After 2001's House Bill 2686, can a corporation still take the enterprise-zone franchise tax deduction, and what replaced it?

Plain-English summary

A taxpayer asked how 2001's House Bill 2686 affected the Texas Enterprise Zone Program franchise tax benefits. The Comptroller explained a grandfather rule keyed to the project designation date.

• What was repealed. Article 1 of House Bill 2686 repealed Tax Code Secs. 171.1015 and 171.1016 (the enterprise-zone franchise tax deductions).
• But only going forward. Section 1.16(a) of the bill says Article 1 applies only to enterprise and defense readjustment projects designated by the Texas Department of Economic Development on or after September 1, 2001. Projects designated before that date are governed by the law in effect on the date of the project designation - so the old law continues for them.
• Grandfathered deduction. Corporations that received a project designation before September 1, 2001 may continue to take the applicable deduction on their franchise tax report until the project designation expires.
• The replacement credits. Corporations designated on or after September 1, 2001 may instead qualify for the Subchapter P Jobs Creation Credit (Secs. 171.751-171.761) and the Subchapter Q Capital Investment Credit (Secs. 171.801-171.811). Under the law as it then stood, they could qualify on franchise tax reports originally due on or after September 1, 2003 but before January 1, 2005 (per Secs. 1.16(b) and 2.14(b) of House Bill 2686).

Currency note: This describes the enterprise-zone franchise tax benefits as they stood in 2002. The pre-2008 franchise tax was later replaced by the margin tax (House Bills 3 and 3928, effective January 1, 2008), and the Jobs Creation and Capital Investment credit provisions have since changed. Treat as historical and confirm current enterprise-zone incentives.

What this means for you

Corporations with an enterprise-zone or defense-readjustment project

The key date is when your project was designated, not when you claim the benefit. A designation before September 1, 2001 kept you on the old deduction until that designation expired; a designation on or after that date moved you to the new Jobs Creation and Capital Investment credits, with their own timing windows. Check your designation paperwork before deciding which benefit applies.

Accountants and tax professionals

This is a classic effective-date/transition problem: the repeal of Secs. 171.1015/171.1016 did not disturb already-designated projects. Match each client's project designation date to the correct regime, and note that the specific credit windows cited here (reports due on/after September 1, 2003 but before January 1, 2005) reflect 2002-era law that has since changed.

Common questions

Q: Did House Bill 2686 end the enterprise-zone franchise tax deduction for everyone?
A: No. It repealed Secs. 171.1015 and 171.1016 only for projects designated on or after September 1, 2001; earlier-designated projects keep the deduction until the designation expires.

Q: What do newer projects get instead?
A: The Subchapter P Jobs Creation Credit (Secs. 171.751-171.761) and the Subchapter Q Capital Investment Credit (Secs. 171.801-171.811).

Q: Is this still current?
A: No - the franchise tax became the margin tax in 2008 and these credit provisions have since changed. Confirm current enterprise-zone incentives.

Citations and references

Statutes and legislation:

• Texas Tax Code Secs. 171.1015, 171.1016 - enterprise-zone franchise tax deductions, repealed by House Bill 2686 (2001) for projects designated on or after September 1, 2001
• House Bill 2686 (2001), Secs. 1.16(a), 1.16(b), 2.14(b) - effective-date and transition provisions
• Texas Tax Code Secs. 171.751-171.761 - Subchapter P Jobs Creation Credit
• Texas Tax Code Secs. 171.801-171.811 - Subchapter Q Capital Investment Credit

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200209496L

Original ruling text

September 25, 2002

To: <**>

From: Jerry Bobbitt

Subject: Question regarding tax deductions for enterprise zone projects.

Dear **:

Thank you for your inquiry concerning the Texas Enterprise Zone Program.
Legislation enacted in 2001 made several modifications to the Tax Code with
respect to the franchise tax benefits for eligible corporations.

Article 1 of House Bill 2686 did repeal Tax Code Sections 171.1015 and
171.1016. However, Section 1.16(a) of the bill specifies that Article 1
applies only to those enterprise and defense readjustment projects designated
by the Texas Department of Economic Development on or after September 1, 2001.
Projects designated before that date are governed by the law in effect on the
date of the project designation. Thus, the applicable law continues in effect
for these projects.

Those corporations that received a project designation before September 1, 2001
can continue to take the applicable deduction on their franchise tax report
until the project designation expires.

Eligible corporations that received designations on or after September 1, 2001
may qualify for the Subchapter P Jobs Creation Credit (Sections 171.751 through
171.761) and the Subchapter Q Capital Investment Credit (Sections 171.801
through 171.811). Under current law, eligible corporations may qualify for
these credits on franchise tax reports originally due on or after September 1,
2003 but before January 1, 2005. Please see Sections 1.16(b) and 2.14(b) of
House Bill 2686.

You can access House Bill 2686 through the legislature's website, "Texas
Legislature Online" at http://www.capitol.state.tx.us.

The referenced statutory provisions, as well as other related franchise tax
information, are available online at
http://www.window.state.tx.us/taxinfo/franchise/index.html.

If you have any questions, my internet address is
[email protected], or you may call toll free at 1-800-531-5441,
extension 3-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division