Texas Conforms Franchise Tax Definitions to Internal Revenue Code Treatment of Pandemic Relief

On May 8, 2021, Texas Governor Abbott signed H.B. 1195 (“the Act”) into law. As enacted, Section 171.10131 authorizes taxpayers to reduce taxable receipts by funds from various federal pandemic relief programs, including:

  • The Paycheck Protection Program
  • The Shuttered Venue Operator Grant
  • The Recovery Assistance Microloan Program
  • The Restaurant Revitalization Fund Grant

The Act also expressly authorizes taxpayers to include expenses paid with these funds in the company’s cost of goods sold and payroll costs to the extent such expenses are permissible to include in the company’s cost of goods sold or compensation (as defined by Texas statutes). As such, taxpayers need not include any proceeds from the various federal pandemic relief programs in their revenue and can deduct the corresponding expenses in the cost of goods sold and/or compensation deductions from revenue.

DHG Observations

These two features of the Act effectively couple the Texas franchise tax code with the federal income tax treatment of PPP funds. Taxpayers with receipts from qualifying federal pandemic relief programs that have already filed their Texas franchise tax return should review whether to amend their originally filed Texas franchise returns. Similarly, taxpayers that have relied on Texas’ automatic extension to June 15 due to winter storms should consider the impact of the Act on their upcoming safe harbor extension payment for the franchise tax.

ABOUT THE AUTHORS

Matt Gentile
Director, State & Local Tax

Matt Howell
Consultant, State & Local Tax

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