Which asset basis controlled gross receipts when federal and former Texas franchise-tax depreciation methods differed?

Plain-English summary

Each former franchise-tax component used the asset basis tied to its own accounting method.

For taxable capital, Rule 3.547(c)(1) required consistency between the method used to compute surplus and the method used to compute receipts. A GAAP filer used its GAAP depreciation basis; a qualifying filer using the federal income-tax method used federal basis.

In the example, federal basis included a $17,500 Section 179 reduction, producing $67,500 of taxable-capital gain assuming no other depreciation.

For earned surplus, the actual Section 179 deduction allowed on the prior report controlled the sale-year basis. The example produced $60,000 of earned-surplus gain.

Any gain entered Texas receipts for both components if the asset was delivered to a Texas purchaser or the throwback rule applied.

What this means for you

Businesses selling depreciable property

One asset sale could produce different gain amounts for taxable capital and earned surplus.

Tax professionals

Identify the taxpayer's taxable-capital accounting method, the Section 179 amount actually allowed earlier, and the delivery or throwback facts.

Common questions

Q: What basis did a GAAP taxable-capital filer use?
A: The depreciation basis used to compute GAAP surplus.

Q: What basis did a federal-method filer use?
A: Federal income-tax basis for the report year.

Q: What were the example gains?
A: $67,500 for taxable capital and $60,000 for earned surplus.

Citations and references

• I.R.C. Sec. 179
• 34 Tex. Admin. Code Secs. 3.547(c)(1), 3.549(e)(41)(I), and 3.557(e)(37)(I)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9612845l

Original ruling text

December 30, 1996

Dear **:

In your FAX of December 20, you requested a determination regarding the
computation of gross receipts on sales of depreciable property when the
property basis differs for federal income tax and franchise tax purposes.

For the purposes of my response, I presume that the asset is tangible personal
property which qualifies as a capital asset for franchise tax purposes. I also
presume that the gain on the sale of the asset is unitary for purposes of
computing the earned surplus component.

In computing the basis of the property for the taxable capital component of
franchise tax (Schedule A of the report), a corporation is required to use the
same method in computing receipts as it uses in computing surplus (Rule
3.547(c)(1)). Therefore, a corporation using the generally accepted accounting
principles (GAAP) method to report taxable capital should use the depreciation
method used in computing surplus for the report year to compute the basis of
the asset sold.

However, if the corporation qualifies and uses the federal income tax method to
report taxable capital, then the method used for federal income tax purposes
for the report year would be used in computing the basis of the asset sold. In
the example you presented, the basis would be reduced by the $17,500 of Sec.
179 deduction in computing gain (or loss) on the asset sale. Accordingly, the
gain of $67,500 would be used in computing receipts assuming no other
depreciation was taken.

For the earned surplus component, the actual Sec. 179 deduction allowed in
computing taxable earned surplus on the previous report would be used in
computing taxable earned surplus and receipts in the year the asset was sold.
In the example presented, the gain of $60,000 would be used to compute taxable
earned surplus and receipts.

Any gain on the asset sale would be used in computing Texas receipts for both
components if the asset was delivered to a purchaser in Texas or if the
throwback rule applied to the sale (see Rule 3.549(e)(41)(I) and Rule
3.557(e)(37)(I)).

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

If you have any questions, contact Tax Policy Division. You may call toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.
You may write me at Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division