Texas Comptroller’s Depreciation Deduction Policy Change Requires Prompt Taxpayer Action

By David E. Colmenero, J.D., CPA-Dallas and Alex J. Pilawski, J.D.

In a memo dated Dec. 19, 2025, the Texas Comptroller announced a significant change in Texas Comptroller policy regarding the conformity of the Texas franchise tax to the Internal Revenue Code (IRC). The memo specifically addresses the difference in depreciation between what may have been allowed for federal income tax purposes and what would have been allowed for Texas franchise tax and provides a framework for relief that requires reporting an adjustment on the 2026 Texas franchise tax reports.

The memo begins by noting that the Texas Comptroller has historically required taxpayers to use the IRC as in effect for the federal tax year beginning Jan. 1, 2007, to compute amounts taken from the applicable federal return. Beginning with the 2026 Texas franchise tax reports, however, the Texas Comptroller will now require taxable entities to determine amounts taken from the federal return under the federal tax law in effect for that federal tax year, unless the statute or rule references the Internal Revenue Code. According to the memo, this change in policy applies to all components of the Texas franchise tax and the Texas Comptroller’s office will be amending its Rules to reflect this new policy.

In the context of depreciable assets, the memo identifies two related areas that will be directly impacted. One is gain reported on a taxpayer’s return associated with the sale of depreciable assets. This amount will be taken directly from the federal income return without adjustment.

The second area directly impacted is depreciation. The memo states that, beginning with the 2026 Texas franchise tax report, a taxable entity will include depreciation reported on its federal tax return for qualifying assets under Section 171.1012(c)(6) in computing cost of goods sold, which may include any federal bonus depreciation claimed on the federal tax return for assets placed in service on or after Jan. 19, 2025. While not specifically mentioned, this date appears tied to the increased bonus depreciation provisions included in the One Big Beautiful Bill Act (OBBBA) enacted into law in July 2025, which are generally applicable to qualifying property placed in service after that date.

The memo goes on to state, “As an equitable remedy for any gain reported on the federal return in excess of the gain that would historically be determined for franchise tax purposes, a taxable entity may calculate a one-time net depreciation adjustment (NDA) for each qualifying asset on its 2026 franchise tax report.” It defines the term “qualifying assets” as “those placed in service prior to the accounting period on which the 2026 franchise tax report year is based, provided that the assets have not been disposed of prior to this date.” We will refer to that 2026 RY adjustment herein as the “2026 NDA.”

The Texas Comptroller memo also provides specific computational guidance and limitations for computing the 2026 NDA, including in part a statement that the 2026 NDA may not reduce an entity’s margin below zero, and any unused 2026 NDA may be carried to consecutive reports until exhausted.

Based on the memo and its computations, it appears the 2026 NDA applies to all qualifying assets that remain in possession of a taxable entity at the beginning of the 2025 accounting period, regardless of whether any gain with respect to that asset is reported on the federal income tax return for the 2025 accounting period. Thus, the NDA appears to provide a means for capturing the difference in depreciation for assets that remain in possession of a taxable entity as of that date as a COGS deduction but only on a prospective basis.

The memo also makes no mention of potential refund claims in lieu of the prospective relief. But the fact that the change in policy is premised on a “reexamination” of the Texas Tax Code rather than a change in the language of the Tax Code suggests that taxpayers may be able to file refund claims in lieu of claiming the prospective relief offered in the memo, provided they do so within the applicable limitations period. The memo offers no reason that taxpayers cannot file refund claims as they generally could in any other situation where an error was made on a prior report. Nevertheless, taking the refund approach may require litigation if challenged by the State.

The statute of limitations period for refund claims is typically four years from when the tax was “due and payable,” although taxpayers who are either currently under audit or who were recently audited may have a longer period under Tex. Tax Code Sections 111.201 and 111.107, 111.104(c)(3). The Texas Comptroller issued guidance in 2024 explaining how the limitations period is computed for Texas franchise tax refund claims where the original reports were filed on extension. (See Tex. Comptroller Memorandum Re Franchise Tax Extensions and the SOL (Aug. 2, 2024) available at https://star.comptroller.texas.gov/view/202408001M?q1=limitations.) For EFT filers who properly filed on extension, the refund claims may need to be filed no later than Aug. 17, 2026.