Texas Issues Guidance On Franchise Tax Conformity To The Internal Revenue Code

The Texas Comptroller of Public Accounts has issued guidance on the change in policy regarding the conformity of the Texas franchise tax to the Internal Revenue Code. Historically, taxpayers were required to use the IRC in effect for the federal tax year beginning January 1, 2007, when computing amounts picked up from the federal return. Beginning with the 2026 franchise tax report, a taxable entity should calculate Texas franchise tax line items picked up from a federal tax return using the current federal tax law in effect for that year, except where a statute or rule specifically references the IRC. In cases where the IRC is referenced, the referenced amounts must still be computed under the 2007 IRC. This applies broadly across the franchise tax calculation and may create differences between what a taxable entity historically reported for franchise tax purposes and what now flows through from current federal law.  

Specific reference to the IRC

The Comptroller’s guidance makes it very clear, where Texas law references specific IRC sections, those referenced items are calculated under the 2007 IRC. For example, Texas law allows certain subtractions from total revenue for foreign royalties and foreign dividends, which includes amounts determined under IRC § 78 and IRC § 951-964. Under the new policy, foreign royalties and foreign dividends are to be computed under current federal tax law but amounts under IRC § 78 and IRC § 951-964 are computed under the 2007 IRC. This subtraction does not include IRC § 951A global intangible low-taxed income (GILTI) because this provision was added to the IRC after 2007. This means that IRC § 951A GILTI is included in the total revenue calculation and not eligible for the subtraction.

Cost of Goods Sold

For many taxpayers, the biggest practical impact may show up in Cost of Goods Sold (COGS).

Texas typically determines COGS by aggregating direct costs of acquiring or producing goods, certain indirect production costs, and costs related to deterioration, obsolescence, and spoilage. A significant direct cost for many manufacturers and producers is depreciation of assets associated with and necessary for production.

Beginning with the 2026 franchise tax report, a taxable entity will include the depreciation reported on its federal tax return for each qualifying asset under Tex. Tax Code § 171.1012(c)(6). Importantly, this depreciation amount may include federal bonus depreciation claimed for assets placed in service on or after January 19, 2025.

One-time “net depreciation adjustment”

To address situations where a taxable entity reports a gain on the sale of depreciable assets included in its franchise tax COGS with differences between federal and state basis, the Comptroller provides an “equitable remedy”: taxable entities may calculate a one-time net depreciation adjustment for each qualifying asset on the 2026 report; this adjustment cannot bring the taxably entity’s margin below zero. Any unused 2026 net depreciation adjustment may be carried forward until exhausted.

Qualifying assets generally include those placed in service prior to the accounting period on which the 2026 report is based, not disposed of prior to that date, and associated with and necessary for production.

What Texas taxpayers should do now

The policy change is a significant shift in how the Comptroller views conformity to the IRC for franchise tax purposes. This guidance creates planning opportunities, but also exposure if calculations are handled the “old way.” Before you file your 2026 franchise tax report, consider a targeted review of:

• Revenue items and adjustments that may now follow current federal law
• Categories that explicitly reference IRC sections (and therefore still require 2007-IRC computation)
• COGS depreciation treatment, including how federal bonus depreciation affects Texas COGS
• Eligibility and value of the one-time net depreciation adjustment
• Apportionment impacts tied to revised gross receipts

If your organization files in Texas and has meaningful depreciation, COGS, or international revenue items, our state and local tax team can help you quantify the impact, document positions, and identify available adjustments on the 2026 franchise tax report. Fill out the form to schedule a franchise tax conformity review before your reporting cycle begins.