Could a corporation use the remainder of a 1996 Texas franchise-tax business loss on its 2000 final report after using part on its 2000 annual report?

Plain-English summary

The corporation could use the remaining 1996 business loss on its 2000 final franchise-tax report after applying the loss during the intervening annual-report years.

The taxpayer's client incurred a federal loss for an accounting year ending March 31, 1995. It reported that loss on its 1996 Texas franchise-tax report, where apportionment produced a Texas business loss. The corporation could not use the loss on its 1997, 1998, or 1999 annual reports, expected to use part on its 2000 annual report, and planned to dissolve in May 2000.

Section 171.110(d) defined a business loss as a negative amount of earned surplus after apportionment and allocation. It allowed the loss to carry forward to the next year and then successively through four more taxable years, until exhausted or the five-year period ended.

The Comptroller therefore confirmed that the 1996-report loss could be carried to the 1997 through 2000 annual reports and the 2000 final report.

Currency note: The letter concerns the pre-2008 earned-surplus tax. Texas replaced that system with the margin tax effective January 1, 2008; current deductions and report-period rules differ.

What this means for you

Corporations closing during a carryforward period

Under the former law applied here, a final report could be one of the reports on which an unexpired business loss was used. The loss still had to remain within the statutory five-taxable-year window.

Tax professionals

Track the Texas loss year and each succeeding report separately. The letter's conclusion is expressly tied to a loss created on the 1996 report and the 1997-2000 annual reports plus a 2000 final report.

Common questions

Q: How long could the former business loss be carried forward?
A: Up to five taxable years after the loss year, or until exhausted, whichever came first.

Q: Could the remaining loss be used on the final report?
A: Yes, on the specific report sequence described in the letter.

Q: Did the corporation have to use the loss earlier if it had earned surplus?
A: Section 171.110(d) described successive carryforward years; this letter says the corporation had been unable to use the loss on its 1997-1999 annual reports.

Citations and references

• Texas Tax Code Sec. 171.110(d) - business-loss definition and carryforward for no more than five taxable years after the loss year

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200003672L

Original ruling text

March 10, 2000

Via fax to **

Dear **:

Thank you for your letter regarding the use of a business loss on a final
franchise tax report.

You stated in your letter that your client incurred a loss for federal income
tax purposes for their accounting year ending 3/31/95. This loss was reported
on the client's 1996 franchise tax report which, after apportionment, created a
business loss. The client was not able to utilize the loss on their 1997, 1998
or 1999 annual franchise tax reports, but will use a portion of the loss on
their 2000 annual franchise tax report. The client plans to dissolve the
corporation in May 2000. You asked that we confirm that your client can use
any remaining business loss from the 1996 franchise tax report year on their
2000 final franchise tax report.

As you know, Section 171.110(d) of the Texas Tax Code (TTC) defines a business
loss as "any negative amount [of earned surplus] after apportionment and
allocation." The statute goes on to say that the "loss shall be carried
forward to the year succeeding the loss year as a deduction to net taxable
earned surplus, then successively to the succeeding four taxable years after
the loss year or until the loss is exhausted, whichever comes first, but for
not more than five taxable years after the loss year." Effectively this means
that the loss can be used to offset net taxable earned surplus on five
franchise tax reports subsequent to the loss year.

Therefore, any business loss created by your client on the 1996 annual
franchise tax report may be carried forward to the 1997 through 2000 annual
franchise tax reports and the 2000 final report.

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

If you have any questions about this or any other franchise tax matter, please
call me at 1-800-531-5441, extension 34612. My direct number is (512)
463-4612. You may write me at Tax Policy Division, Comptroller of Public
Accounts, Austin, Texas 78774.

Sincerely,

Janet Spies
Tax Policy Division