Texas Franchise Tax Conformity, OBBBA International Updates and Fifth Circuit Rulings: Tax News Brief

Tax News Brief: 2026 First Quarter

Weaver’s specialty tax services newsletter covers the key developments across our Specialty Tax Services practice, including state and local taxes (SALT), fixed assets, transaction tax advisory, tax provisions, tax credits and international taxes.

This quarter’s news brief highlights new Texas franchise tax conformity guidance, recent Fifth Circuit rulings affecting self-employment tax treatment, bonus depreciation and cost segregation developments under the One Big Beautiful Bill Act (OBBBA), changes to international tax rules under Sections 951A and 250 and updated guidance affecting research expensing and tax credit planning.

If you have questions about how these developments may affect your organization, contact us to discuss next steps.

©2026

Federal Tax

• The Fifth Circuit held that limited partners in a state law limited partnership may exclude distributive shares from self-employment tax based on legal status rather than a functional services test, while confirming that guaranteed payments for services remain subject to self-employment tax.
• For tax year 2025, taxpayers may use Section 266 to capitalize interest on certain assets, such as inventory or accounts receivable, to increase the amount of interest allowed under Section 163(j). This recharacterization enables the interest to be included in cost of goods sold, providing a current-year deduction.
• Taxpayers using the last-in, first-out (LIFO) inventory method should be aware that several indices previously available for inflation adjustment have been eliminated, including the A-125 PPI index, historically used for certain inventory pools. Because LIFO is a method of accounting, taxpayers must now adopt the most appropriate remaining index for their products.

Fixed Asset/Cost Segregation

• Taxpayers who acquired or self-constructed a building in 2025 can still perform a cost segregation study to accelerate depreciation deductions. Properties acquired and placed in service after January 19, 2025, may benefit from 100% bonus depreciation under the One Big Beautiful Bill Act.
• The IRS issued interim guidance allowing taxpayers to elect 100% bonus depreciation for qualifying components of self-constructed property acquired and placed-in-service after January 19, 2025, even if the overall project met the 10% physical work of a significant nature threshold before that date. This may accelerate deductions for long-term projects.

International Taxes

• The OBBBA implemented changes to the deemed dividend regime under Section 951A for tax years beginning after December 31, 2025, eliminating the fixed asset hurdle and potentially subjecting more CFC income to current U.S. tax.
• The OBBBA enacted changes to the Section 250 export incentive, eliminating interest expense and R&E apportionment against qualifying export income, which may increase the deduction for eligible corporations and create additional permanent tax savings for U.S. exporters.
• The IRS and the U.S. Department of the Treasury plan to issue proposed regulations under the OBBBA addressing transition rules for certain deemed dividends, clarifying when CFC deemed dividends do not reduce a U.S. shareholder’s income to prevent abusive outcomes.
• The IRS and the Treasury Department plan to issue proposed regulations under the OBBBA addressing the disallowance of a portion of foreign tax credits attributable to distributions of Section 951A previously taxed earnings and profits, affecting how U.S. shareholders may claim credits on PTEP distributions.
• The IRS and the Treasury Department plan to issue proposed regulations under the OBBBA clarifying how Section 250 applies to exclude income from the sale or disposition of intangibles and other depreciable, amortizable or depletable property from deduction-eligible income, including guidance on outbound transfers and related-party anti-abuse rules.

State & Local Taxes

Sales & Use Tax | Income/Franchise Tax

Sales & Use Tax

• The City of Chicago increased the personal property lease transaction tax applicable to SaaS and nonpossessory computer leases from 11% to 15%, effective January 1, 2026.
• New York’s appellate court held that fees for a SaaS-based vendor management system were taxable as a license of prewritten software, concluding that the software was the primary value of the transaction and that bundled charges were subject to sales tax.
• Kentucky clarified that sales and use tax applies to prewritten computer software and software access services, including AI-enabled applications, whether delivered via download or accessed remotely through a SaaS model.

Income/Franchise Tax

• The Texas Comptroller issued new administrative guidance effective for the 2026 report year requiring taxpayers to compute Texas franchise tax using federal amounts without modification unless specifically required by Texas statute, with a one-time net depreciation adjustment allowed to mitigate prior bonus depreciation differences and reduce ongoing state-federal conformity gaps.
• Taxpayers changing residency from New York or other Northeastern states should consider both statutory residence and domicile. Time spent in the state, the location of a permanent home, business connections and the residence of a spouse can all affect residency status, and any day physically spent in New York counts toward the 183-day threshold.

Tax Credits & Incentives

• The One Big Beautiful Bill Act provides retroactive relief allowing certain taxpayers to expense domestic R&E costs for tax years 2022-2024, requiring amended returns for prior years if the election is made.
• Taxpayers using AI-assisted software development may still qualify for the research tax credit, as engineers continue to satisfy the four-part test through human-led design, experimentation and technical decision-making, even when AI tools are used to generate code.
• Despite new rules excluding tips from federal taxable income, tips remain subject to FICA, allowing eligible employers in tip-heavy industries to continue claiming the FICA tip credit to offset payroll tax costs and reduce their effective tax rate.

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