| (a) Effective date. The provisions of this section apply to franchise tax reports originally due on or after August 26, 1991. (b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise. (1) Limited liability company--A company organized and existing under the provisions of the Texas Limited Liability Company Act or a foreign limited liability company described in the Act, Article 1.02 A(9). (2) 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. (3) C corporation--A corporation defined in Internal Revenue Code, §1361(a)(2). (4) Tax reporting period--For the purposes of this section, the period upon which the tax is based under the Tax Code, §171.1532 or §171.0011. (c) Taxable capital. To determine the taxable capital of a limited liability company, add the company's members' contributions, as provided for under the Texas Limited Liability Company Act, and surplus. (1) The Texas Limited Liability Company Act, Article 5.01A, provides that the contribution of a
member may be in cash, property or services rendered, or a promissory note or other obligation to pay cash or transfer property to the limited liability company. (2) A member's contribution is the sum of the cash contributed and the agreed value of any other contribution made plus the amount of cash and the agreed value of any other contribution which the member has agreed to make in the future as an additional contribution, provided that the promise by a member to make a contribution to, or otherwise pay cash or transfer property to, the limited liability company is set out in writing and signed by the member. (d) Earned surplus. Where and to the extent a limited liability company allocates income and deductions to its members for federal income tax, such items will be treated as income and deductions in determining earned surplus of the limited liability company as though it were taxed as a C corporation for federal income tax purposes.
(1) Federal income tax requirements or limitations imposed on the limited liability company apply for purposes of this section. (2) Unless otherwise provided, federal income tax limitations or other restrictions imposed on the members of the limited liability company with regard to claiming losses, deductions, and other items are ignored in determining taxable earned surplus of the limited liability company. (e) Limited liability company treated as partnership for federal income tax purposes. Treatment of specific items reported to limited liability company members in computing reportable federal taxable income for earned surplus purposes. (1) Ordinary income from trade or business activities is included and ordinary losses from such activities are deducted. (2) Net income from rental activities is included and net losses are deducted. (3) Taxable interest is
included unless the interest qualifies for exclusion under the provisions of §3.555(k) of this title (relating to Earned Surplus: Computation). Interest income which is exempt from federal income tax is excluded and expenses related to such income are not deductible in computing reportable federal taxable income. (4) Dividend income received by a limited liability company is included except for: (A) amounts reportable under the Internal Revenue Code, §78 or §§951-964; (B) dividends from a subsidiary, associate, or affiliate that does not transact a substantial portion of its business in the United States. If 80% or more of a corporate payor's gross receipts (as computed for earned surplus) are attributable to business outside the United States, the corporate payor is not doing a substantial portion of its business within the United States. The payor's gross receipts are measured based on the
period upon which the recipient's tax is based under the Tax Code, §171.0011 or §171.1532; (C) dividends from a subsidiary, associate, or affiliate that does not maintain a substantial portion of its assets in the United States. If 80% or more of a corporate payor's tangible assets (based on original cost) are situated outside the United States, the corporate payor does not maintain a substantial portion of its assets within the United States. The payor's assets are valued at the end of the tax reporting period upon which the recipient's tax is based under the Tax Code, §171.0011 or §171.1532; and (D) dividends which qualify for exclusion under the provisions of §3.555(k) of this title (relating to Earned Surplus: Computation). (5) Royalty income is included. (6) Payments made to members which qualify as guaranteed payments under Internal Revenue Code,
§707(c), and which constitute ordinary and necessary business expenses under Internal Revenue Code, §162, but are not subject to Internal Revenue Code, §263, are deductible. (7) Salaries and wages used in computing ordinary income or loss are allowed in computing reportable federal taxable income after deduction for any jobs credit claimed on the limited liability company federal income tax return. Other expenses which are reduced for credits claimed on the federal income tax return similarly are allowed net of such credits. (8) Deductions for charitable contributions are allowed. (9) Capital losses in excess of capital gains are deductible. (10) If deductions for oil and gas depletion or intangible drilling costs are allowable to members of a limited liability company rather than to the entity itself, the limited liability company must compute such deductions as though the entity were taxed
as a C corporation for federal income tax purposes. (11) The limited liability company is allowed to deduct Internal Revenue Code, §179, amounts reported to members, subject to limitations imposed on the limited liability company as if it were taxed as a C corporation. (12) A limited liability company may deduct foreign income taxes reported to members unless the taxes are otherwise deducted in computing taxable items reported to members. (13) No deduction is allowed for amounts reported to members which are personal expenses even though such items may qualify as itemized deductions on the member's income tax return. (f) Limited liability company treated as sole proprietorship for federal income tax purposes. (1) The reportable federal taxable income of the limited liability company will be the taxable income and deductions reported on the sole proprietor's individual
income tax return, including any schedules and attachments to the sole proprietor's income tax return that relates to the limited liability company. (2) The limited liability company may not deduct any amounts for compensation of the member who is treated as the sole proprietor for federal income tax purposes. (g) Single member limited liability company which is treated as a division or branch of a corporation for federal income tax purposes. The reportable federal taxable income of the limited liability company will be computed as though the limited liability company were a separate corporation for federal income tax purposes. Therefore, the reportable federal taxable income will be computed under the provisions of Texas Tax Code, §171.110(d). (h) Limited liability company treated as corporation for federal income tax purposes. The reportable federal taxable income of the limited liability company will be computed
under the provisions of Texas Tax Code, §171.110(d) as if the limited liability company were a corporation. (i) Officer and director compensation. See §3.558 of this title (relating to Earned Surplus: Officer and Director Compensation) regarding compensation used in computing earned surplus of a limited liability company. (j) Corporate members of limited liability companies. (1) Taxable capital. (A) A corporate member of a limited liability company must use the cost method of accounting for its investment in the limited liability company. (B) Cost is the original valuation of the investment under Generally Accepted Accounting Principles. There will be no adjustment for the member's distributive share of the limited liability company's items of income or loss as reported annually by the limited liability company. The cost of an investee (limited liability company)
will be reduced by distributions and/or withdrawals from the investee insofar as such distributions represent a return of capital. (C) To the extent a distribution and/or withdrawal from the limited liability company is made up of current or previous undistributed earnings of the limited liability company and not a return of capital, it is included in gross receipts for taxable capital of the receiving corporate member. These distributions and/or withdrawals are apportioned based on the state of organization of the payor (limited liability company). (2) Earned surplus. (A) For the portion of a tax reporting period during which a limited liability company is treated for federal income tax purposes as described in subsection (e) or (g) of this section, a corporate member's distributive share of a limited liability company's items of income or loss is not included in the member's earned surplus or gross receipts
for earned surplus to the extent the items would have been reported at the limited liability company level in accordance with the requirements of subsection (e) or (g) of this section. The amounts excluded are limited to the amounts otherwise included in taxable earned surplus of the corporate member. (B) Distributions and/or withdrawals from a limited liability company described in subparagraph (A) of this paragraph are not included in earned surplus and are not considered gross receipts for apportionment purposes of the corporate member unless a gain is recognized by the corporate member for federal income tax purposes. These distributions and/or withdrawals are apportioned based on the state of organization of the payor (limited liability company). (3) For the purposes of the subsection, a corporate member includes a corporation as defined in the Tax Code, §171.001(b)(3).
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