| (a) Effective date. 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 otherwise. (1) Business loss--A negative amount after apportionment and allocation but before any deductions for solar energy devices under the Tax Code, §171.107, or investment in an enterprise zone under the Tax Code, §171.1015. (2) Corporation--An entity subject to franchise tax under the Tax Code, Chapter 171. (3) Dividends from a subsidiary, associate, or affiliate that does not transact a substantial portion of its business or maintain a substantial portion of its assets in the United States--Dividends treated as gross income from sources without the United States under the Internal Revenue Code, §862, and
dividends received from United States corporations that would satisfy the 80% foreign business requirements of Internal Revenue Code, §861(c)(1). (4) Internal Revenue Code-- (A) For reports originally due on or after January 1, 1998, the Internal Revenue Code (IRC) of 1986 in effect for the tax year beginning on or after January 1, 1996, and before January 1, 1997. (B) For reports originally due on or after January 1, 1996, and before January 1, 1998, the Internal Revenue Code of 1986 in effect for the tax year beginning on or after January 1, 1994, and before January 1, 1995. (C) For reports originally due on or after January 1, 1992, and before January 1, 1996, the Internal Revenue Code of 1986 in effect for the tax year beginning on or after January 1, 1990, and before January 1, 1991 (1990 IRC). (D) The franchise tax law requires that the 1990 IRC be used for reports originally due
prior to January 1, 1996. Because of this requirement, there may be differences between federal taxable income reported for federal income tax purposes and reportable federal taxable income for franchise tax purposes for franchise tax reports originally due prior to 1996. To the extent that such differences exist, the 1990 IRC must be used to report the differences for reports originally due on or after January 1, 1996. For example, if a corporation was denied any portion of an IRC §179 deduction on an asset in computing taxable earned surplus on a franchise tax report due prior to January 1, 1996 (because the §179 deduction exceeded the $10,000 limit allowed under the 1990 IRC), the corporation will be allowed to compute depreciation on the asset based on the 1990 IRC (i.e., the corporation may depreciate the asset based on the $10,000 §179 deduction allowed under the 1990 IRC) for reports originally due on or after January 1, 1996. (5) Schedule C
special deductions--The special deductions allowed in computing federal taxable income as listed in column (c) of Form 1120 of the Department of the Treasury Internal Revenue Service. Any limitations on Schedule C deductions imposed for federal income tax purposes will apply in computing such deductions for earned surplus. (c) Accounting methods. In computing earned surplus, a corporation is deemed to have made an election to use the same methods used in filing its federal income tax return. (d) Jobs and other credits. A corporation required to reduce or forego deductions in order to claim credits for federal income tax purposes cannot deduct any amount from reportable federal taxable income based on the reduced or foregone deductions. For example: (1) if a corporation, in computing federal taxable income, reduces the deduction for salaries and wages in order to claim a federal jobs credit, reportable federal taxable income is
computed without adjustment of the federal deduction for salaries and wages; (2) if a corporation elects, for federal income tax purposes, to take a foreign tax credit instead of a deduction for foreign income or profits taxes, reportable federal taxable income is computed without a deduction for such taxes. (e) Consolidated income tax returns. For the purposes of this section, if a corporation joins in filing a consolidated federal income tax return, the corporation must compute its earned surplus as though no consolidated federal income tax return were filed. Therefore, taxable income, compensation, and other items must be computed as though a separate federal income tax return had been filed by the corporation. For example, the corporation must eliminate all dividends received from members of the consolidated group with which the corporation filed a consolidated federal income tax return. No special or overt election is required for purposes of
this dividend elimination. If the comptroller determines that transactions between members of a controlled group of corporations are not entered into on an arm's-length basis, the comptroller may distribute or allocate income and deductions as necessary to prevent franchise tax avoidance provided such adjustments are authorized by applying the principles in Internal Revenue Code, §482, and regulations thereunder. (f) Deductions. In computing earned surplus for each reporting period, a corporation may take Schedule C deductions, deductions under the Internal Revenue Code, §78 or 951-964, and other items deducted in computing earned surplus only to the extent each item is included in computing reportable federal taxable income. (g) Business losses. (1) A business loss which is carried forward to a report year must be deducted from apportioned plus allocated taxable earned surplus after any allowable deductions for
enterprise zone projects or solar energy devices. (2) A business loss which is carried forward to a successive year must be applied to the extent of apportioned plus allocated taxable earned surplus in that succeeding year. (3) A corporation may not convey, assign, or transfer a business loss to another entity including, but not limited to, by merger. (h) Deductions for solar energy devices, investments in enterprise zones, and investments in defense economic readjustment zones. (1) A corporation that elects to take a deduction from apportioned earned surplus for solar energy devices under the Tax Code, §171.107, a deduction for investments in enterprise zones under the Tax Code, §171.1015, or a deduction for investments in defense economic readjustment zones, may not claim a deduction from taxable capital for such item. (2) A deduction from apportioned earned surplus for solar
energy devices, investments in enterprise zones, or investments in defense economic readjustment zones may not reduce apportioned earned surplus below zero. Any unused deductions may not be carried over to a subsequent report. (i) Officer and director compensation. Regarding the add-back of compensation of officers or directors of corporations, managers of limited liability companies, and directors and executive officers of banking corporations see §3.558 of this title (relating to Earned Surplus: Officer and Director Compensation). (j) Temporary credit on net taxable earned surplus. (1) A corporation which qualifies and properly elects a temporary credit from net taxable earned surplus under the Tax Code, §171.111, may take the credit as a reduction of the tax due on earned surplus. See §3.559 of this title (relating to Earned Surplus: Temporary Credit). (2) If the temporary credit is elected
on a report, the corporation must pay an additional tax of 0.2% of net taxable capital in addition to the franchise tax due under the Tax Code, §171.002. This additional tax is added to tax otherwise due before the provisions of the Tax Code, §171.002(d), are applied. In other words, if the amount of tax due after adding this additional tax is less than $100, then no tax is owed for the reporting period. (k) Federal obligations. (1) Dividends and interest received from federal obligations are not included in earned surplus or gross receipts for earned surplus purposes. (2) For purposes of this subsection, the term "federal obligations" means: (A) stocks and other direct obligations of, and obligations unconditionally guaranteed by, the United States government and United States government agencies; and (B) direct obligations of United States government-sponsored agencies.
(3) The following words and terms, when used in this subsection, shall have the following meanings, unless the context clearly indicates otherwise. (A) Obligation--Any bond, debenture, security, mortgage-backed security, pass-through certificate, or other evidence of indebtedness of the issuing entity. The term "obligation" does not include a deposit, a repurchase agreement, a loan, a lease, a participation in a loan or pool of loans, a loan collateralized by an obligation of an agency of the United States government or a loan guaranteed by an agency of the United States government. (B) United States government--Any department and ministry of the federal government including the 12 Federal Reserve Banks. The definition of United States government does not include state or local governments or commercial enterprises owned in whole or in part by the United States government. In addition, the term does not include local government
entities or commercial enterprises whose obligations are guaranteed by the United States government. (C) United States government agency--An instrumentality of the United States government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the United States government. These agencies include the Government National Mortgage Association (GNMA), the Veterans Administration (VA), the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA), the Export-Import Bank (Exim Bank), the Overseas Private Investment Corporation (OPIC), the Commodity Credit Corporation (CCC), and the Small Business Administration (SBA). (D) United States government-sponsored agency--Agencies originally established or chartered by the United States government to serve public purposes specified by the United States Congress but whose obligations are not explicitly guaranteed
by the full faith and credit of the United States government. These agencies include the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA), the Farm Credit System, the Federal Home Loan Bank System, and the Student Loan Marketing Association (SLMA). (l) 52-53 week accounting year end. A corporation which uses a 52-53 week accounting year end and has an accounting year ending the first four days of January of the year during which the annual report is originally due may use the preceding December 31 as the date through which taxable earned surplus is computed. (m) Allocated taxable earned surplus. See the Tax Code, §171.1061, regarding the allocation of certain taxable earned surplus to this state.
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