Texas Franchise Tax: Comptroller Issues New Guidance on IRC Conformity and Depreciation Adjustments

The Texas Comptroller’s Tax Policy Division recently released a memorandum which provides updated administrative guidance on Texas’ conformity to the federal Internal Revenue Code (IRC). This policy change, beginning with the 2026 report year (2025 tax year), significantly changes how businesses will calculate their Texas franchise tax.

Overview of the New Interpretation

Starting with the 2026 report year, taxpayers should calculate their Texas franchise tax using federal amounts without modification, unless a Texas statute or rule explicitly cites the IRC. Taxpayers should only modify federal amounts when the Texas code specifically references the IRC (in which case the version of the IRC in effect on January 1, 2007, applies).

The Texas franchise tax calculation has been notoriously difficult, because although it relies on federal tax concepts, there has always been ambiguity regarding the state’s adoption of federal changes that have occurred after 2007. The memorandum reflects the Comptroller’s effort to clarify the state’s position and simplify how taxpayers apply these rules.

It is important to note that this is not an actual change to the statute itself, but rather the Comptroller’s interpretation. This memorandum reflects the policy changes that are currently being incorporated into rules 3.587 (Total Revenue) and 3.588 (Cost of Goods Sold).

One-Time Net Depreciation Adjustment

A key element of the guidance is the Comptroller’s recognition that without intervention, taxpayers who have historically taken federal bonus depreciation would have to continue to calculate a state modification on any assets that were not fully depreciated for Texas purposes.

In response, the Comptroller created a one-time transitional adjustment to eliminate historical federal/Texas depreciation differences. Taxpayers should calculate a net depreciation adjustment on qualifying assets and claim this deduction on their 2026 franchise tax report. The adjustment cannot reduce the taxpayer’s margin below zero, however, any excess may be carried forward to future periods. By providing taxpayers with this adjustment, the Comptroller is demonstrating his commitment to simplifying tax compliance by eliminating historical differences that could have burdened taxpayers for years to come.

Potential Impact on Taxpayers

Going forward, taxpayers will need to analyze not only the federal implications of electing bonus depreciation, but the Texas franchise tax implications as well. Unlike federal law, which allows net operating loss carryforwards, Texas does not. Taxpayers should not expect to generate Texas loss carry forwards if bonus depreciation creates a negative margin in the future, despite the fact the Comptroller is allowing taxpayers to carry forward any unused benefit from the one-time net depreciation adjustment. Taxpayers in capital intensive industries such as manufacturing, energy, construction, transportation and technology infrastructure, should take this into consideration when making the decision to elect bonus depreciation in any given year.

Planning Considerations

This guidance will impact other areas of the franchise tax calculation that reference federal income tax concepts, including total revenue and cost of goods sold. Taxpayers should consider the following items when preparing for the 2026 report year:

• Review prior franchise tax filings to determine how depreciation and other federal adjustments were treated
• Identify assets that may qualify for the one-time adjustment
• Evaluate the potential financial statement and cash tax impact of any required changes
• Coordinate with tax advisors to ensure consistency between federal and Texas reporting positions

How We Can Help

The interaction between federal tax provisions and Texas franchise tax rules can be complex, particularly where administrative interpretations evolve. Weaver’s state and local tax team is assisting clients with impact analyses, modeling depreciation adjustments and preparing for the 2026 report year.

If you would like to discuss how this guidance may affect your organization, please contact us. We are here to help.

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