Key takeaways
- A recent Texas Comptroller policy memo interprets the statute of limitations for the Comptroller to assess franchise tax and for a taxable entity to file a franchise tax refund claim.
- For taxable entities filing their franchise tax return under an extension, the statute of limitations can change depending on whether the taxable entity pays tax using electronic funds transfer and the amount of tax paid with the extension request.
- For reports originally due on or after January 1, 2020, regardless of whether the taxable entity obtains a valid second extension, the beginning date for the statute of limitations for an electronic funds transfer payer that has obtained a valid first extension is August 16 because this is the day after the last day on which a payment is required.
Background
Taxable entities doing business in Texas are required to file an annual franchise tax report and pay any franchise tax due on or before May 15 of each year. The statute of limitations for assessment of additional franchise tax, as well as for filing franchise tax refund claims, is generally four years from the date the tax becomes due and payable, but the starting date for that four-year period can vary depending on whether a taxable entity requests an extension for filing its annual report and which extension method it uses.
This alert summarizes the guidance provided by the Texas Comptroller of Public Accounts in a recent policy memo, STAR Accession No. 202404005M (April 24, 2024), which updates and replaces the previous policy memo, STAR Accession No. 202404001L (April 12, 2024). Specifically, this alert explains the two extension methods available to non-electronic funds transfer (non-EFT) payers and the two extension methods available to electronic funds transfer (EFT) payers, how each method affects the beginning date of the statute of limitations, and the effective date of the policy memo and its implications for your franchise tax reporting and compliance.
Non-EFT payers
A taxable entity that is not required to make tax payments by EFT has two options to request an extension of time to file its annual franchise tax report. Under both options, the entity must file an extension request on or before May 15 and remit a certain amount of tax with the request.
The first option is to remit 100 percent of the amount of tax due in the prior report year. To use this option, the entity must have satisfied its filing requirements for the prior report year on or before May 14 of the report year for which the extension is requested. If the entity meets these requirements, it will obtain a valid extension of time to November 15 to file its report and pay any remaining tax owed. The beginning date for the four-year statute of limitations for a non-EFT payer that obtains a valid extension under this option is November 16.
The second option is to remit at least 90 percent of the amount of tax eventually reported as due on the report. To use this option, the entity must also file its report on or before November 15. If the entity satisfies these requirements, it will obtain a valid extension of time to November 15 to file its report and pay any remaining tax owed. The beginning date for the four-year statute of limitations for a non-EFT payer that obtains a valid extension under this option is also November 16.
However, if the taxable entity fails to satisfy the requirements for a valid extension under either option, the due date for the report and payment of the franchise tax due reverts to May 15. Consequently, the beginning date for the four-year statute of limitations for a non-EFT payer that does not obtain a valid extension is May 16.
EFT payers
A taxable entity that is required to make its tax payments by EFT also has two options to request an extension of time to file its annual franchise tax report. Under either option, the entity must file an extension request on or before May 15 and remit a certain amount of tax with the request.
The first option is for the entity to remit 100 percent of the amount of tax due for the entity's prior report year. To use this option, the entity must have satisfied its filing requirements for the prior report year on or before May 14 of the report year for which the extension is requested. If the entity satisfies these requirements, it will obtain a valid extension of time to August 15 to file its report and pay any remaining franchise tax owed. The beginning date for the four-year statute of limitations for an EFT payer that obtains a valid extension under this option is August 16.
The second option is for the entity to remit at least 90 percent of the amount of tax eventually reported as due on the report. Under this option, the entity must also file its report or file a second extension request on or before August 15. If the entity satisfies these requirements, it will obtain a valid extension of time to August 15 to file its report or file a second extension request and pay any remaining tax owed. The beginning date for the four-year statute of limitations for an EFT payer that obtains a valid extension under this option is August 16.
However, if the entity fails to satisfy the requirements for a valid extension under either option, the due date of the report and payment of the franchise tax due reverts to May 15. The beginning date for the four-year statute of limitation for an EFT payer that does not obtain a valid extension is May 16.
A taxable entity that is an EFT payer and has obtained a valid extension for filing its report to August 15 may request a second extension of time to file its report (to November 15). To request a second extension, the entity must file a second extension request on or before August 15 and remit the difference between the amount remitted with the first extension request and the amount of tax eventually reported as due on the report. If the entity satisfies these requirements, it will obtain a valid second extension of time to November 15 to file its report.
However, regardless of whether an entity obtains a valid second extension, the beginning date for the four-year statute of limitations for an EFT payer that has obtained a valid first extension is August 16. This is because, for an entity with a valid second extension, August 16 is the day after the last day on which a payment was required.
Effective date and implications
The Comptroller amended Rule 3.585, relating to annual report extensions, on October 11, 2017, to align the guidance in the rule with the statutory language as interpreted in the policy memo. However, the policy memo applies to reports originally due on or after January 1, 2020. This means that taxable entities that filed reports for a prior year under a different interpretation of the extension methods and the statute of limitations, may be subject to additional tax, penalty, or interest, or may have missed the opportunity to file refund claims. Therefore, it is important to review your past franchise tax filings and payments, as well as whether you need to file any refund claims by August 15.
This article is presented for informational purposes only and is not intended to constitute legal advice.