For the 2004 Texas franchise tax, how much IRC Section 179 depreciation from a 2003 federal return is allowed in earned surplus?

Plain-English summary

A taxpayer sought written confirmation of a phone answer: that IRC Section 179 depreciation claimed on a 2003 federal return would be allowed on the 2004 Texas franchise tax report only up to $25,000, with the additional amount (up to $75,000 more) not allowed. The Comptroller confirmed it.

• Earned surplus follows the 1996 Code. Earned surplus is calculated under the IRC of 1986 as in effect for the tax year beginning January 1, 1996 and before January 1, 1997 (Tax Code Sec. 171.001(b)(5)).
• $25,000 cap. Under that 1996 Code, the allowable IRC Section 179 amount is $25,000 for federal tax years beginning in 2003 or thereafter - so the larger federal deduction does not carry into earned surplus.
• Taxable capital via FIT method. If a corporation qualifies and elects to report taxable capital using the FIT accounting method, the federal Section 179 depreciation is allowed in the taxable-capital component, as long as the same method was used on the most recent federal return.

Currency note: This is the pre-2008 franchise tax's earned-surplus computation, replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008. Treat as historical.

What this means for you

Businesses that expensed equipment federally in 2003

Your Texas earned surplus did not follow the bigger federal Section 179 deduction - it held at $25,000. The only route to the larger amount was the taxable-capital component under the FIT accounting method.

Accountants and tax professionals

Cap Section 179 at $25,000 when computing earned surplus (adding back the excess), consistent with the Sec. 171.001(b)(5) conformity date, and use the FIT method in taxable capital to pick up the full federal amount where the corporation qualifies. This mirrors the companion off-the-shelf-software ruling.

Common questions

Q: How much Section 179 depreciation is allowed for Texas earned surplus?
A: $25,000, under the 1996 Internal Revenue Code that earned surplus follows - not the larger federal amount.

Q: Can I get the full federal amount anywhere?
A: In the taxable-capital component, if you qualify for and elect the FIT accounting method and used the same method on your most recent federal return.

Citations and references

Statutes:

• Tex. Tax Code Sec. 171.001(b)(5) (earned surplus conforms to the 1996 IRC)
• IRC Section 179 (election to expense certain property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200401314L

Original ruling text

January 8, 2004

To: **

Dear **:

Thank you for your Tax Help inquiry concerning depreciation and Texas franchise
tax. You stated that you called the toll free telephone line to ask if
Internal Revenue Code (IRC) Section 179 depreciation allowed on the 2003
federal income tax return would be allowed on the 2004 Texas franchise tax
report. You were told that up to $25,000 would be allowed and that the
additional amount of up to $75,000 would not be allowed. You have asked for
written confirmation that this is correct.

Earned surplus for Texas franchise tax is calculated based upon the 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.
Under the 1996 code, the allowable amount of IRC Section 179 depreciation is
$25,000 for federal tax years beginning in 2003 or thereafter. See Texas Tax
Code Section 171.001(b)(5).

If a corporation qualifies and elects to report taxable capital using the FIT
method, the federal Section 179 depreciation will be allowed as long as the
same method was used in the corporation's most recent federal income tax
return.

The statutory citation mentioned above is available via the Comptroller's
website at www.window.state.tx.us. From the home page, click on the link to
"Texas Taxes," then on the link to "Taxes and Fees - Franchise." Click on the
link for "Statutes."

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

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our on-line survey at
http://aixtcp.cpa.state.tx.us/surveys/tpsurv/.

If you have questions about this, my Internet address is
[email protected], or you may call toll free at 1-800-531-5441,
extension 31374.

Sincerely,

Laurie Massengale
Tax Policy Division