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Texas has changed how it conforms to the federal Internal Revenue Code for purposes of the Texas franchise tax, creating both potential tax benefits and additional costs for Texas businesses.

Beginning with the 2026 franchise tax report, the 2007 Internal Revenue Code will only apply where Texas law expressly references the Internal Revenue Code. The practical impact of this approach depends on the specific federal tax provision included.

For businesses claiming depreciation through cost of goods sold (COGS), the change can provide significant relief by allowing certain federal bonus depreciation to flow through to the Texas franchise tax calculation. For businesses with controlled foreign corporations (CFCs), however, the same conformity approach can result in GILTI, now known as net CFC tested income (NCTI), being included in Texas total revenue without a corresponding subtraction.

Businesses affected by these changes should evaluate their 2026 franchise tax filings and determine whether they may be entitled to a depreciation adjustment, should consider refund claims for prior years, or need to preserve their position regarding GILTI/NCTI through a refund claim or protest.

What Is Changing for Texas Franchise Tax?

Historically, Texas franchise tax has incorporated provisions of the federal Internal Revenue Code as specifically referenced by the Texas Tax Code. The Comptroller's recent approach continues to apply the 2007 Internal Revenue Code where Texas law expressly references the federal Code.

The change is particularly important because federal tax law has changed substantially since 2007. Some of those changes can produce favorable results for Texas taxpayers, while others can create unfavorable differences between federal and Texas tax treatment.

Two areas illustrate the difference:

• Depreciation: Federal bonus depreciation can now flow through to Texas COGS for qualifying assets.
• GILTI/NCTI: GILTI and NCTI must be included in Texas total revenue and generally cannot be subtracted under the Texas subtraction for certain foreign income.

Understanding which federal provisions Texas conforms to, and which it does not, is critical when preparing a Texas franchise tax return.

How Does the Texas Franchise Tax Change Affect Depreciation?

For taxpayers that use the COGS deduction, the change can provide a significant benefit.

Federal bonus depreciation, including the 100% bonus depreciation restored for qualifying property under the One Big Beautiful Bill Act, now flows into Texas COGS when claimed on the federal return and to the extent the depreciable property is associated with and necessary for the production of goods.

As a result, businesses generally no longer need a separate Texas COGS depreciation amount for those assets, although Texas-specific differences remain in some areas. The Comptroller codified this treatment in amended Rule 3.588, effective June 21, 2026.

What Is the 2026 Texas Franchise Tax Net Depreciation Adjustment?

The Comptroller also permits a one-time net depreciation adjustment on the 2026 franchise tax report.

The adjustment addresses differences created under the prior conformity regime. In some cases, a taxpayer may have reduced the federal basis of an asset through depreciation that was not allowable in Texas COGS under the Comptroller’s prior use of the 2007 Code.

For qualifying assets placed in service before the beginning of the accounting period on which the 2026 report is based, the adjustment generally captures the cumulative difference between:

1. Depreciation previously claimed for federal tax purposes; and
2. Depreciation previously included in Texas COGS.

The asset must not have been disposed of before the beginning of the applicable accounting period and must otherwise qualify under Texas Tax Code § 171.1012(c)(6).

Is the Texas Depreciation Adjustment Automatic?

No. The adjustment must be computed and claimed by the taxpayer.

The adjustment cannot reduce taxable margin below zero, but any unused amount carries forward to subsequent reports until exhausted.

Taxpayers still on extension for their 2026 Texas franchise tax reports should evaluate whether they qualify for the adjustment and ensure it is properly reflected on the return.

Taxpayers should also consider whether filing refund claims for open prior years, based on the federal Code applicable to those years, could produce a better result.

How Does GILTI/NCTI Affect Texas Franchise Tax?

The same selective conformity is less favorable for taxpayers with controlled foreign corporations.

Under amended Comptroller Rule 3.587, effective March 1, 2026, GILTI/NCTI must be included in Texas total revenue. The rule also provides that GILTI/NCTI cannot be subtracted under the Texas subtraction for foreign royalties, foreign dividends, and amounts determined under Internal Revenue Code §§ 78 and 951–964.

The Comptroller’s positioning is based on the Texas statute’s reference to those federal Code provisions. Because those provisions are tied to the 2007 Internal Revenue Code, which predates IRC § 951A, the Comptroller’s position is that GILTI/NCTI does not qualify for the applicable Texas subtraction.

The rule similarly addresses GILTI’s successor, net CFC tested income (NCTI).

Why Is GILTI/NCTI Included in Texas Franchise Tax?

The key issue is the distinction between the federal Code provisions specifically incorporated into Texas law and later federal provisions that were not part of the 2007 Internal Revenue Code.

GILTI/NCTI was created under IRC § 951A, which was enacted after the 2007 Code. Because Texas law's relevant statutory references remain tied to the 2007 Code, the Comptroller's rules treat GILTI/NCTI differently from other foreign income covered by the Texas subtraction.

For affected businesses, this can result in GILTI/NCTI being included in Texas total revenue without an offsetting subtraction.

When Did the Comptroller Establish the GILTI/NCTI Position?

The Comptroller proposed the broader conformity approach in August 2025. During the notice-and-comment process, the treatment of GILTI/NCTI was specifically raised.

The Comptroller added express language addressing GILTI/NCTI to the final version of the rule. A December 19, 2025 policy memorandum also stated the agency’s position.

Even so, the final rule became effective only after the 2025 accounting periods it governs had ended.

Which Businesses Are Most Affected?

The impact of the Texas franchise tax conformity changes depends largely on a taxpayer’s business structure, tax elections, and method of calculating taxable margin.

• Likely winners: capital-intensive producers of goods, including manufacturers, oil and gas producers and refiners, chemical companies, and construction contractors.
• Little or no benefit: service businesses and others that use the compensation deduction or the 70 percent computation, because the depreciation benefit runs only through COGS.
• Likely losers: S. multinationals with controlled foreign corporations, especially in technology, pharmaceuticals, and consumer products, where GILTI/NCTI inclusions can be large. A domestic manufacturer with foreign subsidiaries may land on both sides.

The Current Comptroller’s Statements About the New Policy

Comptroller Don Huffines has indicated that his administration intends to prioritize taxpayer-focused rulemaking and transparency in Texas tax policy. Huffines was sworn into office on August 1, 2026. On August 18, 2026, he announced the Taxpayer First Project, which includes stated goals of ending “unfair retroactive policy changes” and communicating tax policy through public rulemaking rather than internal directives.

The GILTI/NCTI treatment described above is contained in an adopted Comptroller rule. Any change would require a rule amendment or legislative action.

Affected taxpayers should consider preserving their positions through refund claims or protests.