On Feb. 20, the Texas State Comptroller adopted amended rules for calculating total revenue subject to the state’s franchise (margin) tax, effective March 1, 2026 (34 TAC Sec. 3.587). These updates respond to statutory changes, judicial decisions, and a major policy shift published by the Comptroller’s Tax Policy Division on Dec. 19, 2025.
What Changed
Starting with the 2026 franchise tax report (covering periods ending in 2025), Texas will use the federal tax law in effect for that year when determining revenue and deductions from federal tax returns; however, where Texas statutes or rules specifically reference a section of the Internal Revenue Code (IRC), all computations and reporting must be done in accordance with the IRC in effect on Jan. 1, 2007. This change impacts all components of the franchise tax, including total revenue, cost of goods sold (COGS), and apportionment.
Key Implications
Total Revenue: Line items from federal returns, including Global Intangible Low-Taxed Income (GILTI) and Net Controlled Foreign Corporation Tested Income (NCTI), will be included based on current federal law, but certain Texas subtractions tied to older IRC provisions may no longer be available.
Cost 0f Goods Sold Deduction: Bonus depreciation from federal returns can now be claimed for qualifying assets, and a one-time net depreciation adjustment may be carried forward if not fully utilized, streamlining basis tracking and “catching up” prior Texas differences.
Apportionment: Gross receipts will align with federal reporting unless Texas law explicitly references the IRC.
What Businesses Should Do
Taxpayers should review their franchise tax calculations for the 2026 report and evaluate revenue, deductions, and apportionment factors under the new guidance. Detailed records and calculations should be maintained to support compliance and defend against potential audit scrutiny. If you have any questions about these amendments to the Texas Franchise Tax regulations, please contact a CBIZ SALT team professional.
Frequently Asked Questions
The Comptroller adopted amended rules, effective March 1, 2026, that align most revenue and deduction calculations for the franchise tax with the federal tax law in effect for each reporting year, unless Texas law or regulations reference a specific section of the Internal Revenue Code (IRC), in which case that must be interpreted as the IRC section in effective on Jan. 1, 2007.
The new rules take effect for franchise tax reports due in 2026, covering business periods ending in 2025.
Total revenue will now be based upon line items from federal tax returns, including items like Global Intangible Low-Taxed Income (GILTI) and Net Controlled Foreign Corporation Tested Income (NCTI), as reported under current federal law. However, some older Texas-specific subtractions tied to pre-2007 IRC provisions may no longer be available.
Companies can now claim bonus depreciation from federal returns for qualifying assets. If the full benefit isn’t used in one year, a one-time net depreciation adjustment can be carried forward, simplifying tracking of asset basis and reconciling prior Texas and federal differences.
Gross receipts for apportionment will generally align with federal reporting, unless Texas statutes specifically reference an IRC section, which defaults to the IRC as of Jan. 1, 2007.
Businesses should review their franchise tax calculations for the 2026 report, assess how revenue, deductions, and apportionment may change, and maintain detailed records to ensure compliance and support potential audits.
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