How did a corporation report the former Texas franchise tax after changing its accounting year-end from January 31 to December 31?

Plain-English summary

The year-end change required no extra filing, but the next report used different measurement periods for taxable capital and earned surplus.

The corporation changed from a January 31 accounting year-end to December 31 during 1998. The Comptroller presumed both components of the corporation's 1998 annual report had used the year ending January 31, 1997.

For the 1999 report:

• Taxable capital, Schedule A: use the new December 31, 1998 year-end and include 12 months of gross receipts from January through December 1998.
• Earned surplus, Schedule B: use February 1, 1997—the day after the prior report period ended—through December 31, 1998. Line 19 combined federal taxable income from every federal return filed for that period, and the receipts factor included all revenues on those returns.

The letter said the corporation had no additional filing requirement solely because it changed accounting year-end.

Currency note: Texas replaced the former Schedule A/Schedule B franchise tax with the margin tax effective January 1, 2008.

What this means for you

Corporations changing fiscal year-end

A transition can produce different and unusually long measurement periods across tax components. Reconcile each period to the prior report and relevant federal returns.

Tax professionals

The earned-surplus period here spanned 23 months and required combining multiple federal returns, while taxable-capital receipts covered only calendar 1998.

Common questions

Q: Was a special report required just for the year-end change?
A: No.

Q: What period supplied taxable-capital receipts?
A: January through December 1998.

Q: What period supplied earned-surplus income?
A: February 1, 1997 through December 31, 1998.

Citations and references

• 34 Tex. Admin. Code Sec. 3.544(a)(1)(C)
• 34 Tex. Admin. Code Sec. 3.549(d)(1)
• 34 Tex. Admin. Code Sec. 3.557(d)(1)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9908777L

Original ruling text

August 12, 1999

To: **

Dear **:

Thank you for your e-mail concerning the change in your clients accounting year
end and its effect for franchise tax reporting purposes.

You stated in your e-mail that your client had a year end of 1/31 and that
during 1998, the client changed to a 12/31 accounting year end.

Based on this information, I presume that both components (taxable capital and
earned surplus) of your client's 1998 annual franchise tax report was based on
their accounting year end at 1/31/97.

There are no additional filing requirements for your client because of the
change in the client's accounting year end.

The taxable capital component of the report (Schedule A) should be based on the
new accounting year end of December 31, 1998 and should include twelve months
of gross receipts (January 1998 through December 1998) in the calculation of
the apportionment factor. See Rule 3.544(a)(1)(C), Reports and Payments and
Rule 3.549(d)(1), Taxable Capital: Apportionment.

The earned surplus component (Schedule B) will have a beginning date of
February 1, 1997 (the day after the ending date on the prior franchise tax
report) and an ending date of December 31, 1998 (the last accounting year end
used for federal income tax purposes in the calendar year prior to the year in
which the report is due). The amount of federal taxable income reported on
line 19 of the 1999 report should be a combination of federal taxable income
taken from all federal returns filed during this period. Gross receipts for
the earned surplus component will include all revenues reported on the federal
income tax returns covering the accounting period. See Rule 3.544(a)(1)(C),
Reports and Payments, and Rule 3.557(d)(1), Earned Surplus: Apportionment.

This rules mentioned above can be viewed via the Comptroller's Window on State
Government at . Once you are at the website, click on
the heading "Texas Taxes", then on "The Franchise Tax" and finally on the
heading, "Franchise Tax Rules."

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 questions about this, my internet address is
, or you may call toll-free at 1-800-531-5441,
extension 3-4612.

Sincerely,

Janet Spies
Tax Policy Division
Texas State Comptroller