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By: Dunnam H.B. No. 70
A BILL TO BE ENTITLED
AN ACT
relating to the application of the franchise tax.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Subchapter A, Chapter 171, Tax Code, is amended
by adding Section 171.003 to read as follows:
Sec. 171.003. APPLICABILITY OF FRANCHISE TAX. (a) This
section applies only to an entity that is not defined as a
corporation by Section 171.001(b)(3) but:
(1) that is operated for profit;
(2) that is operating, organized, or registered under
the laws of this state in a manner that provides liability
limitations for a person who holds an ownership interest in the
entity, including a partner's interest in a partnership; and
(3) in which any ownership interest is held by an
entity other than a natural person, without regard to whether the
person that is not a natural person is located in this state or is in
any other manner doing business in this state.
(b) An entity to which this section applies is subject to
the franchise tax under this chapter in the manner provided by this
section.
(c) The net taxable capital of the entity is computed by:
(1) adding the entity's capital accounts,
undistributed profits, and surplus to determine the entity's
taxable capital;
(2) apportioning the entity's taxable capital to this
state as provided by Section 171.106 to determine the entity's
apportioned taxable capital; and
(3) subtracting from the amount computed under
Subdivision (2) any other allowable deductions to determine the
entity's net taxable capital.
(d) For purposes of Subsection (c)(1), an amount that
belongs to or is included in the entity's capital accounts,
undistributed profits, or surplus is excluded if the amount has
been added once under that subsection in determining the entity's
taxable capital.
(e) The net taxable earned surplus of the entity is
determined as provided by Section 171.110 if the entity is not a
partnership. If the entity is a partnership, the net taxable earned
surplus of the entity is computed by:
(1) determining the partnership's reportable federal
taxable income and making the following adjustments:
(A) subtraction any taxable income of a partner
who is a natural person;
(B) subtracting 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
(C) adding any compensation of each officer or
director who owns 0.1 percent or more of the partnership, to the
extent excluded in determining reportable federal taxable income;
(2) apportioning the partnership's taxable earned
surplus to this state as provided by Section 171.106 to determine
the partnership's apportioned taxable earned surplus;
(3) adding the partnership's taxable earned surplus
allocated to this state as provided by Section 171.1061; and
(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 (f).
(f) For purposes of Subsection (e)(1):
(1) an amount may not be subtracted from reportable
federal taxable income more than once; and
(2) an amount may not be added to reportable federal
taxable income more than once.
(g) 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 incurred before January 1,
2006, may not be used to reduce net taxable earned surplus.
(h) Notwithstanding any other provision of this section, to
the extent that the net income of natural persons, including a
person's share of partnership and unincorporated association
income, may not be taxed as provided by Section 24, Article VIII,
Texas Constitution, the income is not included in net taxable
earned surplus and is not subject to the tax imposed under this Act.
SECTION 2. (a) Subject to Subsection (b) of this section,
the changes made by this section take effect for initial, annual, or
final franchise tax reports originally due on or after January 1,
2007.
(b) For an entity becoming subject to the franchise tax
under this section:
(1) income or losses occurring before January 1, 2006,
may not be considered for purposes of the earned surplus component;
(2) for entities in existence on January 1, 2006, that
would have been subject to the franchise tax had this Act been in
effect on January 1, 2006, the first report due under this Act will
be either a final report, if applicable, or an annual report due May
15, 2007; and
(3) for entities that would have become subject to the
franchise tax after January 1, 2006, had this Act been in effect on
January 1, 2006, the first report due under this Act will be an
initial report or a final report, if applicable.
SECTION 3. This Act takes effect September 1, 2006.