As states across the U.S. consider the implications of the One Big Beautiful Bill Act (OBBB) for their own tax codes, Texas has joined the list of jurisdictions providing early proactive taxpayer guidance. The Texas Comptroller of Public Accounts announced in a Dec. 1 news release that the Comptroller will conform to the bonus depreciation expensing provisions of the OBBB for purposes of calculating cost of goods sold (COGS) beginning with the 2026 franchise tax report year. 

Detailed analysis 

Unlike most states, Texas does not assess a tax on net income of an individual, business, or corporation. Rather, it imposes its franchise tax on a business’s calculated margin, which is determined using one of four methods:

1. 70% of revenue
2. Revenue less COGS
3. Revenue less compensation
4. Revenue less $1 million

Included in the calculation of COGS is “depreciation, depletion, and amortization … to the extent associated with and necessary for the production of goods, including recovery described by Internal Revenue Code Section 197 and property described in Internal Revenue Code Section 179.”  Historically, Texas  applied federal income tax depreciation provisions in effect under the 2007 Internal Revenue Code (IRC) for purposes of computing the COGS deduction. Accordingly, any federal statutory changes to depreciation methods enacted after 2007 were not reflected in the calculation of COGS for Texas franchise tax purposes.

Despite the Comptroller’s prior guidance, a recent statutory review confirmed that the Comptroller can apply the current IRC, rather than the 2007 IRC, for depreciation calculations. Therefore, beginning with the 2026 franchise tax report (2025 calendar year), the Comptroller will apply the current IRC as in effect at the time (for the applicable tax period) to calculate depreciation for determining the COGS deduction. Doing so aligns the depreciation rules used to calculate COGS for Texas franchise tax purposes with those provided for in the OBBB. The change permits taxpayers to deduct the full cost of qualifying fixed assets acquired after Jan. 19, 2025, for franchise tax purposes. 

Additionally, in a subsequent publication issued on Dec. 19, the Comptroller confirmed the prospective nature of this change. To address the prior-year disparities between the 2007 and current-year IRC depreciation rules, the Comptroller is permitting a one-time net depreciation adjustment for each qualifying asset – assets placed in service prior to the 2026 report accounting period and not previously disposed of – on the 2026 franchise tax report. The adjustment is the numerical difference in depreciation claimed for federal income tax purposes with depreciation claimed for Texas franchise tax COGS purposes.

What does CohnReznick think?

The updated guidance is welcome news for taxpayers whose Texas COGS calculation has been limited by conformity to an outdated version of the IRC. While the change itself is not retroactive to prior tax years, the depreciation adjustment provides equitable relief for taxpayers with prior-year disparities between Texas and federal depreciation calculations to the extent such assets continue to be in service during the 2026 franchise tax reporting period. 

Taxpayers should note, however, that the change does present the prospect of reduced depreciation and COGS in future years for taxpayers deducting the full cost of qualifying assets in the current year. A further consideration would be the level of Texas apportionment in the current vs. future report years relative to the amount of depreciation deducted under this change. This issue is exacerbated for taxpayers whose COGS (including depreciation under the OBBB rule) exceeds revenue in a given tax year. In such a case, there would not be a carryover of unused depreciation to future tax years, limiting the tax effect of full expensing for Texas purposes. Moreover, Texas does not permit the carryover of net operating losses, further potentially limiting the Texas benefit of federal bonus depreciation.

Finally, guidance issued by the Comptroller does not note any conformity to the OBBB provision allowing for the expensing of real estate comprising “qualified production property” as defined under newly enacted IRC Section 168(n). 

Taxpayers should consult with their tax advisors to determine whether these changes impact their Texas franchise tax reports or whether they should consider electing federal bonus depreciation.