United States

Texas issues new policy on the credit for business loss carryforwards

TAX ALERT  | 

On June 30, 2017, the Texas Comptroller released Policy Letter Ruling No. 201706006L, relating to the temporary credit for business loss carryforwards as established through Texas Tax Code Section 171.111, and further clarified by the Comptroller through Administrative Rule Section 3.594. Recall that the temporary credit for business loss carryforwards is intended to provide a transition for loss carryforwards generated prior to the enactment of the state franchise tax effective on Jan. 1, 2008. Accordingly, a taxable entity was required to elect to claim the credit for the current year and future year at or before the original due date of any report due after Jan. 1, 2008, until the credit expires provided the credit was fully preserved in accordance with Comptroller guidance.

Policy revision: rule 3.594(e) requirement for timely-filed report

Rule 3.594(e) provided that the election to claim the credit should be made on each report originally due on or after Jan. 1, 2008 and before Sept. 1, 2027 (the expiration of the credit). The rule also provided that if the election was not made on or before the original due date of the report, the credit for that year is lost and cannot be carried over to a subsequent year.

However, a 2015 Comptroller decision found no statutory support for the rule disallowing the credit claimed on a late-filed report. Accordingly, the revised policy now explains that once a taxable entity has preserved the credit and taken the credit on a timely filed report, the taxable entity may claim the credit on any subsequent report, even if the subsequent report is not timely filed. Taxpayers may amend reports to take the credit if it was not previously claimed or allowed on a late-filed report if within the statute of 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. Credits for report years prior to the report year in which the taxpayer claimed the credit on a timely filed report are lost.

Policy revision: claiming a credit when a member entity leaves a combined group

The temporary credit for business loss carryforwards statute provides that a taxable entity loses the right to claim a credit if it changes combined groups. Rule 3.594(c)(3) states that a combined group cannot include a departing member’s credit or credit carryover in the group’s credit calculation.

The revised policy now allows the combined group to claim the departing member’s entire amount of credit and the member’s entire available credit carryover for that report year if the member entity leaves the group during the accounting period on which the report is based. The departed member’s credit is not available to the combined group for subsequent reports. Additionally, the combined group’s credit carryover must be adjusted to remove the portion of the carryover related to the departed member. The policy letter ruling also provides an example of how the credit carryover should be calculated pursuant to a member leaving.

According to the policy letter ruling, the Comptroller will amend any necessary guidance to reflect the two policy changes. Taxpayers with questions about the temporary credit for business loss carryforwards should speak to their tax advisors with questions. 

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