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Franchise Tax
Frequently Asked Questions

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

Total Revenue

Rule 3.587

1. Is the calculation of total revenue the same as federal income?
Total revenue is specifically defined in TTC 171.1011 and is tied to the amounts entered on specific lines from the federal return, to the extent the amount entered complies with federal income tax law, minus statutory exclusions. See FAQ #22 and #25 in this section for more information about the effect on total revenue of line number changes on federal returns. Also note that “Internal Revenue Code” means the Internal Revenue Code of 1986 in effect for the federal tax year beginning on January 1, 2007, and does not include any changes made by federal law after that date. TTC Section 171.0001(9). (Updated 03/20/12)
2. What are some examples of flow-through funds mandated by contract that can be excluded from total revenue?
To the extent included in gross revenue, only the following flow-through funds mandated by contract to be distributed to other entities may be excluded from total revenue: an amount for certain sales commissions to non-employees, the tax basis of securities underwritten, and payments to a subcontractor for the design, construction, or repair of improvements on real property or the location of boundaries to real property. (Updated 11/23/10)
3. Do attorneys have exclusions from total revenue?
Yes, under TTC 171.1011(g-3), attorneys are allowed certain exclusions such as damages awarded by the courts to claimants.
4. Are real estate gains taxable?
A gain from the sale of real property is included in total revenue.
5. If a health care provider excludes from total revenue the actual cost of uncompensated care, must the health care provider decrease its cost of goods sold or compensation deduction by the costs excluded from total revenue?
Yes, the costs of uncompensated care that have been excluded from total revenue may not be subtracted as cost of goods sold or compensation. (Updated 06/19/08)
6. If a health care provider excludes from total revenue payments received under the Medicaid, Medicare and other programs specified in Tax Code §171.1011(n), must the health care provider make a corresponding adjustment to its cost of goods sold or compensation deduction?
No adjustment to the cost of goods sold or compensation deduction is necessary when excluding payments received under these programs.
7. Are co-payments and deductibles received from individuals under the Medicaid, Medicare and other programs specified in Tax Code §171.1011(n) excluded from total revenue?
Co-payments and deductibles received under these programs may be excluded from total revenue.
8. What is "annualized revenue?"
The no-tax-due threshold, discounts on tax due based on total revenue amounts less than $900,000 and qualification for the E-Z computation are typically based on a 12-month (365 day) accounting period. When the accounting period upon which the report is based is more or less than 12 months, a taxable entity must annualize its total revenue calculation to determine its eligibility for these provisions. To annualize total revenue, a taxable entity will divide total revenue by the number of days in the period upon which the report is based, and then multiply the result by 365. (Updated 3/31/08)
9. If you reduce your property taxes and insurance expense for IRS reporting purposes for the amount of reimbursements received from tenants, can you also exclude these reimbursements from total revenue for Texas margin tax purposes?
CFR §1.61-8(c) states, "As a general rule, if a lessee pays any of the expenses of his lessor such payments are additional rental income of the lessor…" Total revenue for franchise tax reporting is specifically defined in Texas Tax Code §171.1011 and is tied to the amounts entered on specific lines from the federal return, to the extent the amount entered complies with federal income tax law, minus statutory exclusions. Based on the above IRS regulation, the reimbursement of expenses should be reported for federal tax purposes in gross rental income and not offset with the expenses. Therefore, for franchise tax reporting purposes the expense reimbursements are included in total revenue. (Updated 4/10/08)
10. Can a bank reduce total revenue by the amount of principal repayment taken as a bad debt?
Bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included in total revenue for the current reporting period or a past reporting period may be excluded from total revenue. The principal repayment of a loan is not included in total revenue and therefore cannot be excluded from total revenue as a bad debt. (Updated 06/19/08)
11. How is the revenue exclusion for the Cost of Uncompensated Care determined?
The Comptroller's office has revised its interpretation of TTC 171.1011(n)(2), concerning the exclusion from revenue for the Cost of Uncompensated Care which applies to health care providers and health care institutions. The above link provides the revised calculation and also includes an example. (Updated 09/21/09)
12. Are co-payments and deductibles received from supplemental insurance for patients under the Medicare, Medicaid and other programs specified in TTC 171.1011(n) excluded from total revenue?
Co-payments and deductibles received from supplemental insurance for patients under these programs may be excluded from total revenue but the exclusion may not exceed the program's allowance amount. (Updated 06/19/08)
13. Can a staff leasing services company or temporary employment service company deduct 1099 labor from total revenue?
A staff leasing services company or temporary employment service company may deduct from revenue the actual amounts reimbursed by the client company for wages reported on W-2's, payroll taxes, and employee benefits including workers' compensation. 1099 labor is not considered wages under the IRC or the TTC Chapter 171 and cannot be excluded from revenue. (Updated 06/19/08)
14. When can an attorney take the $500 pro bono services case exclusion from total revenue?
In order to take the $500 credit per pro bono case, the attorney must maintain records and must report the pro bono hours to the State Bar. The $500 deduction can be taken based on the period when the first hours are reported to the State Bar. (Updated 06/19/08)
15. Are capitation awards excluded from total revenue?
Medicare managed care plans pay health care providers a capitation award for each patient each month. These capitation revenues can be excluded from total revenue. (Updated 06/24/08)
16. How do we treat negative Net Distributive Income (NDI) when computing total revenue?
If NDI is a negative number, then we treat it as a negative number when computing total revenue. Keep in mind that you only subtract NDI to the extent it is included in total revenue. Based on this language, you only exclude from revenue the income items; there is no "exclusion/deduction" for the expense items as the expense items were not included in revenue. (Updated 06/19/08)
17. How do I determine if I am a "Health Care Provider" or "Health Care Institution?"
A "Health Care Provider" is defined in TTC 171.1011(p)(3) as "a taxable entity that participates in the Medicaid program, Medicare, workers compensation program, or TRICARE military health system as a provider of health care services." TTC 171.1011(p)(2) provides an exclusive list of health care institutions. If an entity does not fall into the list of health care institutions, it will be considered a health care provider. (Updated 06/19/08)
18. How does a homeowners association that is not exempt from franchise tax compute total revenue for franchise tax reporting purposes?
A taxable entity that is a homeowners association and files IRS Form 1120-H computes total revenue based on the amounts reportable as income on Lines 1-7 of the Form 1120-H. If a homeowners association files IRS Form 1120, total revenue is computed based on the amounts reportable as income on Lines 1c and Lines 4 through 10 of the Form 1120. (Updated 09/21/09)
19. Can a travel agent exclude from total revenue the funds collected from a customer for items such as an airline ticket?
Total revenue for franchise tax purposes is calculated by reference to specific income line numbers from federal income tax return forms. Therefore, a travel agent's total revenue for franchise tax purposes is determined by how they report income on their federal income tax return, as long as the method is appropriate under federal income tax law. For example, if a travel agent files IRC Form 1120 and reports as income the full amount received from their customers on Line 1c, then the entire amount is included in total revenue. In this situation the amount received from the customer for the airline ticket cannot be excluded from total revenue. If the travel agent files IRC Form 1120 and only reports on Line 1c their commission, then only their commission is included in total revenue for franchise tax reporting purposes. See STAR Document 200704932L. (Updated 09/21/09)
20. For a taxable entity that owns an interest in a passive entity, is the taxable entity's share of net income of the passive entity excluded from total revenue?
Under Tax Code 171.1011(e) a taxable entity can only exclude from total revenue the taxable entity's share of net income of the passive entity if the net income of the passive entity was generated by the margin of a taxable entity. Therefore, a taxable entity that owns an interest in a passive entity may only exclude from total revenue, to the extent included, the taxable entity's share of net income of the passive entity from dividends, distributive shares of partnership income if the partnership is a taxable entity and income from a limited liability company (LLC), if the LLC is a taxable entity. (Updated 09/21/09)
21. Is the federal election for deferral of Cancellation of Debt income, which became effective January 1, 2009, disregarded for Texas franchise tax purposes, or can a taxpayer use the numbers actually reported on the line items of the federal return which take into account this deferral?
Section 1231 of the American Recovery and Reinvestment Act of 2009, effective January 1, 2009, provides for a deferral of recognition of Cancellation of Debt (COD) income. Total revenue for Texas franchise tax is calculated based upon the Internal Revenue Code (IRC) of 1986 in effect for the federal tax year beginning on January 1, 2007, not including any changes made by federal law after that date, and any regulations adopted under that code applicable to that period. See Texas Tax Code Section 171.0001(9). As the federal election for deferral of COD income was effective January 1, 2009, the federal election is disregarded for Texas franchise tax purposes. You must adjust the amounts reported on the federal line items when computing total revenue. (Updated 10/02/09)
22. How do line number changes the IRS makes to federal forms affect the calculation of total revenue?
Total revenue for Texas franchise tax, specifically defined in Texas Tax Code Section 171.1011, is tied to the amounts entered on specified lines from the federal return as they were on the 2006 IRS forms and on 2006 equivalent IRS line numbers on any subsequent version of the corresponding form. TTC 171.1011(b). Below is a list of the changes in federal line numbers that specify an item of total revenue, organized in reverse chronological order by franchise tax report year.

Note that the line numbers referred to in the statute and administrative rules are not revised annually to reflect changes in the IRS forms. Also the October 2012 version of the 2013 franchise tax instructions will not reflect IRS form changes made after that date. Revised instructions appear as soon as possible on the website and in instruction updates.

For 2013 Franchise Tax Reporting from 2012 IRS Forms

IRS Form #2006 IRS Form Line #New IRS Form Line #IRS Line Name
88251718aTotal gross rents
1040 Sch. F119Gross income cash method
1040 Sch. F21bCost or other basis...
1040 Sch. F4544Gross receipts accrual method
1040 Sch. E323aRents received
1040 Sch. E423bRoyalties received

For 2012 Franchise Tax Reporting from 2011 IRS Forms

IRS Form #2006 IRS Form Line #New IRS Form Line #IRS Line Name
88251718aTotal gross rents
11201c1eGross receipts net of returns...
1120s1c1eGross receipts net of returns...
10651c1eGross receipts net of returns...
1040 Sch. F119Gross income cash method
1040 Sch. F21dCost or other basis...
1040 Sch. F4544Gross receipts accrual method
1040 Sch. E34Rents received
1040 Sch. E*323c*Rents received
1040 Sch. E44Royalties received
1040 Sch. E*423d*Royalties received

* IRS 2011 revised form as of 07/17/12

For 2011 Franchise Tax Reporting from 2010 IRS Forms

IRS Form #2006 IRS Form Line #New IRS Form Line #IRS Line Name
88251718aTotal gross rents

(Updated 02/14/13)

23. Where can a taxpayer find information about the Comptroller's certification of oil and gas prices?
TTC Sections 171.1011(r) and (s) allow an exclusion from total revenue for revenue received from oil or gas produced by a low-producing well (described in FAQ #24) during the dates certified by the Comptroller when the monthly average closing price of West Texas Intermediate crude oil is below $40 per barrel or the average closing price of gas is below $5 per MMBtu, as recorded on the New York Mercantile Exchange (NYMEX). The two tables below capture this information by listing for oil and for gas the certified months --not every month - from the first applicable month until December 2010.

Beginning November 2010, the Comptroller certifies and publishes this information on a monthly basis in the Texas Register.

2009

February 2009
Gas $ 4.39
Oil $39.28
March 2009
Gas $4.00
April 2009
Gas $3.56
May 2009
Gas $3.93
June 2009
Gas $3.94
July 2009
Gas $3.55
August 2009
Gas $3.31
September 2009
Gas $3.46
October 2009
Gas $4.78
November 2009
Gas $4.63

2010

March 2010
Gas $4.30
April 2010
Gas $4.08
May 2010
Gas $4.15
June 2010
Gas $4.78
July 2010
Gas $4.59
August 2010
Gas $4.22
September 2010
Gas $3.90
October 2010
Gas $3.60
November 2010
Gas $4.04
December 2010
Gas: $4.28

(Added 09/09/11)

24. What is a low-producing well for purposes of the oil and gas revenue exclusion?
TTC Section 171.1011(r) defines a low-producing oil or gas well as one whose production, as designated by the Railroad Commission or similar authority of another state, averages less than 10 barrels a day over a 90-day period for an oil well or less than 250 mcf a day over a 90-day period for a gas well. The 90-day period for an oil well is the certified month when the average closing price of oil is below $40 per barrel and the prior two calendar months. The 90-day period for a gas well is the certified month when the average price of gas is below $5.00 per MMBtu and the prior two calendar months. See FAQ #23 for information on the monthly certification of oil and gas prices. (Added 09/09/11)
25. Why are some of the line numbers that specify total revenue in the statute and in franchise tax rule 3.587 different from those shown on the current IRS forms?
The line items in the statute and tax rule defining total revenue refer to the specific lines as they were on the 2006 Internal Revenue Service (IRS) forms. Line numbers on some IRS forms have changed for subsequent federal tax years. Total revenue is based on the equivalent line numbers from the current corresponding federal report. See FAQ #22 for a cumulative list of changes from the 2006 IRS forms that affect franchise tax total revenue. (Added 02/15/12)
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