Texas Franchise Tax Update: Depreciation and Bonus Depreciation Align with Current IRC

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A recent memo from the Texas Comptroller marks a significant shift in computing Franchise tax beginning with the 2026 report year. The change aligns Texas franchise tax calculations more closely with current federal tax law. This update follows long-standing differences between federal and Texas rules and reflects a broader move toward conformity with the Internal Revenue Code (IRC) as it exists today. Significant changes are anticipated among certain deductions such as depreciation.

 

A Shift in Texas Franchise Tax Conformity

Historically, Texas required taxpayers to compute franchise tax amounts using the IRC as it existed on January 1, 2007, unless otherwise specified. As a result, depreciation methods enacted after 2007, including federal bonus depreciation and expanded Section 179 expensing, were generally not allowed for Texas franchise tax.

 

Beginning with the 2026 Texas franchise tax report (accounting year-end 12/31/2025 for calendar year taxpayers with franchise tax returns due May 15, 2026), the Comptroller has announced that taxable entities will instead use amounts taken from the federal tax return under the federal tax law in effect for that federal tax year, unless the Texas statute or rules references the IRC as of 2007.

 

This shift follows recent federal tax changes, including the restoration of 100% bonus depreciation under the federal “One Big Beautiful Bill Act” (OBBBA). The Comptroller’s position is outlined in STAR document 202512012M and related policy announcements.

 

Bonus Depreciation Now Included in Texas COGS

Under prior Texas rules, bonus depreciation was excluded from COGS because it was not part of the 2007 IRC. Under the new policy there are several changes listed below:

  • Beginning with the 2026 franchise tax report, a taxable entity will include the depreciation reported on its federal tax return for each asset qualifying for COGS under Section 171.1012(c)(6)
  • As an equitable remedy for any gain reported on the federal tax return in excess of what historically has been determined for franchise tax purposes, a taxable entity may calculate a one-time net depreciation adjustment for each qualifying asset on its 2026 franchise tax report.
  • The taxable entity will include in its COGS the net depreciation adjustment until the taxable entity’s margin is reduced to zero. Any unused net depreciation adjustment may be carried forward to consecutive reports until exhausted.

 

Practical Considerations for Taxpayers

While this guidance provides greater alignment with federal tax law, it also introduces complexity during the transition year. Taxable entities may wish to:

  • Review federal depreciation schedules to identify assets eligible for inclusion in Texas COGS
  • Calculate the one-time net depreciation adjustment and carryforward (as applicable) in accordance with the memo
  • Monitor areas where Texas law continues to reference the 2007 IRC

 

Looking Ahead

The Comptroller’s guidance represents one of the most significant franchise tax policy shifts in recent years. While it simplifies certain aspects of compliance by aligning Texas with federal depreciation rules, it also requires careful analysis to ensure proper implementation for the 2026 report and beyond.

 

As additional guidance or rulemaking emerges, taxpayers should continue to monitor developments affecting Texas franchise tax conformity and depreciation treatment.

 

This summary is intended for general informational purposes and does not constitute tax advice.