Texas Comptroller of Public Accounts STAR System
STAR SUPERSEDED WITHOUT SUMMARY
Accession No.(s): 9601762R
Document superseded on: 08/15/2013
STATE OF TEXAS
COMPTROLLER OF PUBLIC ACCOUNTS
Section 3.559. Earned Surplus: Temporary Credit. (Tax Code, Section 171.111).
(a) Provisions. 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) Accounting methods - The method of allocating the cost, benefit, or expense
of an asset or liability to accounting periods. For purposes of the credit
under Section 171.111, the accounting method used to calculate the timing
difference under the Tax Code, Section 171.111, must be in accordance with
GAAP. A change in accounting method includes the method used to allocate assets
and liabilities to accounting periods or changes in estimates used in
calculating the amount of the timing difference under the Tax Code, Section
171.111(b)(1). The disposition of an asset or liability through a sale, trade,
abandonment, or other similar situation is not considered a change in an
(2) Correction of an error - For purposes of computing timing differences under
this section, the correction of an error resulting from mathematical mistakes,
mistakes in the application of accounting principles, or an oversight or
unintentional misuse of facts that existed on the computation date.
(3) Generally Accepted Accounting Principles (GAAP) - For the 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 Accounts (AICPA) or its designees through publication of a statement,
opinion, interpretation, research bulletin, and the like.
(4) Timing differences - Temporary differences as defined in Statement of
Financial Accounting Standards No. 96 (SFAS 96) as amended effective January 1,
1992, which will reverse at some future date.
(A) Events and transactions which do not result in differences between the
basis of an asset or liability for financial and income tax purposes do not
qualify as timing differences even if a provision for income tax is required
under generally accepted accounting principles.
(B) A timing difference is considered to reverse at some future date if such
difference results in income, deductions, expenses, or credits for financial
accounting or federal income tax purposes which offset the difference in basis
in future accounting years. Differences whose reversal are under the control of
the taxpayer do not qualify as timing differences.
(C) For the purposes of this section, deferred investment tax credits,
allowance for funds used during construction, and basis differences for which
tax provisions are not required under SFAS 96, as amended effective January 1,
1992, do not qualify as timing differences.
(c) Notice of intent.
(1) The notice of intent to preserve the right to claim the temporary credit
under the Tax Code, Section 171.111, must be submitted to the comptroller on
forms specified by the comptroller. The form must be filed on or before March
2, 1992 (because March 1, 1992, falls on a Sunday). The postmark date (or
meter-mark date, if there is no postmark) on the envelope in which the form is
received determines the date of filing.
(2) The corporation must submit with the notice of intent the amount of timing
differences determined under the Tax Code, Section 171.111(b)(1). The amount of
such differences may be estimated if no final determination of such amount is
available at the date of filing of the notice of intent. Although corrections
of errors (as defined in this section) in calculating such timing differences
may be made on reports within the period of limitations, changes in accounting
methods will not be considered a correction of an error in calculating such
differences. The corporation will be liable for any applicable penalty and
interest if the amount of timing differences determined results in an
underpayment of tax.
(3) The preservation of the right to claim the credit may not be conveyed,
assigned, or transferred to another entity.
(d) Electing the credit.
(1) The election to claim the credit is a one-time election. If the election is
revoked, the credit may not be claimed on any reports originally due on or
after the date the election is revoked.
(2) A corporation elects the credit by:
(A) properly taking the credit in computing the tax on earned surplus and
paying the additional tax due under the Tax Code, Section 171.111(h), on a
report filed on or before the original due date; or
(B) electing the credit on a timely filed extension request and complying with
the requirements of subparagraph (A) of this paragraph on the report filed on
or before the extended due date of the report.
(3) If a corporation elects the credit on a report on which the corporation was
ineligible for the credit based on the provisions of this rule or the Tax Code,
Chapter 171, the corporation is treated as though the election was not made.
The corporation will be liable for any applicable penalty and interest for
underpayment of tax.
(4) The allowable credit on reports due within the limitation period as
specified in the Tax Code, Chapter 111, Subchapter D is subject to adjustment
even if the initial election to take the credit is outside the period of
limitations under the Tax Code, Chapter 111, Subchapter D.
(e) Computation of the credit.
(1) If the credit under the Tax Code, Section 171.111, is claimed, the
corporation is required to use the GAAP method in computing taxable capital. In
other words, the corporation may not use the federal income tax method in whole
or in part in computing taxable capital.
(2) The amount subject to the credit determined under the Tax Code, Section
171.111(b)(1), is the excess of the basis of qualifying assets minus
liabilities in accordance with generally accepted accounting principles over
the basis of qualifying assets minus liabilities for federal income tax
purposes as of the accounting year end in 1991. Amounts not allowed as timing
differences under this section or Tax Code, Section 171.111, shall be excluded
from the computation of the amount subject to credit. The corporation must
include all assets and liabilities in computing the credit under the Tax Code,
Section 171.111 (i.e., the corporation can not compute the differences for only
certain assets and/or liabilities).
(f) Revocation of the election. Unless otherwise provided in subsection (g) of
this section, the election to claim the credit under the Tax Code, Section
171.111, is revoked at the earliest of the following occurrences:
(1) after making a valid election:
(A) the corporation notifies the comptroller in writing that the election is
(B) the corporation fails to claim the credit on a subsequent report or fails
to report the additional tax due under the Tax Code, Section 171.111(h), on a
subsequent report; or
(C) the corporation uses the federal income tax method in reporting taxable
(2) when calculating taxable capital, the corporation changes the accounting
method for any asset or liability used in determining the timing differences
under the Tax Code, Section 171.111(b)(1); or
(3) the corporation is the nonsurvivor of a merger or consolidation or the
corporation terminates its existence for any other reason.
(g) Correction of error. The election will not be revoked under subsection
(f)(1)(B) or (C) of this section if the corporation files, within 60 days from
the date of notice of the revocation, an amended report correcting the error
which caused the revocation.
(h) Changes in accounting methods. A corporation, otherwise precluded from
changing accounting methods under the Tax Code, Section 171.109, may change
accounting methods on its first report due on or after January 1, 1992, to the
methods used to account for qualifying assets and liabilities on its financial
statements for the accounting year ended in 1991, if the timing differences
computed under the Tax Code, Section 171.111(b)(1), are based on the methods
used on such 1991 financial statements. A corporation that changes methods
under this section is considered to have made a change in accounting methods
for purposes of the Tax Code, Section 171.109. For the purposes of this
section, other changes in accounting methods for qualifying assets and
liabilities are allowed only with the written consent of the comptroller.
(i) Temporary credit. The temporary credit is not available when computing the
additional tax under the Tax Code, Section 171.0011.
Effective Date: January 4, 1996
Filed with Secretary of State: December 14, 1995
ACCESSION NUMBER: 9601762R
DOCUMENT TYPE: R
TAX TYPE: FRANCHISE