- The Texas Comptroller published STAR Memo 202512012M (the “Memo”) on December 19, 2025.
- New federal tax laws may now impact Texas franchise tax calculations.
- The Memo presents a one-time net depreciation adjustment in Cost of Goods Sold (COGS) on the 2026 Franchise Tax Report.
- There will be fewer adjustments between federal and Texas calculations.
Background
Historically, when filing Texas franchise tax returns, taxpayers were required to compute amounts taken from the federal return using the version of the Internal Revenue Code (IRC) that existed as of January 1, 2007. New tax legislation at the federal level has had little impact on Texas franchise tax because Texas continued to conform to the 2007 IRC.
Updated Guidance
Beginning in the 2026 franchise tax report year (tax year 2025), items taken from the federal return and used on the Texas return will be computed using current federal tax law, unless the Texas statute or rule explicitly references the IRC. The comptroller’s guidance enables Texas taxpayers to take advantage of the federal tax laws in effect for that year. Additionally, Taxpayers will be allowed a one-time net depreciation adjustment in COGS on the 2026 Texas return to align their Texas and federal depreciation. The Comptroller issued a press release noting that the updates provide relief to taxpayers by eliminating the burden of maintaining two different sets of books for federal and state taxes and slashing red tape for business operations in Texas.
Forvis Mazars Insight: Businesses should evaluate current federal tax law and its impact on their Texas franchise tax calculations, including the effects of the conformity changes on tax provisions and upcoming filings.
Total Revenue
Historically, pursuant to Texas Tax Code § 171.1011 a taxpayer calculating total revenue aggregates specific line items pulled from the corresponding federal tax return and subtracts or excludes certain items of income or expense. Additional adjustments were required because the Texas statute did not conform to the current version of the IRC for specific line items on the Internal Revenue Service forms.
Some income and expense categories that reference the IRC will continue to be determined under the 2007 IRC. For example, the Texas Tax Code allows for foreign royalties and dividends to be deducted from revenue along with amounts determined under IRC § 78 and IRC §§ 951-964. However, the deductions calculated under IRC § 78 and IRC §§ 951-964 will need to be computed using the 2007 IRC since the IRC is explicitly referenced. Texas Tax Code § 171.1011(c)(1)(B)(ii) allows a subtraction from total revenue for foreign royalties and foreign dividends, including amounts under IRC § 78 or IRC §§ 951-964. Consequently, Global Intangible Low-Taxed Income (GILTI) and Net Controlled Foreign Corporation Tested Income (NCTI), were not included in IRC § 951A that was added to the IRC after January 1, 2007. Therefore, a taxpayer may not be able to take the GILTI or NCTI exclusion from total revenue.
Forvis Mazars Insight: There may be situations when the amount calculated under the 2007 IRC is favorable compared to current tax law. Since the policy change requires rolling federal conformity, the 2007 IRC can only be used for computing state amounts when the Texas Tax Code makes an explicit reference to the Code in the relevant statute or regulation. This change will affect businesses that previously excluded GILTI from total revenue, as they will now be required to include it.
Cost of Goods Sold
COGS is the aggregation of the direct costs to acquire or produce goods, the specific costs associated with the production of goods, and the costs of deterioration, obsolescence, and spoilage. The depreciation of assets used in the production of goods makes up a major portion of COGS. Historically, depreciation was calculated under the version of the IRC that existed as of January 1, 2007, for the Texas franchise tax return. Beginning in the 2026 Franchise Tax Report, depreciation can be calculated under current federal law. For any qualifying asset, the same depreciation amount reported on the federal tax return can be reported on the Texas franchise tax return, including federal bonus depreciation. Qualifying assets are assets that are placed in service prior to the 2026 franchise tax reporting period. The assets cannot have been disposed of prior to this date.
Despite the divergence from historical depreciation to align with federal depreciation, there remains a discrepancy between the tax basis of assets on the federal and state returns. To account for any depreciation differences reported on the federal return compared to the state return, a one-time depreciation adjustment is allowed on qualifying assets for the 2026 franchise tax report, and any unused portion can be carried forward to future periods.
This adjustment is the difference between federal depreciation and depreciation claimed in the COGS calculation for the Texas franchise tax return. To calculate the adjustment, the taxable entity must first calculate the difference between federal depreciation and depreciation claimed for Texas franchise tax COGS for each period the qualifying asset was in service. This number can be negative, but if there was no depreciation claimed for franchise tax COGS it would be zero. For each asset, add the depreciation adjustments for all the tax years the asset was in service to get the net adjustment. This figure is reported in the entity’s COGS for the 2026 franchise tax report. If this amount is negative, the adjustment is zero. After including qualifying costs under Texas Tax Code § 171.1012, the net depreciation adjustment can be included in COGS to the extent that the adjustment does not take the entity’s margin below zero. Any excess amount can be carried forward indefinitely until exhausted.
Forvis Mazars Insight: As the adjustment is limited to the taxable entity margin, taxpayers should track the net carry forward adjustment as it is able to be carried forward until fully utilized. The adjustment is only able to be taken as a deduction for COGS. Taxpayers with a carryforward will need to re-evaluate on a yearly basis if they maintain eligibility to take the COGS deduction for Texas franchise tax purposes.
How Forvis Mazars Can Help
Forvis Mazars, LLP monitors law changes, from comptroller policy updates to new legislation passed. Our team can assist you in understanding the implications and impact on your Texas COGS. Additionally, we can further analyze how the policy updates impact your current Texas franchise tax calculation.