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By: Wilson H.B. No. 3146
A BILL TO BE ENTITLED
AN ACT
relating to franchise tax reform.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Section 171.001(a), Tax Code, is amended to read
as follows:
(a) A franchise tax is imposed on:
(1) each corporation, as defined in this section, that
does business in this state or that is chartered or organized under
the laws of this state. [authorized to do business in this state,
and
(2) each limited liability company that does business
in this state or that is organized under the laws of this state or is
authorized to do business in this state.]
SECTION 2. Section 171.001(b)(3), Tax Code, is amended to
read as follows:
(3) "Corporation" means every corporation, limited
liability company, limited partnership, business trust, real
estate investment trust, savings and loan association, banking
corporation, and any other entity for which any of the owners have
limited liability. [includes:
(A) a limited liability company, as defined under the Texas
Limited Liability Company Act;
(B) a savings and loan association; and
(C) a banking corporation.]
SECTION 3. Section 171.001(b)(4), Tax Code, is amended to
read as follows:
(4) "Charter" includes a limited liability company's
certificate of organization, a limited partnership's certificate
of limited partnership, and the registration of a limited liability
partnership.
SECTION 4. Section 171.001(b)(6), Tax Code, is amended to
read as follows:
(6) "Officer" and "director" include a limited
liability company's directors and managers, [and] a limited banking
association's directors and managers and participants if there are
no directors or managers, and persons holding comparable positions
of authority in an unincorporated entity subject to the tax imposed
under this chapter.
SECTION 5. Section 171.001(b)(8), Tax Code, is amended to
read as follows:
(8) "Shareholder" means any person who has an ownership
interest in an entity subject to the tax imposed under this chapter
[includes a limited liability company's member and a limited
banking association's participant].
SECTION 6. Section 171.101(a), Tax Code, is amended to read
as follows:
(a) Except as provided by Subsections (b)-(d) [and (c)], the
net taxable capital of a corporation is computed by:
(1) adding the corporation's stated capital, as
defined by Article 1.02, Texas Business Corporation Act, and the
corporation's surplus, to determine the corporation's taxable
capital;
(2) apportioning the corporation's taxable capital to
this state as provided by Section 171.106(a) or (c), as applicable,
to determine the corporation's apportioned taxable capital; and
(3) subtracting from the amount computed under
Subdivision (2) any other allowable deductions to determine the
corporation's net taxable capital.
SECTION 7. Section 171.101, Tax Code, is amended by adding
(d) to read as follows:
(d) The net taxable capital of a partnership or
unincorporated association, other than a limited liability company
or a savings and loan association, is computed by:
(1) adding the entity's capital accounts, undistributed
profits, and surplus to determine the taxable entity's taxable
capital;
(2) multiply that amount by the percentage of the entity's
ownership interests directly owned by persons other than natural
persons;
(3) apportioning the amount determined under Subdivision
(2) to this state as provided by Section 171.106(a), (c), or (d), as
applicable, to determine the entity's apportioned taxable capital;
and
(4) subtracting from the amount computed under Subdivision
(3) any other allowable deductions, to determine the entity's net
taxable capital.
SECTION 8. Section 171.110(a), Tax Code, is amended to read
as follows:
(a) The net taxable earned surplus of a corporation is
computed by:
(1) determining the corporation's reportable federal
taxable income, subtracting from that amount any amount included in
reportable federal taxable income under Section 78 or Sections
951-964, Internal Revenue Code, 1 and dividends received from a
subsidiary, associate, or affiliated corporation that does not
transact a substantial portion of its business or regularly
maintain a substantial portion of its assets in the United States,
and adding to that amount any compensation of officers or
directors, or if a bank, any compensation of directors and
executive officers, to the extent excluded in determining federal
taxable income to determine the corporation's taxable earned
surplus;
(2) If an entity subject to the tax imposed under this
chapter is a partnership or an unincorporated association,
excluding limited liability companies and savings and loan
associations, and that entity is directly owned by a natural person
who is entitled to a distributive share of the entity's income or
loss, then subtract the natural person's distributive share of the
entity's reportable taxable income or loss from the amount computed
under Subdivision (1).
(3) adding to that amount any expense accrued or paid to a
related entity, which was not subject to the tax imposed under this
chapter, including, but not limited to, management fees, the use of
an intangible, or interest on inter-company loan transactions, to
the extent deducted in arriving at the corporation's reportable
federal taxable income;
(4) subtracting from that amount the corporation's share of
income, loss, or deduction from a limited liability company,
limited partnership, or S corporation included in the corporation's
reportable federal taxable income under the provisions of Section
702(a) or 1366(a), Internal Revenue Code, to the extent included in
the net taxable earned surplus of the limited liability company,
limited partnership, or S corporation or to the extent it would be
included in the net taxable earned surplus, excluding income from
payments described in Subdivision (3), of the limited liability
company, limited partnership, or S corporation, if the entity were
doing business in this state;
(5) [(2)] apportioning the corporation's taxable earned
surplus to this state as provided by Section 171.106(b) or (c), as
applicable, to determine the corporation's apportioned taxable
earned surplus;
(6) [(3)] adding the corporation's taxable earned surplus
allocated to this state as provided by Section 171.1061; [and]
(7) [(4)] subtracting from that amount any allowable
deductions and any business loss that is carried forward to the tax
reporting period and deductible under Subsection (e).
(b) A corporation is not required to add the compensation of
officers or directors as required by Subsection (a)(1) if the
corporation is:
(1) a corporation that has not more than 35 shareholders; or
(2) an S corporation, as that term is defined by Section
1361, Internal Revenue Code.
(c) Subsection (b) does not apply to a subsidiary
corporation unless it applies to the subsidiary's parent
corporation.
(d) A corporation's reportable federal taxable income is
the corporation's federal taxable income after Schedule C special
deductions and before net operating loss deductions as computed
under the Internal Revenue Code, except that an S corporation's
reportable federal taxable income is the amount of the income
reportable to the Internal Revenue Service as taxable to the
corporation's shareholders.
(e) Reportable federal taxable income shall be determined
before adjustment for distributions to owners and includes all
income taxable to the entity or the owners for federal income tax
purposes.
(f) [(e)] For purposes of this section, a business loss is
any negative amount after apportionment and allocation. The
business loss shall be carried forward to the year succeeding the
loss year as a deduction to net taxable earned surplus, then
successively to the succeeding four taxable years after the loss
year or until the loss is exhausted, whichever occurs first, but for
not more than five taxable years after the loss year.
Notwithstanding the preceding sentence, a business loss from a tax
year that ends before January 1, 1991, may not be used to reduce net
taxable earned surplus. A business loss can be carried forward only
by the corporation that incurred the loss and cannot be transferred
to or claimed by any other entity, including the survivor of a
merger if the loss was incurred by the corporation that did not
survive the merger.
(g) [(f)] A corporation may use either the "first in-first
out" or "last in-first out" method of accounting to compute its net
taxable earned surplus, but only to the extent that the corporation
used that method on its most recent federal income tax report
originally due on or before the date on which the corporation's
franchise tax report is originally due.
(h) [(g)] For purposes of this section, an approved
Employee Stock Ownership Plan controlling a minority interest and
voted through a single trustee shall be considered one shareholder.
(i) [(h)] A corporation shall report its net taxable earned
surplus based solely on its own financial condition. Consolidated
reporting is prohibited.
(j) [(i)] For purposes of this section, any person
designated as an officer is presumed to be an officer if that
person:
(1) holds an office created by the board of directors
or under the corporate charter or bylaws; and
(2) has legal authority to bind the corporation with
third parties by executing contracts or other legal documents.
(k) [(j)] A corporation may rebut the presumption described
in Subsection (i) that a person is an officer if it conclusively
shows, through the person's job description or other documentation,
that the person does not participate or have authority to
participate in significant policy making aspects of the corporate
operations.
SECTION 9. For an entity becoming subject to the franchise
tax under this Act:
(1) income or losses occurring before January 1, 2003 may
not be considered for purposes of the earned surplus component;
(2) for entities in existence on January 1, 2003, that would
have been subject to the franchise tax had this Act been in effect
on January 1, 2003, the first report due under this Act will be
either a final report, if applicable, or an annual report due May
15, 2004; and
(3) for entities that would have become subject to the
franchise tax after January 1, 2003, had this Act been in effect on
January 1, 2003, the first report due under this Act will be an
initial report or a final report, if applicable.
SECTION 10. This Act takes effect September 1, 2003.