Texas Proposes Adopting Rolling IRC Conformity for Total Revenue and COGS

On August 15, 2025, the Texas Secretary of State published proposed changes to Texas Administrative Code §3.587, “Margin: Total Revenue.” Proposed rule 3.587, “Total Revenue,” would incorporate statutory changes since the rule’s last update in 2012 and address other new statutory interpretations. 

The proposed rule represents the Comptroller’s revisiting of its historical view on fixed-date conformity to the Internal Revenue Code (IRC) in effect as of January 1, 2007. Specifically, the proposed interpretation provides that because lines on the federal income tax return do not specifically mention the IRC, they should follow federal application even if those figures would be adjusted under the 2007 IRC.  

On December 1, acting Comptroller Kelly Hancock released a statement noting that Texas will allow bonus depreciation in the computation of cost of goods sold (COGS). The statement is in response to the selective conformity associated with adjusting total revenue in proposed rule 3.587 without addressing the historical treatment in Texas COGS under Comptroller memo 201401856M and various other policy documents. The update in treatment has not been adopted or proposed in an administrative rule and would apply only prospectively based on an updated statutory interpretation to be issued later.   

On December 19, the Comptroller’s Tax Policy and Audit Division issued internal guidance, saying it plans to allow taxpayers a one-time catchup for bonus depreciation for assets still in service during 2025 when bonus depreciation was taken in a previous period and has yet to be deducted for purposes of Texas COGS. Further, the Comptroller said some exclusions from revenue, such as global intangible low-taxed income (GILTI) or net controlled foreign corporation tested income (NCTI), would be allowed only to the extent they comply with federal income tax law. 

Proposed rule 3.587 has not been officially adopted and does not address comments made since its publication in August. The updated interpretations related to depreciation for COGS and the one-time method change adjustment will presumably be incorporated into a future rule proposal that would apply only to 2026 report years and after. The Comptroller has not commented on whether transition rules or adjustments would be proposed or adopted in response to those changes. 

Proposed Rolling IRC Conformity for Computing Total Revenue

Texas has proposed selective conformity for franchise tax reports due on or after January 1, 2026. Under the proposed regulations, total revenue for returns due on or after January 1, 2026, should be determined as reported under federal income tax law in effect at the time of reporting unless specifically citing back to the definition of "Internal Revenue Code." Tex. Tax Code §171.0001(9) defines the IRC as the version “in effect for the federal tax year beginning on January 1, 2007, not including any changes made by federal law after that date, and any regulations adopted under that code applicable to that period."

The updated interpretation implies that the requirement that amounts determined on IRS forms “comply with federal income tax law” applies a rolling conformity to the current IRC unless specifically referencing the “Internal Revenue Code,” in which case taxpayers apply the code as of January 1, 2007.  Under the updated interpretation amounts should follow those computed on Forms 1120, 1120-S, 1065, 8825, and other variants of those forms.  However, the Comptroller has indicated that some exceptions exist for specific subtractions for total revenue under IRC Sections 78 and 951-964.

In Comptroller memo 202512012M, the Comptroller indicated that a subtraction might not be allowed for GILTI or NCTI because exclusions are calculated under the IRC as of January 1, 2007, for amounts under IRC Sections 951-964. Taxpayers with significant GILTI or NCTI should determine the potential impact of the proposed treatment.

The Comptroller has also indicated that bonus property for which a net gain or loss is calculated for the 2026 report year is eligible to modify that gain or loss as if it had not taken bonus depreciation. That adjustment applies only to the 2026 report year. 

Proposed Rolling IRC Conformity for Texas COGS

Texas has operated under a fixed conformity statute since the inception of the current franchise tax as it defined the “Internal Revenue Code” under Tex. Tax Code §171.0001(9) to apply based on rules in effect for the tax years beginning January 1, 2007, and not including any changes adopted thereafter. Any references to amounts or federal line numbers were presumed to follow allowable methods available as of that fixed conformity date. The result was that taxpayers were unable to elect bonus depreciation or follow methods otherwise allowable and used for current federal income tax returns. Under the revised interpretation, it seems that Texas’s modifications to depreciation, historically required based on fixed-date conformity to the IRC, no longer apply under the revised interpretation proposed in Comptroller memo 202512012M and statements issued by the acting Comptroller. Tex. Tax Code §171.1012(c)(6) states that a taxpayer can include in COGS "depreciation, depletion, and amortization, reported on the federal income tax return on which the report under this chapter is based, to the extent associated with and necessary for the production of goods, including recovery described by” IRC Section 197.

Previously, the Comptroller presumed that the federal income tax return referenced would follow the IRC in effect as of January 1, 2007. Based on the new guidance, the Comptroller’s updated interpretation is that the term “Internal Revenue Code” applies only to computations made under Section 197 for amortization and not to other depreciation, which would follow the amount actually reported on the federal income tax return filed. As a result of the updated interpretation, taxpayers with assets and corresponding depreciation might be eligible to deduct bonus depreciation in line with elections and computations made for federal income tax purposes applicable to the 2025 tax year. 

Under memo 202512012M, taxpayers that historically have claimed the Texas COGS deduction have both an opportunity to claim bonus depreciation for qualifying assets placed in service on or after January 19, 2025, and a one-time opportunity to claim a net depreciation adjustment for qualifying assets placed in service before the 2026 franchise tax report. The one-time net depreciation adjustment allows taxpayers to catch up on depreciation previously deducted for federal tax purposes on qualifying COGS assets and eliminated tax basis differences for federal and Texas purposes on COGS assets. Taxpayers will still need to determine the amount of depreciation allocable to COGS assets versus those assets used in nonqualifying activities, such as services and administrative functions. 

Comptroller memo 202501212M also provides that when a taxpayer’s one-time depreciation catchup would reduce margin below zero, that amount can be carried forward to consecutive reports until exhausted. That helps make sure that taxpayer adoption of this change would not create a permanent adjustment in tax provision calculations. Taxpayers will need significant documentation to account for the one-time depreciation catchup and any associated carryforward computed asset by asset to sustain those items on audit.   

Impact to Taxpayers Using Compensation or 70% of Revenue

The proposed guidance for total revenue and COGS does not provide instructions for taxpayers that do not use the COGS method. Therefore, we would expect that businesses following only the revenue guidance will no longer be able to modify gains and losses for bonus assets. That could create an additional amount to be reported in the total revenue and apportionment of companies whose primary business is not the sale of tangible personal property or other qualifying COGS activities. All taxpayers would also see an increase in taxable gross margin as a result of including GILTI and NCTI.

Status of Proposed Rules and Interpretations

As of the issuance of this Alert, proposed rule 3.587: “Total Revenue,” had not been formally adopted. The additional prescribed policy directives for COGS are from a change in interpretation rather than an adopted change in statute or of any proposed rules. Taxpayers might be able to challenge the application of the updates by broadly applying the IRC as of January 1, 2007, to the preparation of 2026 reports; alternatively, they can choose to apply rolling conformity to all years open under the statute of limitations.