Texas franchise tax adopts current IRC conformity and allows bonus depreciation.

On December 1, 2025, Acting Texas Comptroller Kelly Hancock announced that the Comptroller’s office would align the franchise tax treatment of depreciation with the federal bonus depreciation provisions of the One Big Beautiful Bill Act (OBBBA). On December 19, 2025, the Comptroller issued STAR Accession No. 202512012M, providing more broadly that, beginning with the 2026 franchise tax report, amounts taken from the federal return are determined under the federal law in effect for that federal tax year unless a statute or rule specifically references the Internal Revenue Code (IRC).

The change has two principal effects for taxpayers that compute margin using the cost of goods sold (COGS) deduction. First, federal bonus depreciation may now be included in Texas COGS. Second, a one-time net depreciation adjustment is available on the 2026 report for qualifying assets placed in service in prior periods. Extended 2026 reports are due November 16, 2026.

Background

Tex. Tax Code §171.0001(9) defines the IRC as the Internal Revenue Code in effect for the federal tax year beginning January 1, 2007. The Comptroller historically applied that definition to amounts taken from the federal return in computing total revenue, COGS, and apportionment. As a result, federal changes enacted after 2007, including bonus depreciation, generally were not reflected in the franchise tax, and COGS taxpayers maintained separate depreciation schedules for Texas purposes.

Following what the Comptroller described as a fresh legal review, the agency concluded that the depreciation provision is not tied to the 2007 IRC. STAR Accession No. 202512012M extends that conclusion to amounts taken from the federal return generally. The Comptroller has amended 34 Tex. Admin. Code §3.587 (Margin: Total Revenue) and §3.588 (Margin: Cost of Goods Sold) to reflect the policy.

The change is an administrative interpretation rather than a statutory amendment. The Legislature, which convenes in regular session in January 2027, could codify or modify the policy.

Bonus Depreciation in Cost of Goods Sold

Beginning with the 2026 report, a taxable entity that subtracts COGS includes the depreciation reported on its federal return for each asset qualifying under Tex. Tax Code §171.1012(c)(6). That amount may include bonus depreciation claimed under IRC §168(k).

Under the OBBBA, qualified property acquired after January 19, 2025 is eligible for 100% bonus depreciation on a permanent basis (see RSK’s overview of the OBBBA). Taxpayers that placed qualifying production assets in service during the accounting period for the 2026 report may therefore deduct the full cost of those assets in Texas COGS, consistent with the federal return. The existing Texas limitations on costs includible in COGS continue to apply, including the requirement that depreciation be associated with and necessary for the production of goods.

One-Time Net Depreciation Adjustment

Because Texas COGS will now follow federal depreciation, the remaining Texas basis in assets for which bonus depreciation was previously claimed on the federal return would otherwise not be recovered for franchise tax purposes. The Comptroller addressed this through a one-time net depreciation adjustment, available only on the 2026 report.

The adjustment applies to qualifying assets, which are assets that:

• were placed in service before the beginning of the accounting period on which the 2026 report is based;
• had not been disposed of before that date; and
• are associated with and necessary for the production of goods.

The adjustment is computed as follows:

1. For each qualifying asset, determine the difference between the depreciation claimed on the federal return and the depreciation included in Texas COGS for each year the asset was in service, through the end of the accounting period on which the 2025 report was based.
2. Sum the annual differences for each asset. The net adjustment for an asset may not be less than zero.
3. Include the total in COGS on the 2026 report, to the extent it does not reduce margin below zero.

Under the Comptroller’s guidance, any portion of the adjustment that cannot be used because margin has been reduced to zero may be carried forward to subsequent reports until exhausted. This is a departure from historical Texas practice, under which COGS in excess of total revenue did not generate a carryforward attribute.

Illustration

Assume a calendar-year taxpayer placed $5,000,000 of production equipment in service in 2022 and claimed 100% bonus depreciation on its federal return. For franchise tax purposes, the taxpayer depreciated the equipment over seven years, claiming $2,813,500 through 2024.

Illustration	Amount
Equipment placed in service in 2022	$5,000,000
Federal depreciation through 2024 (100% bonus)	$5,000,000
Texas COGS depreciation through 2024 (7-year MACRS)	$2,813,500
Net depreciation adjustment on the 2026 report	$2,186,500
Franchise tax effect at 0.75%, 100% Texas apportionment	Approximately $16,400

The benefit increases with the size of the taxpayer’s fixed asset base and is reduced by half for taxpayers subject to the 0.375% retail and wholesale rate. Because the computation is performed asset by asset, taxpayers should retain documentation supporting the adjustment and any carryforward for audit purposes.

Taxpayers Not Using Cost of Goods Sold

The depreciation changes affect only taxpayers that compute margin using the COGS deduction, which is generally available to taxpayers that produce, acquire, or sell goods, including manufacturers, distributors, retailers, oil and gas producers, and certain construction contractors. Taxpayers using the compensation deduction, the 70%-of-total-revenue computation, or the E-Z computation are not directly affected.

However, the margin computation method is elected annually and, under 34 Tex. Admin. Code §3.584, may be changed on an amended report filed within the statute of limitations. Taxpayers eligible for the COGS deduction that ordinarily use another method should evaluate whether the one-time adjustment makes COGS the more favorable method for the 2026 report.

Total Revenue and GILTI

Current-law conformity also applies to total revenue and apportionment. Amounts taken from the federal return are no longer adjusted to the 2007 IRC except where a statute or rule specifically references the Code. According to the memo, global intangible low-taxed income (GILTI) under IRC §951A is included in total revenue and is not eligible for the subtraction available for amounts included under IRC §§78 and 951–964, because §951A was enacted after 2007. The same analysis would appear to apply to net CFC tested income, which replaces GILTI for taxable years beginning after December 31, 2025. Taxpayers with controlled foreign corporations should model this effect alongside any depreciation benefit.

Filing Deadlines and Prior Periods

The 2026 franchise tax report was due May 15, 2026. For taxpayers that obtained an extension, the report is due November 16, 2026, as November 15 falls on a Sunday. The net depreciation adjustment must be claimed on the 2026 report. Taxpayers that have already filed a 2026 report without the adjustment should consider filing an amended report within the four-year limitations period.

The Comptroller has applied the policy prospectively. Some practitioners have recommended protective refund claims for open prior periods in the event the policy is applied retroactively, although such claims would likely be contested.

The no-tax-due threshold for 2026 and 2027 reports is $2.65 million of annualized total revenue. Entities at or below the threshold must still file a Public Information Report or Ownership Information Report.

Quick answers

RSK Insight

The Comptroller’s policy eliminates a long-standing difference between federal and Texas depreciation and permits COGS taxpayers to claim bonus depreciation for franchise tax purposes. The one-time net depreciation adjustment, however, is available only on the 2026 report and requires an asset-by-asset reconciliation of federal and Texas depreciation histories. Taxpayers on extension should complete that reconciliation well in advance of November 16, 2026.

Taxpayers with controlled foreign corporations should determine whether the inclusion of GILTI in total revenue offsets the benefit of the depreciation changes. Taxpayers should also evaluate the effect of the policy change on Texas deferred tax balances for ASC 740 purposes and monitor legislative developments during the 2027 session. Importers should also consider the Texas effect of IEEPA tariff refunds, discussed in RSK’s analysis of tariff refund tax treatment.

How RSK Can Help

• Net depreciation adjustment computation. Reconcile federal and Texas depreciation histories asset by asset and compute the adjustment and any carryforward.
• Margin method analysis. Compare the COGS, compensation, 70%-of-total-revenue, and E-Z computations for the 2026 report.
• Amended reports and refund claims. Evaluate amended 2026 reports and protective claims for open periods.
• Total revenue and apportionment review. Assess the effect of current-law conformity, including GILTI and net CFC tested income, on total revenue and apportionment.
• Tax provision support. Evaluate the ASC 740 effect of the policy change on Texas deferred tax balances.

Please visit RSK’s Tax Advisory page or contact us for more information on how RSK can help.

References

1. Texas Comptroller, “Acting Texas Comptroller Kelly Hancock Updates Franchise Tax Depreciation Rules to Align with Federal Provisions,” news release (Dec. 1, 2025). comptroller.texas.gov
2. Texas Comptroller, STAR Accession No. 202512012M, “Conformity of Texas Franchise Tax to the Internal Revenue Code” (Dec. 19, 2025). star.comptroller.texas.gov
3. Texas Comptroller, Tax Policy News, January 2026 (net depreciation adjustment and rulemaking). comptroller.texas.gov
4. 34 Tex. Admin. Code §3.587, Margin: Total Revenue, and §3.588, Margin: Cost of Goods Sold (as amended 2026). §3.587 · §3.588
5. 34 Tex. Admin. Code §3.584, Margin: Reports and Payments (annual margin election and amended reports). §3.584
6. Tex. Tax Code §§171.0001(9) and 171.1012. statutes.capitol.texas.gov
7. Texas Comptroller, Franchise Tax (no-tax-due threshold, rates, and due dates). comptroller.texas.gov
8. IRC §168(k), as amended by Pub. L. 119-21 (One Big Beautiful Bill Act). 26 U.S.C. §168

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This article is for general informational purposes only and does not constitute tax advice. It reflects Texas guidance available as of September 23, 2026. The illustration is simplified and assumes a calendar-year taxpayer, the half-year convention, and 100% Texas apportionment. The Comptroller’s policy is an administrative interpretation and is subject to change. The application of these rules depends on each taxpayer’s specific facts. Readers should consult a qualified advisor before taking action.

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