Does the newly enacted federal Job Creation and Worker Assistance Act of 2002 change the Texas franchise tax?

Plain-English summary

A taxpayer asked whether the newly enacted federal Job Creation and Worker Assistance Act of 2002 changed anything for the Texas franchise tax. The Comptroller said no.

• Frozen conformity. Texas franchise tax is calculated under the Internal Revenue Code of 1986 in effect for the tax year beginning January 1, 1996 and before January 1, 1997 (Tax Code Sec. 171.001(b)(5)), plus the regulations for that period. Any change to that date requires new Texas legislation.
• No effect. Consequently, the new provisions of the 2002 federal Act have no effect for Texas franchise tax purposes.
• Reporting. The resulting difference should be reflected in Item 19 of the franchise tax report.
• Caveat. The response is based on the facts presented and current law; different or additional facts could change it.

Currency note: This letter describes the pre-2008 franchise tax, replaced by the current margin tax effective January 1, 2008 (House Bills 3 and 3928). Treat this letter as historical. (The Comptroller applied the same frozen-conformity reasoning in a companion letter addressing the Act's "bonus depreciation" specifically, and in its letter on the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.)

What this means for you

Corporations affected by 2002 federal tax changes

A new federal deduction or timing change from the 2002 Act did not automatically reduce your Texas franchise tax base. Because Texas was locked to the 1996 Internal Revenue Code, you had to back out the federal change on the Texas report - reflected in Item 19.

Tax preparers

When federal law changed mid-decade, the pre-2008 Texas franchise tax generally did not follow unless the Legislature amended the conformity date. Reconcile the federal-to-Texas difference on the return rather than assuming automatic conformity.

Common questions

Q: Did the Job Creation and Worker Assistance Act of 2002 change the Texas franchise tax?
A: No. Texas franchise tax followed the 1996 Internal Revenue Code (Sec. 171.001(b)(5)); only new Texas legislation could change that.

Q: Where is the federal-to-Texas difference reported?
A: The Comptroller said the difference should be reflected in Item 19 of the franchise tax report.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.001(b)(5) - franchise tax calculated under the Internal Revenue Code of 1986 in effect for the tax year beginning January 1, 1996 and before January 1, 1997

Federal law referenced:

• Job Creation and Worker Assistance Act of 2002

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200203898L

Original ruling text

March 25, 2002

TO: **

Dear **:

Thank you for your email regarding the newly enacted Job Creation and Worker
Assistance Act of 2002 and how it relates to the Texas franchise tax.

Texas franchise tax is calculated based upon the Internal Revenue Code of 1986
in effect for the tax year beginning January 1, 1996 and before January 1,
1997, and any regulations adopted under that code applicable to that period.
Texas Tax Code (TTC) 171.001(b)(5). Any changes require new legislation to be
passed by the Texas legislature.

Consequently, the new provisions of the Job Creation and Worker Assistance Act
of 2002 will have no effect for Texas franchise tax purposes. The difference
should be reflected in Item 19.

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

If you need any additional information, please feel free to call me at
1.800.531.5441, extension 34629.

Sincerely,

Lowell Olsen Dunn
Tax Policy Division