United States: Texas Comptroller Revenue Estimate Results In Reduced Franchise Tax Rates For 2015 Reports

In a recently-released document, the Texas Comptroller of Public Accounts has provided the certification required to enact reduced Revised Texas Franchise Tax (RTFT) rates for 2015 reports (generally based upon business done during federal income tax periods ending in 2014).1 As a result of the certification, businesses other than retailers and wholesalers may elect a reduced tax rate of 0.95 percent and retailers and wholesalers may elect a reduced tax rate of 0.475 percent for 2015 reports. The reduced rates raise tax accounting issues that should be addressed in order to properly reflect the RTFT in an enterprise's financial statements.

Background and Development

As originally enacted in 2006, the RTFT rates were 1.0 percent for businesses other than retailers and wholesalers and 0.5 percent for most retailers and wholesalers (with some minor variations such as E-Z rates for taxpayers with total revenue not more than $10 million).2 It should be noted that the applicable tax rate for a taxable entity or a combined group is often complex, and is a source of significant controversy.

Legislation enacted during 2013 allowed taxpayers to elect reduced tax rates of 0.975 percent and 0.4875 percent for retailers and wholesalers for 2014 reports (generally federal income tax years ending during 2013).3 The reduced tax rates are elected by simply calculating tax on the 2014 report forms pursuant to those rates.

The same 2013 legislation provided for further reduced tax rates for 2015 reports (generally federal income tax years ending during 2014) if the Comptroller certified on or after September 1, 2014 that probable revenue for the state fiscal biennium ending August 31, 2015 was estimated to exceed probable revenue as stated in the Comptroller's Biennial Revenue Estimate for the 2014-2015 fiscal biennium, as adjusted.4 The reduced tax rates for 2015 reports are 0.95 percent and 0.475 percent for retailers and wholesalers. As stated, the Comptroller has provided this certification and the lower tax rates may be elected for 2015 reports. The election is again made by simply calculating tax on the 2015 report forms pursuant to those rates.

Despite the issuance of the Comptroller's certification, a RTFT statute provides for tax rates to revert to 1.0 percent and 0.5 percent for retailers and wholesalers beginning with the 2016 reports.5

Tax Accounting Ramifications

Because the certification is dated September 14, 2014, the reduced tax rates become a third quarter of 2014 event for calendar year financial statement issuers. Generally, the tax rate reductions should be applied to adjust current RTFT liabilities and assets beginning with the third quarter of 2014 for calendar-year enterprises. As the tax rate reductions are temporary, the reductions should not impact the measurement of temporary differences. Enterprises with fiscal accounting periods that do not coincide with the calendar year may have slightly more complex considerations.

Accounting Standards Codification (ASC) 740 (formerly known as Financial Accounting Standard No. 109 or FAS 109), Accounting for Income Taxes, provides:

  • A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year.
  • A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards.
  • The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.
  • Deferred tax liabilities and assets should be adjusted in the period of enactment for the effect of an enacted change in tax laws or rates. The effect is included in income from continuing operations.

ASC 740-270 (formerly known as FASB Interpretation No. 18 or FIN 18), Accounting for Income Taxes in Interim Periods, provides guidance for reporting income tax in interim periods, including such periods that include the effect of tax law changes. ASC 740-270 provides:

  • If new tax legislation prescribes changes that become effective during an enterprise's fiscal year, the effect of those changes shall be reflected in the computation of the estimated annual effective tax rate beginning with the first interim period that ends after the new legislation becomes effective.

Accounting and tax practitioners of enterprises with significant Texas operations and/or RTFT liabilities or assets should collaborate to ensure the tax rate reductions are properly reflected in financial statements and related disclosures.


The Comptroller's affirmative certification had been anticipated by Texas state budget-watchers. Texas tax revenues continue to exceed estimates and trend strongly upward. Texas finished its fiscal 2014 year (August 31, 2014 year-end) with a surplus of almost $4 billion. The state's rainy day fund balance is estimated to stand at $6.7 billion.

In accordance with the Texas Constitution of 1876, the Texas legislature is scheduled to meet every two years. The Texas legislature's 2015 session is scheduled to convene in January. The session will address the state budget for fiscal years 2016 and 2017.

The Comptroller's revenue estimate is generated early in the session and determines the amount of revenue that the legislature may consider committing. Given that Texas legislatures have been historically conservative with respect to spending increases, tax relief, including that of franchise taxes, may be considered by the legislature.


1. Certification of Probable Revenue for State Fiscal Biennium Ending August 31, 2015, Texas Comptroller of Public Accounts, filed Sep. 19, 2014.

2. TEX. TAX CODE ANN. §§ 171.002; 171.1016.

3. Ch. 1232 (H.B. 500), Laws 2013, enacting TEX. TAX CODE ANN. § 171.0022. For further discussion of this legislation, see GT SALT Alert: Texas Enacts Franchise Tax Reform Legislation Temporarily Lowering Tax Rates, Excluding Items from Tax Base and Enacting Research Credit.

4. Ch. 1232 (H.B. 500), Laws 2013, enacting TEX. TAX CODE ANN. § 171.0023.

5. TEX. TAX CODE ANN. § 171.002.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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