On December 19, 2025, the Texas Comptroller of Public Accounts (Comptroller) issued a memo to provide guidance on a recent policy change regarding Texas Franchise Tax conformity to the current Internal Revenue Code (IRC).¹ Notably, the Comptroller will now align the cost of goods sold (COGS) deduction depreciation rules with the bonus depreciation provisions of the "One Big Beautiful Bill Act" (OBBBA).

The Comptroller also said that it will amend 34 Tex. Admin. Code Section 3.587 (Total Revenue Rule) and 34 Tex. Admin. Code Section 3.588 (COGS Deduction Rule) to incorporate the changes contained in the memo.

Memo on IRC conformity

Total revenue

Historically, the Comptroller's office required a taxpayer (referred to as a taxable entity) to compute the Texas franchise tax line items picked up from a federal tax return using the IRC in effect for the federal tax year beginning January 1, 2007 (2007 IRC). Following a statutory review, the Comptroller determined that "not all amounts taken from the applicable federal return used to compute the franchise tax are tied to the 2007 IRC." Starting with the 2026 franchise tax report, a taxable entity should calculate Texas franchise tax using the amounts from the federal income tax return under the federal law in effect for that year, except where a statute or rule references the IRC. When the IRC is referenced, the taxable entity must compute such amounts using the 2007 IRC.

The Comptroller's memo uses Tex. Code Section 171.1011(c)(1)(B)(ii) as an example of when income or expense is determined under the current IRC or the 2007 IRC. Tex. Code Section 171.1011(c)(1)(B)(ii) allows a subtraction from total revenue for foreign royalties and foreign dividends, including amounts determined under IRC Section 78 and IRC Sections 951-964. The Comptroller explained that foreign royalties and foreign dividends are computed under current federal tax law but amounts under IRC Section 78 and IRC Sections 951-964 are computed under the 2007 IRC (noting that the 2007 IRC does not include GILTI under IRC Section 951A).

COGS deduction

The memo clarifies that the Comptroller will now allow federal bonus depreciation claimed on the federal tax return for assets placed in service on or after January 19, 2025 as part of a taxpayer's COGS deduction.² On the 2026 franchise tax report, a taxpayer may also include a one-time net deprecation adjustment in its COGS deduction for qualifying assets under Section 171.1012(c)(6).

Specifically, a taxable entity reporting gain from the sale of "depreciable assets associated with and necessary for the production of goods" for which depreciation is included in its franchise COGS deduction should report the gain from its federal return without adjustment for differences in state and federal basis. As an equitable remedy to account for the historic differences in federal and Texas depreciation, the Comptroller is allowing taxable entities to include a one-time net depreciation adjustment in COGS for qualifying assets on their 2026 franchise tax report. Taxpayers will base the net deprecation adjustment on the difference in depreciation claimed for federal income tax and depreciation claimed for franchise tax COGS for a given asset. Any unused 2026 net depreciation adjustment may be carried forward to consecutive reports until exhausted. The memo provides additional detail as to how to calculate this adjustment.

Apportionment

For apportionment purposes, starting with the 2026 franchise tax report, since gross receipts equals total revenue, with certain exceptions, a taxpayer's gross receipts will be based on amounts reported on the taxpayer's federal tax return, without adjustments to the 2007 IRC, except when the IRC is specifically referenced by statute or rule.

Implications

The memo reflects a significant shift in how the Comptroller views conformity to the IRC for franchise tax purposes. While Texas historically followed the IRC in effect as of January 1, 2007, Texas will now follow the current IRC, except when the IRC is specifically referenced by statute or rule. As the Texas franchise tax is based on specific line items from the federal income tax return, this could have a material impact on certain taxpayers doing business in Texas. Affected taxpayers should review the Comptroller's guidance regarding total revenue, COGS and apportionment and take it into consideration when completing their 2026 Texas franchise tax report.

Note that the memo clearly provides that the state views this policy change as being effective beginning with the 2026 Texas franchise tax report. Because there have been no changes to the underlying statutory or rule guidance on conformity as of the date of this Tax Alert, there is some question as to whether a taxpayer could assert that these provisions could be applied retroactively in certain instances as well.

The Total Revenue Proposed Rule was published in the Texas Register on August 15, 2025. Given the Comptroller's announcement regarding bonus depreciation, it is anticipated that a COGS Deduction Proposed Rule will also be issued for public comment in the near future.

EY will monitor the Total Revenue and the COGS Deduction Proposed Rules for any revisions or finalization as well as any additional guidance from the Comptroller regarding the state's treatment of other provisions of the OBBBA, and issue additional Tax Alerts when warranted.