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Ezel / Tax Rulings / TX
TX 200204957L Franchise Tax (PRIOR TO 01/01/2008) 2002-04-04

What are the carryback and carryforward rules for a corporate franchise-tax 'business loss,' and is it the same as a federal NOL?

Short answer: A Texas franchise-tax 'business loss' is defined by Texas Tax Code Sec. 171.110(e) and Franchise Tax Rule 3.555(b)(1), which allow it to be carried forward to the five successive years following the loss year. A business loss is not identical to a federal net operating loss (NOL), and unlike a federal NOL it may only be carried forward - there is no carryback. Rule 3.555(g)(1) also prohibits conveying, assigning, or transferring a business loss to anyone else.

Apply this to your situation

This page answers the general question as of 2002. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 2002
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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. It refers to the pre-2008 franchise tax (based on taxable capital and earned surplus) and its earned-surplus business loss, which the 2007 legislation (House Bill 3 and House Bill 3928) replaced with the current margin tax effective January 1, 2008; the margin tax handles losses differently, so confirm current 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 taxpayer asked for "the rule for corporate NOL carry back and carry forward" under the Texas franchise tax. The Comptroller explained that the franchise tax uses its own concept - a "business loss" - which is not the same as a federal NOL.

  • Definition and carryforward. Tax Code Sec. 171.110(e) and Franchise Tax Rule 3.555(b)(1) define a business loss and let it be carried forward to the five successive years following the loss year.
  • Carry-forward only. A business loss and a federal NOL are not identical. Unlike a federal NOL, a business loss may only be carried forward - there is no carryback.
  • No transfers. Under Rule 3.555(g)(1), a business loss may not be conveyed, assigned, or transferred.

Currency note: This letter describes the pre-2008 franchise tax and its earned-surplus business loss (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The current tax treats losses differently; confirm present law.

What this means for you

Corporations with franchise-tax losses (pre-2008)

Do not assume federal NOL rules carried over. Under the old franchise tax a "business loss" only went forward, for five years, and could not be sold or moved to a related entity. If you expected to carry a loss back the way a federal NOL sometimes allowed, that was not available for the franchise tax.

Tax professionals

Treat the franchise "business loss" as a distinct attribute from the federal NOL - different definition, forward-only, non-transferable. (A companion letter, 200203958L, applies Rule 3.555(g)'s no-transfer rule to a corporate merger.)

Common questions

Q: Can a Texas franchise-tax business loss be carried back?
A: No. Unlike a federal NOL, it may only be carried forward - for the five successive years after the loss year.

Q: Is a franchise business loss the same as a federal NOL?
A: No. The Comptroller said they are not identical.

Q: Can a business loss be transferred to another entity?
A: No. Rule 3.555(g)(1) prohibits conveying, assigning, or transferring a business loss.

Citations and references

Statutes and rules:

  • Texas Tax Code Sec. 171.110(e) - defines a business loss for franchise tax and provides for its carryforward
  • Franchise Tax Rule 3.555(b)(1), 34 Tex. Admin. Code - carried forward for the five successive years after the loss year
  • Franchise Tax Rule 3.555(g)(1), 34 Tex. Admin. Code - a business loss may not be conveyed, assigned, or transferred

Source

Original ruling text

April 4, 2002

To: **

You ask: "Please advise what is the rule for corporate NOL carry back and carry
forward?"

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

Texas Tax Code Section 171.110(e) and Franchise Tax Rule 3.555(b)(1) define a
business loss for franchise tax and provide for the carry forward of such a
loss to the successive five years following the loss year. A business loss and
a federal net operating loss (NOL) are not identical. Furthermore, unlike a
federal NOL, a business loss may only be carried forward.

Please refer to Rule 3.555(g)(1) concerning the application of a business loss
and which prohibits the conveyance, assignment or transfer of a business loss.

If you have other questions, please call me toll free at 1-800-531-5441,
extension 3-4931, or directly at 512-463-4931.

Bill York
[email protected]
Texas State Comptroller

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