If a corporation stops doing business in Texas and later resumes, does it lose its Texas franchise-tax business loss, and is that the same as a federal NOL?

Plain-English summary

A taxpayer asked: if a corporation stops doing business in Texas and later resumes, does it lose its NOL? The Comptroller explained that the Texas franchise tax has no federal-NOL deduction, but it does have its own "business loss."

• No federal NOL deduction. For earned surplus, the starting point under Tax Code Sec. 171.110(d) is federal taxable income before the NOL deduction, so Texas does not allow a deduction for a federal NOL.
• The franchise "business loss." Sec. 171.110(a)(4) allows a business loss, defined by Sec. 171.110(e) as "any negative amount after apportionment and allocation."
• It stays with the corporation. Texas is a separate-entity state, so the business loss belongs to the corporation that created it. Rule 3.555(g)(3) bars conveying, assigning, or transferring it to another entity, including by merger.
• Use it while it lasts. A corporation that resumes Texas business may still use any remaining business loss to the extent it is within the carryforward period (Sec. 171.110(e)). The letter's example: if the company did not return for seven years, the carryforward period would have expired. (A companion letter, 200204957L, and Franchise Tax Rule 3.555(b)(1) put the carryforward at the five successive years after the loss year.)

Currency note: This letter describes the pre-2008 franchise tax and its earned-surplus business loss (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The current tax treats losses differently; confirm present law.

What this means for you

Corporations that pause and resume Texas operations (pre-2008)

Leaving and coming back did not, by itself, erase a franchise business loss - but the clock kept running. If you returned after the carryforward window closed, the loss was lost. Track the loss year and the remaining carryforward.

Tax professionals

Two points: the franchise "business loss" is not a federal NOL (different starting point under Sec. 171.110(d)), and it is non-transferable under Rule 3.555(g)(3), including through a merger - consistent with the separate-entity structure of the tax. Companion letter 200204957L covers the forward-only, five-year mechanics.

Common questions

Q: Does Texas let me deduct a federal NOL on the franchise tax?
A: No. Earned surplus starts from federal taxable income before the NOL deduction (Sec. 171.110(d)).

Q: Do I lose the business loss if I stop and restart Texas business?
A: Not automatically, but only if you resume while the loss is still within its carryforward period; a seven-year gap would put it past the window.

Q: Can I move a business loss to another company or through a merger?
A: No. Rule 3.555(g)(3) prohibits conveying, assigning, or transferring it, including by merger.

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 171.110(d) - earned surplus begins with federal taxable income before net operating loss deductions
• Texas Tax Code Sec. 171.110(a)(4) - allows a deduction for a business loss
• Texas Tax Code Sec. 171.110(e) - defines a business loss as any negative amount after apportionment and allocation, and sets the carryforward period
• Franchise Tax Rule 3.555(g)(3), 34 Tex. Admin. Code - a corporation may not convey, assign, or transfer a business loss to another entity, including by merger

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200201960L

Original ruling text

January 29, 2002

To: **

Thank you for your Tax Help inquiry concerning the business loss carryover for
Texas franchise tax reporting purposes.

In your email you ask if a corporation discontinues doing business in Texas and
then resumes in the future, do they lose their NOL.

Under the Texas Tax Code (TTC) Section 171.110(d), the beginning point for
computing earned surplus is the corporation's "federal taxable income after
Schedule C special deductions and before net operating loss deductions as
computed under the Internal Revenue Code." Texas franchise tax law does not
permit a deduction against earned surplus for a federal net operating loss
(NOL).

TTC Section 171.110(a)(4) does, however, allow for a deduction of a business
loss, which is defined in TTC Section 171.110(e) as "any negative amount after
apportionment and allocation."

I presume there will be no change in the corporate organization. Texas is a
separate entity state and the business loss is unique to the corporation
creating the loss. Franchise tax rule 3.555(g)(3) states "A corporation may
not convey, assign, or transfer a business loss to another entity including,
but not limited to, by merger."

If your client resumes business in Texas they may utilize any remaining
business loss to the extent they are still within the carry forward period as
defined under Section 171.110(e). If, for example, they did not come back into
Texas until 7 years later, the carry forward period would have expired.

The statutes and rules mentioned, as well as other related materials, are
accessible online at http://www.window.state.tx.us/taxinfo/frantax.html.

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

If you have questions about this, my internet address is
, or you may call toll-free at 1-800-531-5441,
extension 59952.

Sincerely,

Teresa Bostick
Tax Policy Division