Texas Franchise Tax provides comprehensive discussions on a wide range of issues dealing with the taxation of corporate entities in Texas and considers important issues for all business enterprises doing business in the state. Written by Eric L. Stein, Esq., CPA, with Ryan, in Dallas, this Portfolio gives a detailed discussion of the federal limitations imposed on Texas' corporate tax scheme. It addresses state limitations, such as retroactivity, fairness and equity, and open courts; federal limitations, such as the due process and commerce clauses; and federal statutory limitations, such as Pub. L. No. 86-272.
This Portfolio offers insight concerning both the margins tax enacted in 2006 and the earlier franchise tax provisions, specifying how the taxes are computed and noting the types of activities and entities that are exempt from tax. The discussion includes special issues affecting specific entities such as S corporations, partnerships, and limited liability companies.
In addition, Texas Franchise Tax addresses the taxing of multistate businesses, apportionment and allocation considerations, and credits and deductions available to corporate entities. Administrative and return requirements are also discussed in detail.
Finally, this Portfolio analyzes the Texas Taxpayer's Bill of Rights and addresses tax planning considerations.
Texas Franchise Tax allows you to benefit from:
This Portfolio is part of the Premier State Tax Library, a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.
Detailed Analysis
2400.01. INTRODUCTION
2400.02. SCOPE AND HISTORY OF THE TEXAS REVISED FRANCHISE TAX
A. Scope of Tax
1. Revised Franchise Tax (Reports Originally Due on or After Jan. 1, 2008)
2. Former Franchise Tax (Reports Originally Due on or Before Jan. 1, 2008)
B. History
1. Enforcement
2. Enactment
3. Recent Court Involvement
4. Legislative Involvement
2400.03. ENTITIES SUBJECT TO TAXATION
A. Expanded Definition of Taxable Entities Under the 2006 Amendments
B. Exempt Entities Under 2006 Amendments
C. Exemption for Passive Entities Under 2006 Amendments
D. Disregarded Entities Under 2006 Amendments
E. Entities Subject to Tax Prior to H.B. 3; Corporate Privilege and Qualification to do Business in Texas
F. Domestic Corporations and Limited Liability Companies
1. C Corporations and S Corporations
2. Limited Liability Companies
G. Foreign Corporations and Limited Liability Companies
1. Foreign Corporations
2. Foreign Limited Liability Companies
H. Doing Business
1. "Doing Business" in Texas
2. Texas Certificate of Authority Safe Harbors
3. Comptroller's Business Tax Questionnaire
4. Withdrawal, Dissolution, Merger, Conversion, Consolidation, or Other Termination
2400.04. CONSTITUTIONAL LIMITATIONS
Introductory Material
A. Overview of Federal Constitutional Limitations
B. Overview of State Constitutional Limitations
1. Retroactivity
2. Fairness and Equity
3. Equal and Uniform
4. Open Courts
C. Jurisdiction to Tax
1. Nexus
2. Federal Constitutional Limitations
a. Due Process
b. Commerce Clause-Domestic and Foreign
(1). Substantial Nexus
(2). Fairly Apportioned and Fairly Related to Economic Activity in the State
3. Federal Statutory Limitation on Taxation (Pub. L. No. 86-272)
4. Texas Application of Pub. L. No. 8-272
2400.05. TAX EXEMPTIONS
A. Applying for an Exemption
1. Statutory Exemptions
2. Federal Nonprofit Corporation Exemption
B. Effective Date of Exemption
C. Denied or Revoked Exemption
2400.06. COMPUTING THE REVISED FRANCHISE TAX
A. Overview of 2006 Amendments
B. Calculation of Taxable Margin
1. Determination of Total Revenue from Entire Business
a. Calculation of Total Revenue for Corporations
b. Calculation of Total Revenue for Partnerships
c. Exclusions from Total Revenue
(1). In General
(2). Specific Exclusions for Taxable Entities Providing Legal Services
(3). Specific Exclusions for Health Care Providers
(4). Specific Exclusions for Oil and Gas Producers
(5). Specific Exclusions for Management Companies and Staff Leasing Services Companies
2. Determination of Cost of Goods Sold
3. Determination of Compensation
C. Special Rules
1. Margin for Affiliated Group Engaged in Unitary Business
2. Margin for Certain Partnerships in Tiered Partnership Arrangements
3. Temporary Credit for Business Loss Carryforwards
D. Accounting Business Reports for Computing Tax Base for 2008 and After
1. Initial Report Business Period
2. Annual Reports Business Periods
E. Computing the Franchise Tax Under Former Law for Reports Due Prior to 2008
1. Overview of Prior Law
2. Calculation of Tax on Net Taxable Capital
a. Stated Capital
b. Surplus
(1). Allowances for Depreciation, Depletion and Amortization
(2). Allowance for Funds Used During Construction
(3). Allowance for Uncollectable Accounts
(4). Contingent Liabilities and Estimated Reserves
(5). Deferred Federal Income Taxes
(6). Deferred Investment Tax Credit
(7). Dividends
(8). Foreign Currency Transactions and Translations
(9). Goodwill and Amortization of Goodwill
(10). Intercompany Liabilities (Debt/Equity)
(11). Inventory
(12). Investments in Subsidiaries
(13). Leases
(14). Long–Term Construction Contracts
(15). Mergers
(16). Prepaids
(17). Pushdown Accounting
(18). Public Utility Bonded Rate Increases
(19). Redeemable Preferred Stock
(20). Stock Agreements
(a). Stock Appreciation Rights ("SARs")
(b). Stock Options and Stock Ownership Plans
(c). Stock Subscriptions
(d). Stock Warrants
(21). Treasury Stock
(22). Unrealized Losses
(23). Write-downs/ Write-offs
3. Calculation of Surtax on Taxable Earned Surplus
a. Adjustments to Federal Taxable Income
b. Other Special Deductions
(1). I.R.S. Form 1120, Schedule C, Special Deductions
(2). Other Authorized Deductions
c. Officer's and Director's Compensation
(1). Who Qualifies as an Officer and Director
(2). The Amount of Compensation to Be Added Back to the Earned Surplus Tax Base
d. Business Loss Carryovers
e. Accounting Treatment of Earned Surplus
(1). Internal Revenue Code Provisions
(2). S Corporations/Qualified Subchapter S Subsidiaries
(3). Investment Companies and Trusts
(4). Limited Liability Companies ("LLC")
(5). Conversions
(6). Sale of Stock Deemed a Sale of Assets Under IRC § 338(h)
f. Calculation of Exit Tax (Addition to Earned Surplus Tax)
F. Accounting Methods and Periods
1. Accounting Methods
a. General Accounting Method Requirements
(1). Accounting Methods for Taxable Capital for Reports Due Prior to 2008
(2). Accounting Methods for Earned Surplus for Reports Due Prior to 2008
b. Specific Accounting Method Requirements
(1). Installment Sales
(2). Inventory
(3). Investments in Partnerships and Joint Ventures
(4). Investments in Subsidiaries or Investees
(5). Oil and Gas Corporations
(6). Push Down Accounting
(7). Methods of Accounting for Public Utilities
(8). Transfers of Assets
2. Privilege Periods Covered by the Franchise Tax
3. Accounting Business Periods for Computing the Tax Base
a. Initial Report Business Period
(1). Net Taxable Capital for Reports Due Before 2008
(2). Net Taxable Earned Surplus for Reports Due Before 2008
b. Annual Reports Business Periods
c. Example Privilege and Business Periods
G. Credits and Incentives
2400.07. TAXATION OF MULTISTATE BUSINESSES
A. Overview
1. Constitutional Limitations
2. Legislation
3. Comptroller's Rules
B. Allocation
C. Apportionment
1. Apportionment of Margin to Texas Under 2006 Amendments
a. In General
b. Apportionment for Margins Derived From Certain Sales to or on Behalf of Regulated Investments Companies or Employee Retirement Plans
c. Miscellaneous Apportionment Rules
2. Determination of Gross Receipts for Margin Apportionment Purposes Under Amended Franchise Tax
a. Determination of Gross Receipts From Texas Business
b. Determination of Gross Receipts From Entire Business
3. Apportionment Under Prior Law
a. Ability to Apportion
b. Single-Factor Apportionment
D. Taxable Capital and Earned Surplus Gross Receipts for Franchise Tax Reports Due Before 2008
1. Taxable Capital Gross Receipts
a. Determination of Gross Receipts
b. Periods Used for Gross Receipts
2. Earned Surplus Gross Receipts
E. The Comptroller's List of Sourcing Requirements
F. Examples of Gross Receipts and Sourcing Requirements
1. Dividends and Interest
a. Taxable Capital
b. Earned Surplus
2. Intercorporate Expense Allocations, Receipts, and Tax Allocations
3. Patents, Copyrights, Franchises, Licenses, Trademarks, and Other Intangibles
G. Throwback Rule Under Prior Law
2400.08. REPORTS AND RETURNS
A. Filing Requirements
1. Initial Report
a. Reports Due On or After January 1, 2008
b. Reports Due Prior to 2008
2. Annual Report
3. Final Report
a. Reports Due on or After January 1, 2008
4. Other Reports
a. Public Information Report
b. Insurance Report
c. Additional Public Information Report of Texas Employees Receiving CHIP or Medicaid Assistance.
d. Tax Credit Forms
B. Combined Reporting
1. Affiliated Group Engaged in Unitary Business
1. Reporting for Certain Partnerships in Tiered Partnership Arrangements
D. Tax Rates
E. Due Dates
F. Effective Date of Filings
G. Extensions
1. Initial Report and Final Report
3. Natural Disaster
H. Amended Reports
1. Changing Computation Method
2. Correct Mathematical/Other Error
3. Change in Policy at the Comptroller
4. Internal Revenue Service ("IRS") Adjustments
5. Non-IRS Adjustment
6. Amended Federal Income Tax Consolidated Return
I. Electronic Funds Transfer
2400.09. TAX COLLECTION
A. Comptroller Authority
B. Statute of Limitations
1. Extension By Agreement
2. Taxpayer Omission, Fraud, or Error
3. Assessment When a Refund is Claimed
4. Federal Income Tax Adjustments
5. Final Determination of a Regulatory Agency
6. Tolling of the Limitations Period
C. Audits
D. Confidentiality
E. Dispute Resolution Conference
F. Deficiency and Jeopardy Determination
G. Settlement Authority
H. Forfeiture of Corporate and Business Privileges
I. Forfeiture of Charter or Certificate of Authority
J. Interest, Penalties, and Fines
1. Interest
2. Penalties and Fines
a. Overview
b. General Provision for Penalties and Fines
c. Franchise Tax Provisions for Penalties and Fines
d. Penalties and Interest - Electronic Funds Transfer
K. Waiver of Penalty or Interest
1. Overview
2. Audit Penalty or Interest Waiver Request
3. Nonaudit Penalty or Interest Waiver Request
L. Collection
M. Enforcement
N. Liens
2400.10. CONTESTING TAXES
A. Protest Payment
B. Administrative Review
1. Petition for Redetermination
2. Claim for Refund
3. Administrative Hearing Process
a. Overview of Practice and Procedure
(1). Representation and Participation
(2). Filing of Documents and Inspection of Files
(3). Computation of Time
(4). Service
(5). Witness Fees
(6). Stipulations
(7). Burden of Proof
(8). Ex Parte Communications
(9). Definitions
b. Prehearing Process
(1). Statement of Grounds
(2). Position Letter
(3). Notice of Setting
(4). Reply to Position Letter or Notice of Setting
(5). Response of the Administrative Hearings Section
c. Discovery
(1). Protective Orders
(2). Objections
(3). Interrogatories
(4). Subpoenas, Depositions, and Orders to Allow Entry
(5). Request for Admission
d. Motions
(1). Motion For Extension
(2). Motion for Continuance
(3). Motion for Joinder/Severance
(4). Motion to Dismiss
e. Hearings
f. Proposed Decision
g. Comptroller's Decision
h. Motion for Rehearing
4. Expedited Hearing Process
C. Refund Lawsuit
D. Injunction or Restraining Order
2400.11. TAXPAYER'S BILL OF RIGHTS
A. Requests for Information
B. Easy to Understand Rules
C. Fair and Timely Complaint System
D. Fair, Timely, and Confidential Tax Process
E. Equitable Tax System
F. Working Relationship with Business Community
2400.12. TAX PLANNING
B. Nontaxable Entities
2. Form of Business
3. Limited Partnership
C. Unique Apportionment Rules
2. Converting Texas Property to Non-Texas Property
3. Intermediate Holding Company
D. Summary
Working Papers
Item Description Sheet
Worksheet 1 Texas Certificate of Authority
Worksheet 2 New Franchise Tax Calculation
Worksheet 3 Texas Comptroller's Revised Franchise Tax Presentation
Worksheet 4 BNA 2008 Survey of State Tax Departments: Texas Questionnaire
Worksheet 5 Applicable IRC Versions for Each Report Year
Worksheet 6 "Deep in the Heart of Taxes: Working With Regulations For Texas Margin Tax Points to Still Unresolved Questions," by Mark L. Nachbar and Fredric J. Attermeier
Worksheet 7 "The 'Technically Corrected' Texas Margin Tax Law: What Amendments Made the Cut, What Got the Axe," by Karen Currie, Kirk Lyda, and Kelvin Sellers
Worksheet 8 Franchise Tax Exemptions
Worksheet 9 Examples of Gross Receipts and Sourcing Requirements
Worksheet 10 Alternative GAAP Adjustments
Worksheet 11 Texas Franchise Tax Assistance
Worksheet 12 Texas Articles of Incorporation
Bibliography
BIBLIOGRAPHY