Ezel / Tax Rulings / TX
TX 9901585L Franchise Tax (PRIOR TO 01/01/2008) 1999-01-11

Could a qualified subchapter S subsidiary elect the federal-income-tax method for taxable capital even if it was not a close corporation and exceeded $1 million?

Short answer: Yes. Section 171.113 allowed certain close corporations and S corporations to use the federal-income-tax accounting method instead of GAAP for taxable capital. Because the Comptroller already treated a QSSS as a separate S corporation for earned-surplus reporting, it extended that treatment and allowed the QSSS to elect the federal method for taxable capital even if it was not a close corporation and had more than $1 million of taxable capital.

Apply this to your situation

This page answers the general question as of 1999. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1999
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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. The election and $1 million reference belong to the pre-2008 taxable-capital system, which Texas replaced with the margin tax effective January 1, 2008; current QSSS, combined-reporting, and accounting rules differ, so confirm present law. 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 QSSS could elect the federal-income-tax accounting method for taxable capital even if it was not a close corporation and had more than $1 million of taxable capital.

Section 171.113 provided an exception to GAAP for certain close corporations and S corporations. The Comptroller had previously treated a qualified subchapter S subsidiary as a separate S corporation for earned-surplus reporting.

Based on that treatment, the agency allowed the QSSS to elect the federal-income-tax method when calculating net taxable capital.

Currency note: This election belongs to the former taxable-capital system. Texas replaced that tax with the margin tax effective January 1, 2008.

What this means for you

Historical QSSS filers

The Comptroller extended separate-S-corporation treatment from earned surplus to the taxable-capital accounting-method election.

Tax professionals

The letter addresses accounting method, not every consequence of QSSS classification under Texas law.

Common questions

Q: Did the QSSS have to be a close corporation?
A: No.

Q: Did taxable capital over $1 million prevent the election?
A: No.

Q: What method could it elect?
A: The federal-income-tax method under Section 171.113.

Citations and references

  • Texas Tax Code Sec. 171.113

Source

Original ruling text

January 11, 1999

Dear Mr. **:

Thank you for your letter concerning the eligibility of a QSSS to use the FIT
method of accounting in determining taxable capital.

You asked in your letter if a qualified subchapter S subsidiary (QSSS) be
deemed to be an S corporation and therefore be eligible to elect to use the FIT
method for computing net taxable capital (even if it is not a close corporation
and has taxable capital in excess of 1 million dollars).

As you stated in your letter, there is an exception to using GAAP to report the
taxable capital component of the franchise tax that applies to certain close
corporations and certain S corporations. See section 171.113 of the Texas Tax
Code (TTC). For the earned surplus component of the franchise tax, we have
previously determined that a QSSS will be treated as if it were a separate S
corporation for franchise tax reporting purposes.

Based on this information and our previous rulings regarding the earned surplus
of a QSSS, we have determined that a QSSS may elect to use the FIT method of
accounting in calculating net taxable capital.

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

If you have any questions about this or any other franchise tax matter, please
call me at 1-800-531-5441, extension 34612. My direct number is (512)
463-4612. You may write me at Tax Policy Division, Comptroller of Public
Accounts, Austin, Texas 78774.

Sincerely,

Janet Spies
Tax Policy Division

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