The Texas Comptroller of Public Accounts (“Comptroller”), in STAR Document Number 201706006L, announced its change in policy relating to business losses not exhausted on a franchise tax report due before January 1, 2008. Such business loss carryforwards (BLC) are covered by the “temporary credit” provision in Tax Code Sec. 171.111 (which replaced the previous version addressing federal tax asset and liability timing differences for reports due prior to January 1, 2008). The two aspects of an unused BLC that were modified for reports after January 1, 2008, are 1) whether a BLC must be taken only on a timely filed report; and 2) whether a combined group can take a BLC of a departing member.
1) Whether a BLC Must Be Taken Only on a Timely Filed Report
A taxpayer is still required by the Comptroller to provide written notice of its intent to take its BLCs by the due date of its first report that was due on or after January 1, 2008. But no additional notice is required to take the BLC credits. The Notice of Intent is a one-time election that was made by filing Form 05-172, “Texas Franchise Tax Preservation of Temporary Credit.” Based on the revised policy, the Comptroller will no longer prevent a BLC credit from being taken on a “subsequent” report that was not timely filed.
However, the revised policy still requires that the first report on which the BLC is taken be timely filed. After the first timely filed report in which a credit was taken, the Comptroller will now allow credits to be carried forward to be claimed on a report that is within limitations. The revised policy is described as follows:
Accordingly, for reports years after the credit is taken on a timely filed report, a taxable entity may amend these reports to take a credit that was not previously claimed or allowed on a late-filed report, if the report year is within limitations. If the report year is beyond the statute of limitations, a taxable entity may carryover the credit that was not previously claimed or allowed on a late-filed report.
It further concludes that credits for reports prior to the [first] report in which a credit was taken on a timely filed report are lost.
The policy acknowledges that Comptroller’s Decision No. 110,191 (2015) found that a timely return is not a statutory condition for taking the credit. Regardless, it concludes that the initial credit must be claimed on a timely filed report, though the support for this position is not clear. Thus, the revised policy still applies a requirement that is not in the statute or Comptroller’s Decision No. 110,191—that the first report on which a BLC credit is taken must be a timely filed report.
2) Whether a Combined Group Can Take a BLC of a Departing Member
The second policy revision is that a BLC credit of an entity that left a combined group is allowed to be taken by the combined group if the credit relates to an entity that left the combined group during the accounting period on which the report is based. But the credit is only allowed for the report covering the accounting period during which the departing entity was still part of the combined group. The amount of BLC credit and credit carryover that cannot be used by the combined group on the report is lost.
BLC credits that are allowed under the revised policy for a departing entity may be used on amended franchise tax reports that are still open within the statute of limitations.
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