SECTION 3.594. Margin: Temporary Credit for Business Loss Carryforwards

(a) Provisions. The provisions of this section apply to franchise tax reports originally due on or after January 1, 2008.

(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Business loss--Any negative amount of earned surplus after apportionment and allocation but before any deductions for solar energy devices under Tax Code, §171.107, clean coal project under Tax Code, §171.108, or investment in an enterprise zone under Tax Code, §171.1015. Business losses must have been used to offset any positive amount of earned surplus even in years when no tax was due.

(2) Business loss carryforward--Unused and unexpired amounts of business losses created on the 2003 and subsequent franchise tax report years.

(c) Eligibility.

(1) A taxable entity may claim the credit if the entity was, on May 1, 2006, subject to franchise tax.

(2) A taxable entity that is a combined group may claim the credit for each member entity that was, on May 1, 2006, subject to the franchise tax and shall compute the amount of the credit for that member as provided by this section.

(3) If a member of a combined group changes combined groups after June 30, 2007, the business loss carryforward of that member will no longer be included in the temporary credit calculation of the group and the related share of any temporary credit carried over from a previous year is lost to the group. There is no proration for a partial year. In addition, the business loss carryforward does not follow the member to a separately filed report or another combined group. If a member merges into another member of the group, that member's business loss carryforward will remain with the group. If the member dissolves, terminates, or otherwise leaves the group, the business loss carryover of that member is no longer eligible for use. If the combined group adds a new member or members, the credit of the existing members will remain intact, but no credit is allowed for the new member(s).

(4) Example. Corporation A, corporation B, corporation C and corporation D are members of a combined group. They have business loss carryforwards of $2,000,000, $2,000,000, $2,000,000, and $4,000,000 respectively. In 2008, the combined group's credit will be $10,000,000 x 2.25% x 4.5% equaling $10,125. The combined group's tax due before the credit is $9,000 which results in a carryover of $1,125. During 2008, corporation D leaves the group. On the 2009 report, the combined group is entitled to a credit of $6,000,000 x 2.25% x 4.5% equaling $6,075. In addition, the group only has $675 of the carryover credit. They lost the 40% that was related to corporation D. However, if corporation D had merged into corporation C during 2008 instead of leaving the group, the combined group's credit will remain $10,125 for 2009 and there will still be a $1,125 carryover from 2008.

(5) The preservation of the right to claim the credit may not be conveyed, assigned, or transferred to another entity.

(d) Notice requirements.

(1) A notice of intent to preserve the right to claim the temporary credit for business loss carryforwards must be submitted to the comptroller with the first report due from a taxable entity after January 1, 2008, on a form prescribed by the comptroller. The postmark date (or meter-mark date, if there is no postmark) on the envelope in which the form is received determines the date of filing.

(2) The taxable entity must submit with the notice of intent the amount of business loss that is being carried forward.

(3) After the initial preservation, the taxpayer may change the amount preserved only as the result of an Internal Revenue Service audit. The taxpayer must notify the comptroller in writing of the change within 120 days after the Internal Revenue Service audit is final.

(4) If, upon audit by the comptroller, an adjustment is made to the business loss carryforward used on reports prior to 2008, then no notice is required and the amount of business loss carryforwards that were preserved and subsequently taken will be adjusted accordingly. The taxable entity will be liable for any additional tax, penalty, and interest due for years in which the credit was improperly claimed.

(5) No other changes to the amount preserved will be allowed except as provided by subsections (d)(3) and (d)(4) of this section.

(e) Electing the credit. The election to claim the credit shall be made on each report originally due on or after January 1, 2008 and before September 1, 2027.

(1) A taxable entity elects the credit by:

(A) properly taking the credit on a report filed on or before the original due date; or

(B) electing the credit on a timely filed extension request and properly taking the credit on the report filed on or before the extended due date of the report.

(2) If an election to take the credit is not made on or before the original due date of the report as indicated in paragraph (1) of this subsection, the credit for that year is lost for that year and cannot be carried over to a subsequent year.

(3) A taxable entity that uses the E-Z Computation to report and pay its franchise tax may not elect to take the business loss carryforward credit in that year. See Tax Code, §171.1016(c). For any report year in which the E-Z Computation is used, the credit for that year's report is lost and may not be carried over to subsequent years.

(f) Computation of the credit.

(1) For report years 2008 - 2017: Business loss carryforward amount x 2.25% x 4.5%.

(2) For report years 2018 - 2027: Business loss carryforward amount x 7.75% x 4.5%.

(g) Credit carryover. The amount of credit claimed on any report may not exceed the amount of franchise tax due for that report year. The credit is applied to the franchise tax due only if the tax due exceeds $1,000. Unused credits may be carried over to subsequent report years unless subsection (e)(2) of this section applies.

Source Note: The provisions of this §3.594 adopted to be effective January 1, 2008, 32 TexReg 10051; amended to be effective January 1, 2009, 33 TexReg 10505