Ezel / Tax Rulings / TX
TX 200412931L Franchise Tax (PRIOR TO 01/01/2008) 2004-12-08

Does a Texas corporation need advance approval or certification before claiming franchise-tax incentive credits?

Short answer: No advance approval or certification is required. The Comptroller explained that a corporation does not need prior approval to claim the franchise-tax incentive credits - the three economic development credits (research and development, Tax Code Secs. 171.721-171.731; jobs creation, Secs. 171.751-171.761; and capital investment, Secs. 171.801-171.811), the day-care and after-school-care credits (Secs. 171.701-171.707), and the credit for wages paid to persons with certain disabilities (Secs. 171.871-171.876). To claim them, a qualifying corporation completes and submits Schedule D (Texas Franchise Tax Credit Summary) with the specific credit worksheet, and must meet all qualifying conditions and follow the Tax Code calculation rules.

Apply this to your situation

This page answers the general question as of 2004. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 2004
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. It describes the pre-2008 franchise tax (based on taxable capital and earned surplus), which the 2007 legislation (House Bill 3 and House Bill 3928) replaced with the current margin tax effective January 1, 2008; treat the holding as historical. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

A taxpayer asked whether advance approval or certification was needed before using the various incentive credits against the (pre-2008) Texas franchise tax. The Comptroller said advance approval is not required and summarized the available credits:

  • Three economic development credits. For research and development expenses (Tax Code Secs. 171.721-171.731), qualified capital investments (Secs. 171.801-171.811), and new jobs created in Texas on or after January 1, 2000 (Secs. 171.751-171.761). Corporations designated as an enterprise or defense readjustment project on or after September 1, 2001 could qualify for the capital investment and jobs creation credits. See Rule 3.578 and Publication 96-686.
  • Child-care credits. Two credits for day-care and after-school-care programs, for qualifying Texas expenditures on or after January 1, 2000 (Secs. 171.701-171.707). See Rule 3.579 and Publication 96-766.
  • Disability-hiring credit. A credit for wages paid to persons with certain disabilities, for reports originally due on or after January 1, 2002 and wages paid or incurred on or after that date (Secs. 171.871-171.876; Rule 3.580).
  • How to claim. No advance approval from the Comptroller is required. A qualifying corporation completes and submits Schedule D (Texas Franchise Tax Credit Summary) with the specific credit worksheet, must meet all qualifying conditions, and must calculate the credit under the Tax Code rules.

Currency note: These are pre-2008 franchise-tax credits. The 2007 legislation (House Bills 3 and 3928) replaced the tax with the current margin tax effective January 1, 2008, and these credits were largely phased out or expired. Treat this as historical; confirm current incentives separately.

What this means for you

Corporations claiming credits on older franchise-tax reports

You did not have to get the Comptroller's sign-off before claiming these credits. The mechanism was self-executing: attach Schedule D and the relevant worksheet, and be ready to show you met every qualifying condition. That also means the burden of proving eligibility sat with the taxpayer at audit.

Accountants and tax professionals

Use this letter as a map of the pre-2008 credit landscape and its statute/rule cites (Rules 3.578, 3.579, 3.580). Because none of these credits exist under the margin tax, this is relevant only for open pre-2008 years.

Common questions

Q: Did I need the Comptroller's approval before taking a franchise-tax credit?
A: No. Advance approval or certification was not required; you claimed the credit on Schedule D with the specific worksheet and had to meet all qualifying conditions.

Q: Which credits did this cover?
A: The R&D, jobs creation, and capital investment economic development credits; the day-care/after-school-care credits; and the credit for hiring persons with certain disabilities.

Citations and references

Statutes and rules:

  • Tex. Tax Code Secs. 171.721-171.731 (research and development credit)
  • Tex. Tax Code Secs. 171.751-171.761 (jobs creation credit)
  • Tex. Tax Code Secs. 171.801-171.811 (capital investment credit)
  • Tex. Tax Code Secs. 171.701-171.707 (child-care/after-school-care credits)
  • Tex. Tax Code Secs. 171.871-171.876 (credit for hiring persons with disabilities)
  • 34 Tex. Admin. Code Secs. 3.578, 3.579, 3.580

Source

Original ruling text

December 8, 2004

To: **

Dear **:

Thank you for your Tax Help inquiry concerning Texas franchise tax.

You ask if prior approval and/or certification are needed before using the
various incentive credits against the franchise tax.

The statutes, rules, forms and publications I mention below, as well as other
related information, are available online at
http://www.window.state.tx.us/taxinfo/franchise/index.html

There are three economic development credits for which a corporation may
qualify. Eligible corporations may take advantage of these credits for certain
research and development expenses and payments incurred, for qualified capital
investments or expenditures made, or for certain new jobs created in Texas on
or after January 1, 2000. Additionally, eligible corporations designated as an
enterprise or defense readjustment project on or after September 1, 2001, may
qualify for the capital investment and jobs creation credit. Texas Tax Code
Sections 171.721-171.731, Sections 171.751-171.761 and Sections
171.801-171.811, respectively. Also see Rule 3.578, Economic Development
Credits, and Publication 96-686, Franchise Tax Credits for Economic
Development.

The franchise tax provides for two credits related to day-care and
after-school-care programs. Eligible corporations may take advantage of these
credits for qualifying expenditures made in Texas on or after January 1, 2000.
Tax Code Sections 171.701-171.707. Also see Rule 3.579, Child Care Credits,
and Publication 96-766, Franchise Tax Credits for Child-Care Programs.

A credit for wages paid to persons with certain disabilities is also available
for franchise tax reports originally due on or after January 1, 2002, and
applies to wages paid or incurred on or after January 1, 2002. Tax Code
Sections 171.871-171.876 and Rule 3.580, Credit for Hiring Persons with
Disabilities.

Advance approval from the Comptroller is not required to claim the above
credits. To claim the credits, qualifying corporations must complete and
submit with their franchise tax report Schedule D, Texas Franchise Tax Credit
Summary, along with the specific credit worksheet. All qualifying conditions
must be met in order to establish eligibility for the credits and the credit
calculations have to be made in accordance with the Tax Code requirements.

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

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our on-line survey at
http://aixtcp.cpa.state.tx.us/surveys/tpsurv/.

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

Sincerely,

Teresa Bostick
Tax Policy Division

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