Does the federal 'bonus depreciation' from the Job Creation and Worker Assistance Act of 2002 apply for the Texas franchise tax?

Plain-English summary

A taxpayer asked whether the federal "bonus depreciation" enacted in the Job Creation and Worker Assistance Act of 2002 applies for Texas franchise tax reports. The Comptroller gave a split answer that turns on the two components of the old franchise tax.

• Earned surplus - no. Earned surplus for Texas franchise tax is calculated under the Internal Revenue Code of 1986 in effect for the tax year beginning January 1, 1996 and before January 1, 1997 (Tax Code Sec. 171.001(b)(5)), together with the regulations for that period. That conformity date is frozen; changing it takes new Texas legislation. So the new 2002 federal bonus-depreciation provisions have no effect on the earned-surplus component.
• Taxable capital (FIT method) - yes. If a corporation qualifies for and elects to report taxable capital using the FIT method, the federal bonus depreciation is allowed, as long as the same method was used on the corporation's most recent federal income tax return.
• Caveat. The response is based on the facts presented and current law; different or additional facts could change it.

Currency note: This letter describes the pre-2008 franchise tax (taxable capital and earned surplus). House Bills 3 and 3928 replaced it with the current margin tax effective January 1, 2008, which conforms to a different, later Internal Revenue Code and handles depreciation differently. Treat this letter as historical.

What this means for you

Corporations claiming accelerated federal depreciation (pre-2008)

Do not assume a new federal depreciation break flows through to Texas. For the earned-surplus base, Texas was locked to the 1996 IRC, so 2002 bonus depreciation simply did not reduce earned surplus. The break only reached the franchise tax through the taxable-capital side, and only for corporations electing the FIT method consistently with their latest federal return.

Tax preparers reconciling federal and Texas depreciation

When a federal law change alters depreciation, check the specific Texas conformity date for each franchise-tax component before adjusting the Texas computation. Under this letter, a mismatch between the frozen 1996 earned-surplus conformity and current federal law was expected and correct.

Common questions

Q: Did 2002 federal bonus depreciation reduce Texas earned surplus?
A: No. Earned surplus was tied to the 1996 Internal Revenue Code (Sec. 171.001(b)(5)), and only new Texas legislation could change that.

Q: Could any part of the franchise tax use bonus depreciation?
A: Yes - the taxable capital component, if the corporation qualified for and elected the FIT method and used the same method on its most recent federal return.

Q: Why the difference between the two components?
A: The earned-surplus base used a frozen IRC conformity date, while the FIT-method taxable-capital computation followed the corporation's actual most-recent federal return.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.001(b)(5) - earned surplus is calculated under the Internal Revenue Code of 1986 in effect for the tax year beginning January 1, 1996 and before January 1, 1997

Federal law referenced:

• Job Creation and Worker Assistance Act of 2002 - the federal bonus-depreciation provisions at issue

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200204014L

Original ruling text

April 26, 2002

TO: ** <**>

Dear **:

Thank you for your email regarding the "bonus depreciation" and whether or not
it applies for Texas franchise tax reports for corporations that use the FIT
method.

The statute and rule I mention below, as well as other related materials, are
available online at http://www.window.state.tx.us/taxinfo/frantax.html.

Earned surplus for Texas franchise tax is calculated based upon the Internal
Revenue Code (IRC) of 1986 in effect for the tax year beginning January 1, 1996
and before January 1, 1997, and any regulations adopted under that code
applicable to that period. Texas Tax Code (TTC) 171.001(b)(5). Any changes
require new legislation to be passed by the Texas legislature.

Consequently, the new provisions of the Job Creation and Worker Assistance Act
of 2002 will have no effect for the earned surplus component of the Texas
franchise tax.

However, if a corporation qualifies and elects to report taxable capital using
the FIT method, the federal "bonus depreciation" will be allowed as long as the
same method was used in the corporation's most recent federal income tax
return.

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

If you need any additional information, please feel free to call me at
1-800-531-5441, extension 34629.

Sincerely,

Lowell Olsen Dunn
Tax Policy Division