Now that the long-form requirement is gone, must a short-form filer still reduce its business-loss carryover, and does using the short form extend the loss carryforward period?

Plain-English summary

The prior year's instructions had said you must use the long form to preserve a business-loss carryover, but that requirement was removed from the current instructions. A taxpayer asked three questions.

• Q1 - Must a short-form-eligible company use the long form to preserve the carryover? A corporation may want to use the long form to preserve or add to a carryover even if it qualifies for the short form and owes no tax. (Filing the long form is the way to keep it visible, but it is framed as advisable, not mandated.)
• Q2 - Must the carryover be reduced in a short-form year? Yes. Under Rule 3.555(g)(2), a carried-forward loss must be applied to the extent of apportioned plus allocated taxable earned surplus in the succeeding year - even though no tax is owed.
• Q3 - Does using the short form extend the time to use a loss? No. Under Sec. 171.110(e), a loss is carried forward to the succeeding year and the four years after, or until exhausted - no more than five years after the loss year, with no extension for franchise-tax purposes.

Currency note: This 2000 letter applies the pre-2008 franchise tax and its earned-surplus loss rules (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 tracking a business-loss carryover

Dropping the long-form requirement did not change the substance: a profitable amount of earned surplus still ate into your loss in any year, short form or not, and the five-year clock kept running whether or not you used the short form. If you wanted a clean record of the carryover, the practical move was still to file the long form.

Tax professionals

Three crisp points: the long form is advisable, not required; the loss must be applied in short-form years (Rule 3.555(g)(2)); and the five-year carryforward is not extended by short-form filing (Sec. 171.110(e)). All pre-2008; re-verify under the margin tax.

Common questions

Q: Do I have to use the long form to preserve my business-loss carryover?
A: Not required, but advisable. You may want to file the long form to preserve or add to the carryover even if you qualify for the short form and owe no tax.

Q: Must I reduce my carryover in a year I file the short form?
A: Yes. The loss must be applied against that year's apportioned plus allocated earned surplus, even though no tax is due.

Q: Does filing the short form give me more years to use a loss?
A: No. The five-year carryforward under Sec. 171.110(e) is not extended by using the short form.

Citations and references

Statute and rule:

• Texas Tax Code Sec. 171.110(e) - business loss carried forward up to five years; no extension of the period
• 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/200004282L

Original ruling text

April 27, 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.

I have restated you specific questions along with my responses below:

Question 1
The prior year franchise tax instructions specifically stated that you must use
the long form if you want to preserve a business loss carryover. However, the
requirement to use the long form to report the business loss carryover has been
removed from the current year instructions. Is a company that qualifies to use
the short form required to use the long form to preserve the business loss
carryover?

Response
A corporation may want to use the long form franchise tax report to preserve or
add to a business loss carryover even if they qualify to file a short form
report and will owe not tax.

Question 2
If yes then is a company required to reduce its business loss carryover in a
year that it uses the short form?

Response
Yes, 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.

Question 3
If yes then is the time to use a business loss extended when the company uses
the short form?

Response
No. 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." There is no extension of time for a loss carry forward for Texas
franchise tax reporting purposes.

The rule and the statute cite 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