Texas Franchise Tax Bonus Depreciation Update: IRC Conformity Change for 2026

Texas Franchise Tax – Conformity to the Internal Revenue Code

What Changed

Texas has generally adopted a fixed conformity date of January 1, 2007 for the Internal Revenue Code (IRC) when calculating the franchise tax. Beginning with the franchise tax report due in 2026, Texas will follow the IRC on a rolling basis except where the IRC is specifically referenced in the statute or rule . The policy change is prospective and is not expected to have an impact on prior filings or audits of prior years.

Key Impacts

The most significant difference affecting prior years’ franchise tax calculations has been bonus depreciation for taxpayers that used the cost of goods sold (COGS) method. The favorable bonus depreciation methods were not allowed for Texas franchise tax. This resulted in a lower COGS deduction and it also created complications when assets were sold because of the difference between tax basis for federal and Texas purposes.

As a result of this policy change, Texas will allow bonus depreciation beginning with the 2026 franchise tax report. In addition, a one-time catch-up adjustment will be allowed on the 2026 report for the difference in depreciation for prior years. The depreciation adjustment cannot cause taxable margin to be less than zero. Any excess depreciation adjustment can be carried forward to future reports. Depreciable assets disposed of prior to 2025 will not be included in the catch-up adjustment. The Texas Comptroller is amending Rule 3.588 (Cost of Goods Sold) to reflect these changes.

Other Considerations

The catch-up adjustment for depreciation only applies to depreciation differences for the years that the COGS method was used for the franchise tax calculation. This can complicate the calculation of the adjustment for taxpayers that used COGS in some years but not others. The change in conformity is generally positive for taxpayers. However, care should be taken to evaluate other areas where conformity may not be favorable. For example, taxpayers with Global Intangible Low-Taxed Income (GILTI) or Foreign-Derived Intangible Income (FDII) may experience negative consequences from the conformity update.

John LaBorde, CPA

State Tax Resources

John.laborde@statetaxresources.com

This firm is not a CPA firm and these services are not regulated by the Texas State Board of Public Accountancy.