If a corporation has under $150,000 in gross receipts and owes no franchise tax, must it file the regular (long) form to keep using a business-loss carryover, and does a no-tax-due year still consume the loss?

Plain-English summary

A taxpayer with a business-loss carryover and under $150,000 in gross receipts everywhere asked whether it must file the regular (long) form to keep using the carryover in future years - illustrated by a $10,000 (1998) loss carried into 2000, an added $20,000 (1999) loss in an under-$150,000 year, then an over-$150,000, $50,000-profit year in 2000.

• The loss must be applied each succeeding year. Sec. 171.110(e) carries a business loss forward up to five years (or until exhausted). Rule 3.555(g)(2) requires applying it to the extent of apportioned plus allocated taxable earned surplus in the succeeding year - so a no-tax-due year still consumes the loss.
• File the long form to preserve or add to the carryover. A corporation may want to use the long form to preserve or add to a business-loss carryover even if it qualifies for the short form and will owe no tax.
• Where it goes on the report. A taxpayer with a carryover must use the loss on line 27 to reduce any positive apportioned plus allocated earned surplus on line 25.
• No-tax-due doesn't matter. That no tax is due because gross receipts are under $150,000 or the tax is under $100 has no bearing on the use of a business loss (Sec. 171.002(d)(2)).

Currency note: This 2000 letter applies the pre-2008 franchise tax and its earned-surplus loss rules and report lines (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The margin tax handles losses and forms differently; confirm current law.

What this means for you

Small corporations carrying a business loss

Two practical points: filing the short form in a low-receipts year did not let you skip applying your loss - a profitable amount of earned surplus used it up regardless of tax due. To keep or grow the carryover, you filed the long form and reported it on line 27 against line 25. Silence on the short form did not extend or protect the loss.

Tax professionals

The line-item mechanics (line 27 loss against line 25 earned surplus) and the Sec. 171.002(d)(2) point (no-tax-due thresholds don't suspend loss use) are the takeaways, together with the five-year clock of Sec. 171.110(e). All pre-2008; re-verify under the margin tax, whose loss and form rules differ.

Common questions

Q: Must I file the long form to keep my business-loss carryover?
A: You may want to. Filing the long form lets you preserve or add to the carryover even when you qualify for the short form and owe no tax.

Q: Does a no-tax-due year still use up my loss?
A: Yes. Rule 3.555(g)(2) requires applying the loss against that year's apportioned plus allocated earned surplus regardless of whether tax is due.

Q: Where does the loss go on the report?
A: On line 27, to reduce any positive apportioned plus allocated earned surplus reported on line 25.

Citations and references

Statutes and rule:

• Texas Tax Code Sec. 171.110(e) - business loss carried forward up to five years or until exhausted
• Texas Tax Code Sec. 171.002(d)(2) - no-tax-due thresholds do not bar use of a business loss
• 34 Tex. Admin. Code Sec. 3.555(g)(2) (Franchise Tax Rule 3.555) - a carried-forward loss must be applied in the succeeding year

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200004281L

Original ruling text

April 28, 2000

To: **

Dear **:

Thank you for your e-mail regarding the preservation of a business loss and the
filing of a short form report for Texas franchise tax.

You asked in your e-mail "if a taxpayer has a business loss carryover from a
prior year and has less than $150,000 in gross receipts everywhere this year,
must the taxpayer file regular form to be able to use the loss carryover in
future years?

"Example - Taxpayer was required to file a 1999 report and showed a $10,000
loss for 1998 (carryover into 2000 report). In 1999, taxpayer has less than
$150,000 in gross receipts everywhere and an additional $20,000 loss. In 2000,
taxpayer will have over $150,000 in gross receipts and expects to have a profit
of $50,000."

Texas Tax Code (TTC) Section 171.110(e) states that a business loss shall be
carried forward "...to the year succeeding the loss year...then successively to
the four taxable years after the loss year or until the loss is exhausted,
whichever occurs first, but for not more than five taxable years after the loss
year."

Franchise tax rule 3.555(g)(2) states that "a business loss which is carried
forward to a successive year must be applied to the extent of apportioned plus
allocated taxable earned surplus in that succeeding year." Even though the
taxpayer will owe no franchise tax, they must use the loss from a prior year to
offset the current year's apportioned plus allocated taxable earned surplus.

Based on the information in the TTC and the rule, a corporation may want to use
the long form franchise tax report to preserve a business loss carryover, or
add to it, even if they qualify to file a short form report and will owe not
tax.

A taxpayer with a business loss carryover from prior franchise tax years must
use that loss on line 27 of the report to reduce any positive amount of
apportioned plus allocated earned surplus on line 25 of the franchise tax
report. The fact that no tax is due because the corporation's gross receipts
from its entire business for both taxable capital and earned surplus are each
less than $150,000 or the corporation's calculated tax liability is less than
$100 has no bearing on the use of a business loss. See Section 171.002(d)(2).

The statute cite and the rule mentioned above can be found on 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." At
that point you'll see a headings for "Franchise Tax Rules" and "Chapter 171 of
the Texas Tax Code."

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, you may
call me at 1-800-531-5441, extension 3-4612, or e-mail me at the address below.

Sincerely,

Janet Spies
[email protected]
Comptroller of Public Accounts