| (a) Effective date. The provisions of this section 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. (c) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise. (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, litigation). (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 §3.547 of this title (relating to Accounting Methods)) allows its use. (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 §3.553 of this title (relating to 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 §3.547 of this title (relating to Accounting Methods). (2) Tax effect. A surplus adjustment will be reported net of any applicable tax effect. (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 §3.548 of this title (relating to 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 investees must reflect the cost method of accounting in accordance with the Tax Code, §171.109(h). (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 §3.550 of this title (relating to 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.
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