By Ashleigh M. Paige, Esq., Checkpoint News
The Texas Comptroller of Public Accounts has provided guidance on the policy change regarding the conformity of the Texas franchise tax to the Internal Revenue Code (IRC). Historically, a taxable entity was required to use the IRC in effect for the federal tax year beginning January 1, 2007, to compute amounts taken from the applicable federal tax return, but the comptroller has determined that not all amounts taken from the applicable federal tax return used to compute the franchise tax are tied to the 2007 IRC. Therefore, taxable entities will use the then-current federal tax law instead of the 2007 IRC when determining amounts used to compute the franchise tax, except where the IRC is referenced. (Conformity of Texas Franchise Tax to the Internal Revenue Code, Texas Comptroller of Public Accounts, 12/19/2025.)
Implementation
Beginning with the 2026 franchise tax report, a taxable entity will determine amounts taken from the federal tax return under federal tax law in effect for that federal tax year, unless the statute or rule references the IRC, with the change applying to all components of the franchise tax. Where the statute or rule references the IRC, a taxable entity will be required to compute such amounts under the 2007 IRC. On the 2026 franchise tax report, a taxable entity may also include a one-time net deprecation adjustment in cost of goods sold (COGS) for qualifying assets.
Categories of Income or Expense Which Specifically Reference the IRC
For those certain categories of income or expense which specifically reference the IRC, the income or expense is determined under the 2007 IRC. For example, Tex. Tax Code Ann. § 171.1011(c)(1)(B)(ii) subtracts royalties and foreign dividends from total revenue, including amounts determined under IRC § 78 or IRC § 951 through IRC § 964. Any foreign royalties and foreign dividends will be determined under current federal tax law. By contrast, amounts under IRC § 78 and IRC § 951 through IRC § 964 are determined under the 2007 IRC and do not include the current IRC § 951A global intangible low-taxed income (GILTI) as GILTI was added to the IRC after January 1, 2007.
Cost of Goods Sold
Under Tex. Tax Code Ann. § 171.1012, COGS is determined by aggregating the direct costs of acquiring or producing goods; certain indirect costs associated with the production of goods; and the costs of deterioration, obsolescence, and spoilage. A significant direct cost is depreciation of assets associated with and necessary for the production of the goods. Therefore, beginning with the 2026 franchise tax report, a taxable entity will include the depreciation reported on its federal tax return for each qualifying under Tex. Tax Code Ann. § 171.1012(c)(6). Also, this amount may include any federal bonus depreciation claimed on a federal tax return for assets placed in service on or after January 19, 2025.
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, taxable entities may calculate a one-time net depreciation adjustment for each qualifying asset on its 2026 franchise tax report. “Qualifying assets” means those placed in service prior to the accounting period on which the 2026 report is based, provided that the assets have not been disposed of prior to this date and are associated with and necessary for the production of goods under Tex. Tax Code Ann. § 171.1012(c)(6).
Apportionment
Taxable entities apportion their margins to Texas based on a single gross receipts factor. Because of the changes to total revenue, beginning with the 2026 franchise tax report, a taxable entity will calculator gross receipts for apportionment based on amounts reported on their federal tax returns, without adjustments to the 2007 IRC, except where the statute or rule specifically references the IRC.
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