Could close corporations and federal S corporations use their federal-income-tax accounting method to compute Texas franchise tax under the new 1989 law?

Plain-English summary

New 1989 legislation allowed corporations organized under the Texas Close Corporation law or a similar law of another state, and corporations with federal S-corporation status, to compute Texas franchise tax using the accounting method used for federal income tax.

The method was optional. The letter also said corporations with less than $1 million of surplus under the federal method already had been allowed to use it.

The legislation applied to reports originally due after December 31, 1989. Eligibility had to exist before the original due date for an initial report and before May 1 of the reporting year for an annual report. A subsidiary could not use the method unless its parent was also eligible.

The STAR record contains two substantially similar versions dated September 25 and October 13, 1989. This summary follows the later version where the wording differs.

Common questions

Was the federal accounting method mandatory? No.

When did the new provision apply? To reports originally due after December 31, 1989.

Could an eligible subsidiary use the method if its parent was ineligible? No.

Is this sales-tax guidance? No. The body addresses Texas corporation franchise tax, despite its placement in the SST discovery stream.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8910L0966G11

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

October 13, 1989

Dear Taxpayer,

The Texas Legislature passed a new law that affects corporations
organized under the
Texas Close Corporation law, or under similar laws of another state, and
corporations
that have elected an "S corporation" status for federal income tax
purposes.

The law allows these corporations to compute their Texas franchise tax
using the same
method of accounting they use to report their federal income tax.

Corporations with surplus of less than $1 million, as determined by their
federal income
tax method of accounting, were already allowed to use this method of
accounting for
franchise tax purposes. No corporation is required to use this method,
even under the
new law.

The legislation applies to reports originally due after December 31,
1989. Guidelines for
this new provision are:

For initial reports, the corporation must be eligible before the original
due date of the return

For annual reports, the corporation must be eligible before May 1 of
the reporting year.

This reporting method does not apply to any subsidiary corporation if
its parent is not also eligible.

For tax assistance call 1-800-252-5555 toll free nationwide, or call
512/463-4600.

(From a Telecommunication Device for the Deaf (TDD) ONLY
call 1-800-248-4099 toll free, or call 512/463-4621-.)

Sincerely,
BOB BULLOCK
Comptroller of Public Accounts

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

September 25, 1989

Dear Taxpayer

The Texas Legislature passed a new law which allows certain corporations
to compute
their Texas franchise tax using the same accounting method they use to
report their
federal income tax.

This new law covers those companies organized under the Texas Close
Corporation law,
or under a similar law of another state, and corporations which have
elected to be treated
as 'S corporations' for federal income tax purposes.

This legislation applies to reports due after December 31, 1989.
Guidelines for this new
provision are:

For initial reports: the corporation must be eligible before the original
due date of the return.

For annual reports: the corporation must be eligible before May 1 of
the reporting year.

This reporting method does not apply to any subsidiary corporation if
its parent is not also eligible.

For tax assistance call 1-800-252-5555 toll free nationwide, or call
512/463-4600.

(From a Telecommunication Device for the Deaf (TDD) ONLY
call 1-800-246-4099 toll free, or call 512/463-4621)

Sincerely,
BOB BULLOCK
Comptroller of Public Accounts