Does Texas require any special franchise-tax filing or short-period report when a corporation changes its fiscal year end?

Plain-English summary

A representative of a Canadian group of companies that was changing its fiscal year end asked whether Texas requires any special franchise-tax filing to approve the change. The Comptroller advised:

• No approval or notification is required for a change in accounting year end, and the corporation files no short-period franchise tax report because of the change. The change is generally reflected on the next annual report.
• Taxable-capital component. Based on the corporation's financial condition as of the last day of the last accounting period ending in the calendar year before the year the tax is originally due, and should include twelve months of gross receipts in the apportionment factor (Tax Code Sec. 171.153(c); Rules 3.544(a)(1)(C) and 3.549(d)(1)).
• Earned-surplus component. Based on business done from the day after the last date the earned-surplus component was based on the previous report, through the last federal accounting period ending in the calendar year before the report year. The federal taxable income on line 19 combines the amounts from the federal returns filed for that period, and gross receipts include all revenues reported (Tax Code Sec. 171.1532(b); Rules 3.544(a)(1)(C) and 3.557(d)(1)).

Important currency note: This letter applies the pre-2008 franchise tax, which had separate taxable-capital and earned-surplus components. The 2007 legislation (House Bills 3 and 3928) replaced it with the current margin tax, which uses a single margin base. Confirm the current accounting-period and reporting rules before relying on this.

What this means for you

Corporations (including foreign groups) changing a fiscal year end

Good news for compliance: Texas asked for nothing special — no approval request, no short-period return — and simply picked up the change on the next annual report. The detailed period rules mattered mainly for lining up the correct months of income and receipts.

Accountants and tax professionals

The value here is the accounting-period mechanics for each pre-2008 component and the confirmation that a year-end change triggers no short-period report. Because the margin tax uses one base, re-verify the current period and apportionment rules for any year-end change today.

Common questions

Q: Does Texas have to approve a franchise-tax fiscal year-end change?
A: No — no notification or approval is required, and no short-period report is filed because of the change.

Q: How does the change show up?
A: Generally on the corporation's next annual franchise tax report.

Q: What period does each component use?
A: Taxable capital uses financial condition on the last day of the last accounting period ending in the year before the report year (twelve months of gross receipts); earned surplus uses business done through the last federal accounting period ending in that prior year.

Citations and references

Statutes and rules:

• Tex. Tax Code Sec. 171.153(c) (accounting period for the taxable capital component)
• Tex. Tax Code Sec. 171.1532(b) (accounting period for the earned surplus component)
• Franchise Tax Rule 3.544(a)(1)(C) (Reports and Payments)
• Franchise Tax Rule 3.549(d)(1) (Taxable Capital: Apportionment)
• Franchise Tax Rule 3.557(d)(1) (Earned Surplus: Apportionment)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200606694L

Original ruling text

June 1, 2006

To: **

Dear **:

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

You state that you represent a Canadian group of companies. The group of
companies is changing its fiscal year end. You ask if Texas requires any
special filing to grant approval for a change in fiscal year end.

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

For franchise tax reporting purposes notification or approval of a change in
accounting year end is not required. Additionally, the corporation does not
file any short period franchise tax reports because of the change in accounting
year end. Generally the corporation’s change in accounting year end will be
reflected on their next annual franchise tax report.

The taxable capital component on an annual report is based on the financial
condition as of the last day of the last accounting period ending in the
calendar year before the calendar year in which the tax is originally due and
should include twelve months of gross receipts in the calculation of the
apportionment factor. See Texas Tax Code Section 171.153(c), Comptroller’s
Rule 3.544(a)(1)(C), Reports and Payments and Rule 3.549(d)(1), Taxable
Capital: Apportionment.

The earned surplus component on an annual report is based on the business done
during the period beginning with the day after the last date upon which the
earned surplus component was based on the previous report, and ending with the
last accounting period ending date for federal income tax purposes ending in
the calendar year before the calendar year in which the report is originally
due. The amount of federal taxable income reported on line 19 of the report
should combine the federal taxable income amounts reported on the federal
returns filed for this period. Gross receipts for the earned surplus component
will include all revenues reported on the returns. See Tax Code Sec.
171.1532(b), Rule 3.544(a)(1)(C), Reports and Payments, and Rule 3.557(d)(1),
Earned Surplus: Apportionment.

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 email address is
[email protected], or you may call toll-free at 1-800-531-5441,
extension 59952.

Sincerely,

Teresa Bostick
Tax Policy Division