For nearly two decades, Texas businesses have operated under a fixed-date conformity model. This required companies to calculate their franchise tax using the Internal Revenue Code (IRC) as it existed on January 1, 2007. This regulatory disconnect forced businesses to ignore modern federal tax incentives, such as bonus depreciation, and maintain a second set of complex records specifically for Texas. The result was often higher tax liabilities and an immense administrative burden.
A recent memorandum from the Texas Comptroller has finally changed this landscape. Starting with the 2026 report year (covering 2025 activity), Texas will conform to the federal tax law in effect for the current tax year for most margin components. To make this official, the state is amending two core rules:
- 34 Tex. Admin. Code Section 3.587, which dictates how you calculate your Total Revenue.
- 34 Tex. Admin. Code Section 3.588, which governs your Cost of Goods Sold (COGS) deductions.
Breaking Down the 2026 Calculation Shifts
While this move toward current-year conformity provides a significant opportunity for cash-flow optimization, it creates a hybrid environment where different rules govern different parts of the same report.
1. Total Revenue Calculation
Starting with the 2026 report, taxpayers will use line items from their federal tax return based on the current year federal law. However, if a category of income or expense specifically references the IRC within the Texas statute, the 2007 IRC still controls.
For example, foreign royalties and dividends eligible for subtraction under IRC Sections 78 and 951-964 are determined under the 2007 IRC. This means that Global Intangible Low-Taxed Income (GILTI) is generally included in the total revenue calculation without the benefit of those historical subtractions.
2. Cost of Goods Sold (COGS) and Bonus Depreciation
The most immediate benefit is the recognition of 100% bonus depreciation for qualifying assets placed in service on or after January 19, 2025. This allows for the immediate deduction of asset costs in the year of purchase, finally mirroring the federal benefit at the state level.
3. The Mechanics of the One-Time Net Depreciation Adjustment (NDA)
To bridge the gap for assets purchased before the 2025 accounting period, the Comptroller is providing an equitable remedy through a one-time election on the 2026 report. This process involves three critical steps:
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- Step 1: Calculate the Yearly Variance. Determine the positive or negative difference between the depreciation claimed for federal purposes and what was allowed for Texas COGS for each year the asset was in service through the end of the 2025 report period. If no depreciation was claimed as part of COGS for Texas franchise tax purposes, the depreciation adjustment for that year for that qualifying asset is zero.
- Step 2: Aggregate the Adjustment. Sum those yearly differences. This only applies to qualifying assets still in service at the start of the 2025 accounting period; assets disposed of prior to this date are excluded. The net depreciation adjustment cannot be less than zero. If the sum of the yearly depreciation adjustment is less than zero, then the net depreciation adjustment is zero.
- Step 3: Apply and Carry Forward. The total adjustment is added to your 2026 COGS. The adjustment cannot reduce your taxable entity’s margin below zero. If this occurs, the taxable entity will include the net depreciation adjustment in its COGS until the taxable entity’s margin is reduced to zero and any unused adjustment can be carried forward until exhausted.
4. Apportionment Calculation
To maintain consistency, the Comptroller is aligning the measurement of the gross receipts factor with total revenue. Beginning with the 2026 report, a taxable entity is required to calculate gross receipts for apportionment based on current federally reported amounts (without adjustment to the 2007 IRC) except in cases where the apportionment statute or rule specifically references the IRC.
Securing Your 2026 Tax Position
The 2026 reporting cycle represents the most significant shift in Texas franchise tax in two decades. Because the Net Depreciation Adjustment (NDA) is a one-time election, failing to accurately calculate the cumulative basis difference on the 2026 report could mean permanently forfeiting substantial tax savings. To formalize these shifts, the Comptroller is currently amending Rule 3.588 (Margin; Cost of Goods Sold) and updating the
Our State and Local Tax (SALT) team acts as your partner to navigate these technical nuances. Our process includes:
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- Quantifying the NDA: Performing a deep-dive analysis of fixed asset listings to calculate the one-time catch-up deduction and identifying qualifying vs. non-qualifying assets.
- Optimizing COGS: Determining which depreciation methods maximize your deductions while remaining compliant with the remaining 2007 IRC restrictions.
- Strategic Planning: Helping you time upcoming capital expenditures to ensure they qualify for the 100% bonus depreciation rules.
- Refund Opportunity Reviews: Determining if your business is eligible for refund claims for prior open years to recover overpaid taxes.
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