Does the Texas franchise tax allow the phased-in IRC Section 179 expense deduction in computing earned surplus, and which year's amount applies to a 2000 report?

Plain-English summary

A taxpayer asked whether the IRC Section 179 expensing deduction is allowed in computing earned surplus on the 2000 franchise tax report, and how much.

• Yes, the phase-in is allowed. Sec. 171.001(b)(5) defines the IRC (for Texas purposes) as the code in effect for the 1996 calendar year. Because the 1996 IRC changes under Public Law 104-188 included a phase-in of the maximum Section 179 deduction, the Comptroller allows that phase-in for earned surplus too.
• The phase-in amounts. $18,000 (1997), $18,500 (1998), $19,000 (1999), $20,000 (2000), $24,000 (2001-2002), $25,000 (2003 or later).
• Which year applies. Under Sec. 171.1532(b), the earned surplus component is based on the corporation's federal accounting period. So the allowable amount on the 2000 report depends on that period - a corporation with a Jan 1-Dec 31, 1999 federal year gets a $19,000 maximum.
• Fact-based. The answer rests on the facts presented and current law.

Currency note: This 2000 letter applies the pre-2008 franchise tax and its fixed 1996 IRC reference (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). These amounts and the conformity date are historical; confirm current law.

What this means for you

Corporations claiming Section 179 expensing

Texas followed the federal phase-in schedule for Section 179 in the earned-surplus base, but you had to use the amount tied to your federal accounting period, not the calendar year of the report - a mismatch that could change the deduction. Because the Texas IRC reference was frozen at 1996, later federal increases to the Section 179 cap did not automatically flow through under this old tax.

Tax professionals

The mechanics: 1996-IRC conformity (Sec. 171.001(b)(5)) + the PL 104-188 phase-in schedule, applied through the earned-surplus reporting period defined in Sec. 171.1532(b). Match the amount to the federal accounting period. All historical under the margin tax; re-verify current expensing conformity.

Common questions

Q: Can I take the IRC Section 179 deduction in computing Texas earned surplus?
A: Yes. Texas allowed the Public Law 104-188 phase-in amounts in computing earned surplus under the old franchise tax.

Q: Which year's amount do I use on a 2000 report?
A: The amount tied to your federal accounting period. A January-December 1999 federal year yields a $19,000 maximum.

Q: Do later federal increases to the Section 179 cap apply?
A: Not under this old tax - Texas conformed to the 1996 IRC. Confirm current conformity under the margin tax.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.001(b)(5) - IRC means the code in effect for the 1996 calendar year
• Texas Tax Code Sec. 171.1532(b) - accounting period on which the earned surplus component is based
• Internal Revenue Code Sec. 179 - expense deduction, with the Public Law 104-188 phase-in of the maximum amount

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200003280L

Original ruling text

March 31, 2000

To: **

Dear **:

Thank you for your email regarding the Internal Revenue Code (IRC) Sec. 179
deduction allowed in computing earned surplus on the 2000 franchise tax report.
I apologize for the delay in responding to your inquiry.

Texas Tax Code Sec. 171.001(b)(5) defines the Internal Revenue Code (IRC) as
the code in effect for the 1996 calendar year. Because the changes to the 1996
IRC (under Public Law 104-188) included a "phase-in" of the maximum deduction
under IRC Section 179, we will allow the phase-in for franchise tax reporting
purposes in computing earned surplus as well.

IRC Section 179 provides the following phase-in deduction amounts:

For federal tax years beginning in: 1997
The applicable amount is: 18,000

For federal tax years beginning in: 1998
The applicable amount is: 18,500

For federal tax years beginning in: 1999
The applicable amount is: 19,000

For federal tax years beginning in: 2000
The applicable amount is: 20,000

For federal tax years beginning in: 2001 or 2002
The applicable amount is: 24,000

For federal tax years beginning in: 2003 or thereafter
The applicable amount is: 25,000

As you know, the earned surplus component of the franchise tax "covering the
regular annual period, other than a regular period included on the initial
report, is based on the business done by the corporation during the period
beginning with the day after the last date upon which net taxable earned
surplus on a previous report was based and ending with its last accounting
period ending date for federal income tax purposes in the year before the year
in which the report is originally due." Texas Tax Code (TTC) Section
171.1532(b).

Therefore, for the 2000 annual franchise tax reports, the amount of the
allowable deduction for Sec. 179 will depend on the accounting period used for
federal income tax purposes. If the corporation's accounting period for
federal tax reporting purposes began on January 1, 1999 and ended on December
31, 1999, the maximum Sec. 179 expense deduction will be $19,000.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you have any questions about this or any other franchise tax matter, you may
call me at 1-800-531-5441, extension 3-4612, or e-mail me at the address below.

Sincerely,

Janet Spies
[email protected]
Comptroller of Public Accounts