the reporting method used for franchise tax, if allowed by
GAAP. The transferor's basis may not, however, be reduced by unrealized,
estimated, or contingent losses for the purposes of this subsection.
(d) Generally accepted accounting principles method.
(1) For purposes of this title, unless the context clearly requires otherwise,
GAAP means those broad rules of accounting formally accepted by the American
Institute of Certified Public Accountants (AICPA) or its designees through
publication of a statement, interpretation, opinion, or research bulletin. If
no such pronouncement has been published and is effective, such formal
acceptance may be in the form of a written interpretation of a committee of the
AICPA or its designee. In cases where no such interpretation has been published
and is effective, formal acceptance may be through accepted industry accounting
practices, publications of the Securities and Exchange Commission, publications
of regulatory agencies, or any other means which may be shown by the taxpayer
to indicate formal acceptance.
(2) A corporation may report its franchise tax using any allowable method
without regard to accounting methods used for the general ledger, financial
statements, or any other financial reports. However, factual assertions made
for published financial statements will be presumed to be accurate unless the
corporation or the comptroller can show the assertions are incorrect.
(3) The following guidelines are applicable to push-down accounting.
(A) For reports due on or after January 1, 1994, the push-down method of
accounting cannot be used in computing a corporation's surplus.
(B) For reports due prior to January 1, 1994, a corporation may use either the
push-down method of accounting or historical cost in computing its surplus. A
corporation cannot write down its assets pursuant to Tax Code, sec. 171.109(a).
Thus, negative push-down is not allowed.
(e) Federal income tax method.
(1) If a corporation is found to be ineligible to use the federal income tax
method (e.g., as a result of an audit by the comptroller or the Internal
Revenue Service), the corporation will be required to report its franchise tax
using the GAAP method.
(2) In determining if taxable capital is less than $1 million for purposes of
the Tax Code, sec. 171.109(c) and sec. 171.112(c), or if a corporation
qualifies to report under the Tax Code, sec. 171.113, and elects to report
using the federal income tax method, the corporation must apply the methods
used in the last federal income tax return originally due on or before the
franchise tax report is originally due, unless another method is required under
a specific provision of this title or the Tax Code, Chapter 171.
(3) Income exempt for federal income tax purposes must be included in surplus
and receipts based on the same method used for similar items on the federal
income tax return. Expenses which are nondeductible for federal income tax
purposes may be excluded from surplus, if they are allowable for franchise tax
purposes, based on the same method used for similar items on the federal income
(f) Temporary credit claim. If a corporation claims a credit under the Tax
Code, sec. 171.111, it must use the same GAAP method in computing taxable
capital that is used in computing the credit. If the credit is claimed, the
corporation may not use the federal income tax method in whole or in part in
computing taxable capital.
Effective Date: March 7, 1995
Filed with Secretary of State: February 14, 1995
Comptroller of Public Accounts
ACCESSION NUMBER: 9503883R
DOCUMENT TYPE: R
TAX TYPE: FRANCHISE