Alert

Texas issued guidance on the favorable policy change regarding the conformity of the Texas franchise tax to the Internal Revenue Code (IRC).

Specifically, due to the recent federal tax reform often referred to as the One Big Beautiful Bill Act (OBBBA), states have begun evaluating their IRC conformity and the potential implications of OBBBA on their state filings. Notably, Texas is among the states that recently issued updated IRC conformity guidance as detailed below.

Background

Historically, Texas adopted the IRC on a fixed conformity basis as of January 1, 2007, known as the conformity date, for the Texas franchise tax.

The Texas franchise tax is calculated on a taxable entity’s margin—total revenue less specific enumerated deductions—which is unique to Texas. Due to the fixed conformity date and structure of the franchise tax, many adjustments were required when using the figures from the applicable federal income tax return to complete the Texas franchise tax return.

What’s New with the IRC Conformity Policy Change Guidance?

Changes include an IRC policy update, total revenue and apportionment changes, a one-time depreciation adjustment, and a OBBBA bonus depreciation update.

IRC Policy Update

The Texas Comptroller of Public Accounts, known as the comptroller, issued a press release on December 1, 2025, stating “effective with the 2026 franchise tax report, Texas will align its franchise tax depreciation rules with the bonus depreciation provisions of the One Big Beautiful Bill.”

Due to the conformity date in the Texas franchise tax law, Texas has used the 2007 IRC for franchise tax depreciation calculations, so this update is very favorable for Texas taxpayers.

Subsequently, the comptroller issued additional guidance regarding Texas’s conformity to the IRC for Texas franchise tax purposes.

The guidance states that “beginning with the 2026 franchise tax report, a taxable entity will determine amounts taken from the federal tax return under the federal tax law in effect for that federal tax year, unless the statute or rule references the IRC.”

The change applies to all components of the franchise tax unless the IRC is specifically referenced and then the 2007 IRC controls.

Total Revenue and Apportionment

The franchise tax law references specific lines of federal income tax forms to use when preparing the franchise tax report. In prior years, taxpayers had to evaluate whether the amounts on those lines should be different based on the 2007 IRC.

Starting with the 2026 franchise tax report, taxpayers will use line items from their federal tax return based on the current year’s federal law when preparing their report unless specific categories of income or expense specifically reference the IRC. In those instances, the 2007 IRC will control.

Further, the guidance states “consistent with the change to total revenue, beginning with the 2026 franchise tax report, a taxable entity will calculate gross receipts for apportionment based on amounts reported on the federal tax return, without adjustment to the 2007 IRC, except where the statute or rule specifically references the IRC.”

One-Time Depreciation Adjustment

To address the historical depreciation adjustments resulting from the differences in the conformity date between the federal return and the franchise tax report, the comptroller has provided guidance regarding a one-time depreciation adjustment.

Specifically, on the 2026 franchise tax report, a taxable entity may include a one-time net deprecation adjustment in cost of goods sold (COGS) for qualifying assets. The depreciation adjustment is based on the difference in depreciation claimed for federal income tax and the depreciation claimed for franchise tax COGS for a given asset.

One-Time Adjustment Calculations

1. Calculate the difference in the depreciation claimed on the federal tax return and the depreciation claimed for the COGS on the Texas franchise tax report for each tax year the asset was in service through the end date on the 2025 report. Note, the depreciation adjustment is zero if no depreciation was claimed as part of COGS for Texas purposes. This will complicate the calculation for taxpayers that didn’t use COGS for every Texas report. Also, depreciable assets disposed of prior to 2025 will not be included in this calculation.
2. Sum the yearly depreciation adjustments for the qualifying asset and include the total in the entity’s COGS on the 2026 franchise tax report. Note, the net depreciation adjustment cannot be less than zero.
3. After the taxpayer has included its COGS qualifying costs, it will add the net depreciation adjustment to its COGS, only until its margin reaches zero. Any remaining adjustment can be carried forward to future reports until fully used. There is no mention of a limitation on the length of the carryforward.

OBBBA Bonus Depreciation Update

The guidance is in line with the press release regarding the OBBBA update to bonus depreciation. The guidance states “beginning with the 2026 franchise tax report, a taxable entity will include the depreciation reported on its federal tax return for each asset qualifying under Section 171.1012(c)(6). This amount may include any federal bonus depreciation claimed on the federal tax return for assets placed in service on or after January 19, 2025.”

What’s Next?

The guidance is a very favorable update for Texas taxpayers. As stated by the comptroller, “not only does it deliver upfront tax relief, it also eliminates the burden of maintaining two different sets of books for federal and state taxes, slashing red tape for business operations in Texas.” The comptroller is in the process of amending Rule 3.588 (Margin: Cost of Goods Sold). Additional guidance for other items affected by the change in conformity is expected to be provided in a comptroller memo. The instructions for the 2026 report will also reflect the changes to conformity.

Texas taxpayers should reach out to their state tax advisors to review their Texas franchise tax report to understand the impacts of the IRC policy update and determine if a depreciation adjustment would be applicable on the 2026 franchise tax report.

Please reach out to your firm professional with any questions.

Additional Resources

State & Local Tax Services