| (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 accounting periods. (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, §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 date. (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 comptroller. (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 method. (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 GAAP. (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, §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, §171.109(c) and §171.112(c), or if a corporation qualifies to report under the Tax Code, §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 tax return. (f) Temporary credit claim. If a corporation claims a credit under the Tax Code, §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.
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