Combined Reporting
Combined Reporting
Section 171.1014 / Rule 3.590
Presented by: Franchise Tax Policy Staff
Organizer:
Janet Spies
Panelists:
Teresa Bostick, Claire Jamal, Jerry Oxford,
Martha Preston, Nat Robberson & Jennifer Specchio
Combined Reporting - Mandatory
Texas Tax Code 171.1014
(a)
Taxable entities that are part of
an
affiliated group engaged in a unitary
business shall file a combined group
report in lieu of individual reports based
on the combined group's business.
(b) The combined group is a single taxable
entity for purposes of the application of
the tax imposed under this chapter.
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Combined Reporting - Definitions
Combined group--Taxable entities that are part of an affiliated group
engaged in a unitary business and that are required to file a
combined group report under Tax Code, sec. 171.1014.
Affiliated group--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 more than 50%, owned directly or
indirectly, of the stock of a corporation; of the membership
interest of a limited liability company; or an interest in a
partnership, association, trust, or other entity. (Attribution Rule -
husband and wife are deemed to be one owner; no other family
attribution.)
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Combined Reporting - Definitions
Unitary business--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.
In determining whether a unitary business exists, the comptroller
shall consider any relevant factor, including whether:
• activities of the members are in the same general line of
business;
• activities of the members are steps in a vertically structured
enterprise or process; or
• members are functionally integrated through the exercise of
strong centralized management.
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Combined Reporting - Definitions
Reporting entity--The combined group’s choice of an entity
that is:
•the parent entity, if it is part of the combined group, or
•the entity that:
--is included within the combined group;
--is subject to Texas' taxing jurisdiction; and
--has the greatest Texas business activity during the
first period upon which the first combined group
report is based, as measured by the Texas receipts
after eliminations for that period.
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Combined Reporting - Members
All affiliated and unitary taxable entities even if
those entities do not have nexus in Texas.
Includes pass-through entities:
partnerships, limited liability companies taxed
as partnerships under federal law, limited
liability companies that are disregarded under
federal law, S corporations, and trusts.
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Combined Reporting –
Excluded Entities
80/20 Affiliates--if an affiliate has 80% of its property or payroll
outside of the US.*
Exempt Entities--entities that have an exemption from the franchise
tax under Subchapter B of Chapter 171.
Insurance Companies--that pay gross premiums tax.
Passive Entities--not included in the combined group; however, the
pro rata share of net income from a passive entity shall be
included in total revenue to the extent it was not generated by
the margin of another taxable entity.
* 80/20 affiliates with nexus in Texas are required to file a separate franchise tax report.
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Combined Reporting – Example
Papa Bear
Bear Trust
Baby Bear
Goldilocks
(not a grantor trust)
Result:
Based on these
facts and
presuming that
neither of the
partnerships or
the trust
45%
2%
qualified as
2%
passive entities,
45%
10%
9%
45%
10%
45%
2%
three franchise
tax reports
Bear Mgt.
would be filed.
1%
Bear
84%
Bear Operating
Services LLC
Capital
LLC
General
1) Bear Trust –
Partnership
separate entity
report
15%
3) Combined report for
84%
2) Bear Mgt
Bear Capital General
1%
Services LLC –
Partnership, Bear
separate entity
Porridge
Operating LLC and
report
LTD.
Porridge LTD.
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Combined Reporting –
Calculation Options
The reporting entity must “elect” a method of
reporting for the entire group:
Margin - 70% of Total Revenue
Margin - Total Revenue minus COGS
Margin - Total Revenue minus Compensation
E-Z Computation
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Combined Reporting –
Total Revenue
A combined group shall determine its total revenue by:
determining the total revenue of each of its members as if
the member were an individual taxable entity;
adding together the total revenues of each of the
members; and
subtracting, to the extent included, items of total revenue
received from a member of the combined group.
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Combined Reporting –
Cost of Goods Sold
A combined group shall determine its COGS by:
determining the COGS of each of its members as if the member
were an individual taxable entity (only if the member sells real or tangible
personal property in the ordinary course of business) ;
adding together the COGS of each of the members; and
subtracting, any COGS amounts paid from one member of the
group to another member of the group, but only to the extent the
corresponding item of total revenue was subtracted.
Note: The election to capitalize or expense allowable costs in computing
COGS must be the same for all members of the combined group.
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Combined Reporting –
Compensation
The combined group may not subtract in relation to a person,
more than $300,000 or the amount determined under Tax
Code, sec. 171.006, per 12-month period on which margin
is based. A combined group that elects to subtract
compensation shall determine that amount by:
determining the compensation of each of its members as if
the member were an individual taxable entity; and
adding together the compensation of each of the members.
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Combined Reporting –
Apportionment
Texas Gross Receipts / Everywhere Gross Receipts
Texas gross receipts includes receipts from business done in this
state by taxable entities with nexus in Texas.*
Everywhere gross receipts includes receipts from business done
everywhere by all members of the group.
* Exception – drop shipments made by a member of the group from
a Texas location to a Texas purchaser will be included in Texas
receipts even if the seller is a no-nexus member of the group.
See rule 3.591, Margin: Apportionment, for more information.
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Combined Reporting –
Accounting Period
The accounting period of the group shall be:
The accounting period used for federal tax reporting if two
or more members of the combined group file a consolidated
federal return.
In all other instances, the accounting period is the federal
taxable period of the reporting entity.
Note: If the federal tax period of a member differs from the federal tax
period of the group, the reporting entity will determine the portion of
that member's revenue, cogs, compensation, etc. to be included by
preparing a separate income statement using information on the federal
report for the months included in the group's accounting period.
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Combined Reporting –
Accounting Period
Facts:
Corporation A is a separate entity from 1/1/07 through 6/30/07.
On July 1, 2007 Corp A was acquired by Corp X combined group and is owned by them until
9/30/07. X has a 3/31/07 accounting year end.
On October 1, 2007 A is sold by X to Z.
Group Z has a 12/31 AYE.
Corp A had $250,000 in total revenue for the period of 1/1/07 – 6/30/07.
Result:
Corp A will file on its own for the period 1/1/07 through 6/30/07. It does not qualify for a
No Tax Due report based on total revenue. It’s annualized Total Revenue is $500,000
which is greater than the $300,000 threshold.
Corp X group will file a combined report on May 15, 2008 based on the period 4/1/06
through 3/31/07. It will NOT include Corp A in the 2008 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 2009
annual report for the period 7/1/07 through 9/30/07.
Corp Z group will file a combined report on May 15, 2008 based on the period 01/01/07
through 12/31/07 and will include Corp A’s data for the period 10/01/07 through
12/31/07.
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Combined Reporting –
0.5% Tax Rate
The revenue from each retail and wholesale trade activity
of each of the members of the group shall be aggregated
for purposes of determining whether the group is engaged
in retail or wholesale trade (after eliminations).
Taxable Entities primarily engaged in retail or wholesale trades will qualify to use the
0.5% tax rate.
A taxable entity is primarily engaged in retail or wholesale trade only if:
(1) the total revenue from its activities in retail or wholesale trade is greater than the
total revenue from its activities in trades other than the retail and wholesale trades;
(2) less than 50 percent of the total revenue from activities in retail or wholesale trade
comes from the sale of products it produces or products produced by an entity that
is part of an affiliated group to which the taxable entity also belongs (this does not
apply to Eating & Drinking Places described in Major Group 58 of Division G); and
(3) the taxable entity does not provide retail or wholesale utilities, including
telecommunications services, electricity or gas.
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Combined Reporting –
Miscellaneous
No Tax Due – a combined group is not eligible to file a no tax due
report.
E-Z Computation – if the combined group has annualized total
revenue of $10 million or less (after eliminations) it may elect to
pay its franchise tax using the E-Z method. No tax credits may be
taken if E-Z is elected. Business loss credits for that period are
lost – they may not be carried to future reports.
Annualized Total Revenue – for a combined group is based on total
revenue after eliminations.
Discounts – based on annualize total revenue of the combined group.
(80% if TR > $300,000 & < $400,000; 60% if TR >$400,000 & < $500,000; 40% if
TR > $500,000 & < $700,000; 20% if TR > $700,000 & < $900,000)
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Combined Reporting –Credits
Business Loss Credit - - Members of a combined group MUST
preserve their right to take the credit on a separate company
basis. The reporting entity will add the preserved amounts of
all members together, multiply by 2.25% (for report years
2008 – 2017; 7.75% for 2018 – 2027) then multiply by 4.5%
to calculate the credit for the report period. Credit for a
member is lost if the member leaves the group. Member must
be in group at year end.
Economic Development Credits - - The reporting entity may take
any installments or carryovers of economic development
credits previously created by members of the group.
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Contact Us!
Susan Combs
Texas Comptroller
Post Office Box 13528, Capitol Station
Austin, Texas 78711-3528
Comptroller’s Website:
www.window.state.tx.us
Tax Questions?
Call toll free:
Send email to:
(800) 252-1381
tax.help@cpa.state.tx.us
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