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Franchise Tax
Frequently Asked Questions

Note: TTC means Texas Tax Code and IRC means Internal Revenue Code

Combined Reporting

Rule 3.590

1. What entities must be included in the combined group that files a combined report?
Taxable entities that are part of an affiliated group engaged in a unitary business are required to file a combined report.

2. What types of entities are included in a combined group?
A combined group can include any taxable entity, including but not limited to, pass-through entities, LLCs, S corporations and disregarded entities.

3. What type of entities cannot be included in a combined group?
A combined group cannot include certain entities that conduct business outside the United States, insurance companies that pay gross premiums tax, a passive entity and an entity exempt from the franchise tax.

4. Can a passive entity be part of a combined group?
No, a passive entity cannot be included in a combined group; however, a member of a combined group will include in total revenue the pro rata share of net income from a passive entity to the extent it was not included in the margin of another taxable entity.

5. What is an affiliated group?
An affiliated group is a group of one or more entities (with or without nexus in Texas) in which a controlling interest (more than 50%) is owned by a common owner.

6. What does unitary business mean?
A unitary business means a single economic enterprise that is made up of separate parts of a single entity or of a commonly controlled group of entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.

7. What factors are considered in determining a unitary business?
Factors to be considered in determining a unitary business include whether the activities of the members are:
  • in the same general line of business, or
  • steps in a vertically structured enterprise or process, or
  • functionally integrated through the exercise of strong centralized management

8. When filing a combined report, should the reporting entity include entities in which there is part ownership, but not more than 50%?
No. An affiliated group is defined as “entities in which a controlling interest is owned by a common owner, either corporate or noncorporate, or by one or more of the member entities.” Controlling interest means an ownership interest (directly or indirectly) of more than 50%. Neither the Affiliate Schedule, Form 05-166, or the Affiliate List, Form 05-165, should include any entity where the ownership interest is 50% or less. If ownership interest is 50% or less in every entity owned, a combined report is not due. Each entity must file a separate report.

This is not to be confused with the reporting requirements when an entity files the Public Information Report or Ownership Information Report as a part of the franchise tax report filing. An entity filing either form must report information on each entity of which it owns 10% or more, and on each entity which owns 10% or more of the reporting entity. (Updated 10/20/08)

9. In determining a combined group, is there attribution of ownership between family members?
An individual constructively owns stock or interest that is owned by his or her spouse. There is no other attribution of ownership between family members.

10. Does a combined group include entities meeting the ownership and unitary criteria if the entity does not have nexus in Texas?
Yes, an entity meeting the ownership and unitary criteria is included in the combined group regardless of whether the entity has nexus in Texas.

11. Does the no-tax-due threshold apply to the individual members of the combined group or the combined group as a whole?
The no-tax-due threshold, discussed at FAQ #32 under Rule 3.584 Reports and Payments, applies to the combined group as a whole. For example, for report years 2014 and 2015 even if one member of a combined group on its own has less than or equal to $1,080,000 in annualized total revenue, that member must still be included in the combined group report. (Updated 12/03/2013)
12. If members of a combined group qualify for different tax rates, how is the tax rate determined for a combined group?
To determine if the combined group is primarily engaged in retail or wholesale trade and therefore allowed the 0.5 percent rate, the combined group must meet all the qualifying criteria in §171.002(c) using the total revenue for the combined group as a whole after eliminations. (Updated 07/22/10)

13. How does the reporting entity of a combined group determine an appropriate SIC Code for the group if its members have different SIC codes?
The reporting entity of a combined group selects an SIC code that is appropriate for the group based on the primary business activity of the combined group as determined by the total revenue of the combined group after eliminations.

14. Is a combined group eligible to use the 70% of revenue calculation?
A combined group is eligible to elect the 70% of revenue calculation.

15. Is a combined group eligible for the discount, E-Z computation or No Tax Due report?
The determination of whether a combined group is eligible for the discount or the E-Z computation shall be made for the combined group as a whole after eliminations. A combined group, if eligible, may file a No Tax Due Information Report.

16. Who is responsible for filing the reports and remitting payments for combined reports?
The combined group must choose a reporting entity. The reporting entity is the combined group's choice of an entity that is:
  • the parent entity, if it is part of the unitary business, or
  • the entity that: (i) is included within the combined group; (ii) is subject to Texas' taxing jurisdiction; and (iii) has the greatest Texas business activity during the first period upon which the first report is based, as measured by the Texas receipts after eliminations for that period.

17. How does a combined group determine its accounting period?
If two or more members of a combined group file a federal consolidated return, the group's accounting period is the federal taxable period of the federal consolidated group. In all other instances, the accounting period is the federal taxable period of the reporting entity.

18.How does a combined group handle members with a different accounting period?
If the federal taxable period of a member differs from the federal taxable period of the combined group, the reporting entity will determine the portion of that member's revenue, cost of goods sold, compensation, etc. to be included by preparing a separate income statement prepared based on federal income tax reporting methods for the months included in the group's accounting period.

19.How will adding members with no Texas receipts affect the calculations?
A member of a combined group that does not have nexus in Texas is included in the calculation of total revenue, margin and gross receipts everywhere. However, the member is not included in the calculation of Texas receipts.

20. If an entity is acquired by a combined group, is the entity required to file a short period franchise tax report?
Facts:


 - Corp A is a separate entity from 1/1/13 through 6/30/13.
 - On July 1, 2013 Corp A was acquired by Group X and is owned by them until 9/3013. Group X has a 3/31/13 accounting year end.
 - On October 1, 2013 Corp A is sold by Group X to Group Z.
 - Group Z has a December 31 accounting year end.
 - Corp A had $600,000 in total revenue for the period of 01/01/13 - 06/30/13.
All entities/groups will file 2014 annual reports based on the following accounting periods:
  • Corp A will file on its own for the period 01/01/13 through 06/30/13. It does not qualify for a No Tax Due Information Report based on total revenue. Its annualized Total Revenue is $1,209,945 which is greater than the $1,080,000 threshold.
  • Group X group will file a combined report on May 15, 2014 based on the period 04/01/12 through 03/31/13. It will NOT include Corp A in the 2014 report because A was not part of the group during the period upon which the tax is based. It will include Corp A in its 2015 annual report for the period 07/01/13 through 09/30/13.
  • Group Z will file a combined report on May 15, 2014 based on the period 01/01/13 through 12/31/13 and will include Corp A's data for the period 10/01/13 through 12/31/13.

(Updated 12/03/2013)

21. Is a combined group required to file initial or final franchise tax reports?
A combined group will not file an initial franchise tax report and will file a final report only if the reporting entity and all of its affiliates are no longer subject to the tax. For the period that a combined group exists, the combined group will file only annual reports regardless of whether the reporting entity or any of the members of the combined group would have been required to file an initial or final report as a separate entity. (Updated 01/03/2012)
22. If an entity is a member of a combined group, will it be required to file a separate first annual franchise tax report?
No. If an entity is part of a combined group report, it will not report its data on a separate first annual report but will include its data with the combined group's report for the corresponding accounting period. The entity should send its first annual report notification letter back to tell the comptroller the name of the reporting entity.

However, if the entity was not a member of a combined group for the accounting period that would be covered by its first annual report, the entity is required to file separate annual reports for the periods that are outside the accounting period that will be used by the combined group.

Example 1: Corporation A is formed on April 3, 2011 as a member of Combined Group Z. It is spun off as a separate non-unitary entity effective August 15, 2011. The normal accounting year end for all parties is December 31. Corporation A will file a 2012 first annual report due May 15, 2012 for August 15, 2011 - December 31, 2011, the period after the spin-off of the corporation. Combined Group Z will file a 2012 annual report including Corporation A for April 3, 2011 - August 14, 2011, the period before the spin-off of the corporation.

Example 2: Corporation A is a separate entity that was formed on November 15, 2010 and has a June 30 accounting year end. Corporation A was acquired by Combined Group Z effective February 1, 2011. Combined Group Z has a December 31 accounting year end. Corporation A will file a 2011 first annual report due May 15, 2011 and report no income for its one-day accounting period 11/15/10-11/15/10 (See FAQ #29 under Rule 3.584 Reports and Payments.) Corporation A's 2012 report will report its operations for the period 11/15/10 through 01/31/11 and is due May 15, 2012. Because Corporation A was acquired by Combined Group Z effective February 1, 2011, Combined Group Z will file a 2012 annual report including Corporation A for the period February 1, 2011 - December 31, 2011.

(Updated 01/03/2012)

23. If an entity is a member of a combined group, will it be required to file a final franchise tax report?
No. If an entity ceases doing business in Texas and is a member of a combined group, the data that would have been reported on the final report will be included in the combined group's report for the corresponding accounting period. The entity should send its final return notification letter back to tell the comptroller the name of the reporting entity.

However, if the entity was not a member of a combined group for the accounting period that would be covered by its final report, the entity is required to file a separate final report for the period that is outside the accounting period that will be used by the combined group.

Example 1: Corporation C is a separate entity that has a December 31 accounting year end. Corporation C was acquired by Combined Group W effective July 1, 2011. Combined Group W also has a December 31 accounting year end. On October 31, 2011 Corporation C is dissolved. Corporation C will file a final report, due December 30, 2011, for the period January 1, 2011 - June 30, 2011, which is the period before Corporation C was purchased by Combined Group W. Combined Group W will file a 2012 annual report and include Corporation C for the period July 1, 2011 - October 31, 2011.

Example 2: Corporation C is a member of Combined Group W. Both Corporation C and Combined Group W have a September 30 accounting year end. Corporation C leaves the combined group effective May 1, 2011. On August 15, 2011, Corporation C is dissolved. Corporation C will file a final report due October 14, 2011 for the period May 1, 2011 - August 15, 2011, which is the period after Corporation C left Combined Group W. Combined Group W will file a 2012 annual report and will include Corporation C for the period October 1, 2010 - April 30, 2011.

(Updated 02/01/2012)

24. If a member of a combined group is required to pay by electronic funds transfer, does the combined group have to pay by electronic funds transfer?
Yes, if any one member of a combined group receives notice that it is required to electronically transfer franchise tax payments, then the combined group is required to electronically transfer payments.
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