How is 'surplus' defined for the taxable-capital component of the Texas franchise tax?

Plain-English summary

A taxpayer asked how to calculate surplus for the taxable-capital component of the old franchise tax. The Comptroller restated the three linked statutory definitions.

• Surplus. Under Sec. 171.109(a)(1), surplus is a corporation's net assets minus stated capital, and it includes unrealized, estimated, or contingent losses or obligations and any writedowns of assets.
• Net assets. Under Sec. 171.109(a)(2), net assets are the corporation's total assets minus total debts.
• Debt. Under Sec. 171.109(a)(3), debt is any legally enforceable obligation measured in a certain amount of money that must be performed or paid within an ascertainable period of time or on demand.
• Rule. Surplus is further defined by Franchise Tax Rule 3.551.

This is a definitional letter; it does not decide how any particular item is classified.

Currency note: This 2000 letter applies the pre-2008 franchise tax's taxable-capital / surplus base (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The margin tax no longer taxes taxable capital or surplus; treat this as historical and confirm current law.

What this means for you

Corporations computing taxable capital under the old franchise tax

The base was built on surplus = net assets - stated capital, and the definition swept in soft items (unrealized, estimated, or contingent obligations) rather than letting them reduce the base. Only obligations meeting the strict debt test (certain amount, ascertainable time) reduced net assets. Because the margin tax dropped this base, the definitions matter today only for historical pre-2008 periods.

Tax professionals

Keep the interplay in mind: the three definitions in Sec. 171.109(a) work together, and Rule 3.551 fleshes out surplus. For a worked application of these same definitions to reserves and accruals, see the Comptroller's contemporaneous surplus letters. All of it is pre-2008; re-verify under the margin tax.

Common questions

Q: What is "surplus" for the Texas franchise tax?
A: Net assets minus stated capital, including unrealized, estimated, or contingent losses or obligations and asset writedowns (Sec. 171.109(a)(1)).

Q: What counts as "debt" that reduces net assets?
A: A legally enforceable obligation of a certain amount that must be paid within an ascertainable period of time or on demand (Sec. 171.109(a)(3)).

Q: Does this still apply?
A: No. The taxable-capital/surplus base was replaced by the margin tax effective January 1, 2008. This letter is historical; confirm current law.

Citations and references

Statutes and rule:

• Texas Tax Code Sec. 171.109(a)(1) - surplus is net assets minus stated capital, including unrealized/estimated/contingent losses or obligations and asset writedowns
• Texas Tax Code Sec. 171.109(a)(2) - net assets are total assets minus total debts
• Texas Tax Code Sec. 171.109(a)(3) - debt is a legally enforceable obligation of a certain amount payable within an ascertainable period or on demand
• 34 Tex. Admin. Code Sec. 3.551 (Franchise Tax Rule 3.551, Taxable Capital: Surplus)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200008113L

Original ruling text

August 28, 2000

To: **

Thank you for your e-mail concerning the calculation of surplus for the taxable
capital component of the franchise tax.

Section 171.109(a)(1) of the Texas Tax Code (TTC), defines Surplus as "the net
assets of a corporation minus its stated capital...Surplus includes unrealized,
estimated, or contingent losses or obligations or any writedowns of assets..."
Sec. 171.109(a)(2) defines "Net Assets" as "the total assets of a corporation
minus its total debts." And finally, Sec. 171.109(a)(3) defines "Debt" as "any
legally enforceable obligation measured in a certain amount of money which must
be performed or paid within an ascertainable period of time or on demand."
Surplus is furthered defined in franchise tax rule 3.551, Taxable Capital:
Surplus.

The rule and statutory cites mentioned above may be viewed via the
Comptroller's website, Window on State Government, at .
Once you are on the home page, click on the heading "Texas Taxes", then on
"The Franchise Tax." You'll see links to "Chapter 171 of the Tax Code" and
"Franchise Tax Rules."

If you have questions about this, my internet address is
, or you may call toll-free at 1-800-531-5441,
extension 3-4612.

Sincerely,

Janet Spies
Tax Policy Division
Texas State Comptroller