Franchise Tax Frequently Asked Questions

Beginning with the 2026 franchise tax report, a taxable entity determines amounts taken from its federal tax return under the federal tax law in effect for that federal tax year, unless the Texas statute or rule specifically references the IRC. Where the Texas statute or rule references the IRC, a taxable entity must compute such amounts under the 2007 IRC. This change applies to all components of the franchise tax.

Yes. A taxable entity will include any GILTI or FDII reported on its federal return on the line items used to calculate total revenue. A taxable entity uses the line items as they are reported on its current federal tax return because Section 171.1011 does not reference the Internal Revenue Code when it references the Internal Revenue Service form line items used to calculate total revenue.

No. GILTI and FDII may not be subtracted from total revenue as foreign royalties or foreign dividends. These categories of foreign source income are not dividends or royalties.

No. GILTI and FDII may not be subtracted from total revenue as amounts described in IRC Section 78 or Sections 951-964. Section 171.1011 ties amounts described in Sections 78 and Sections 951-974 to the 2007 IRC. Because of post-2007 amendments to the IRC, Sections 951-964 now include additional categories of foreign source income, e.g., GILTI and FDII, renamed by the One Big Beautiful Bill Act to Net Controlled Foreign Corporation Tested Income (NCTI) and Foreign-Derived Deduction Eligible Income (FDDEI) respectively.

No. GILTI and FDII reported on Form 1120, line 29b Special deductions (Schedule C, line 24) do not qualify for the Schedule C deduction from total revenue. Section 171.1011 allows a subtraction “to the extent the relating dividend income is included in total revenue”. Because neither GILTI or FDII are dividend income, the deduction on Schedule C related to GILTI and FDII, as well as their successors, Net Controlled Foreign Corporation Tested Income (NCTI) and Foreign-Derived Deduction Eligible Income (FDDEI), are not allowed as Schedule C deductions.

Yes. A taxable entity may use either method allowed under Section 174 of the 2007 IRC to calculate its R&D costs that it includes in cost of goods sold (COGS). Generally, a taxable entity must use the same methods it uses on its current federal return. Section 171.1012(h). However, because Section 171.1012(c)(9) ties the deduction for Section 174 to the 2007 IRC, a taxable entity may use either method allowed under Section 174 of the 2007 IRC.

Yes. A taxable entity may include in its COGS federal bonus depreciation reported on its federal tax return, to the extent associated with and necessary for the production of goods. Section 171.1012(c)(6). Because this section only references the IRC in relation to recovery under Section 197, a taxable entity will include the depreciation reported on its federal tax return for each asset qualifying under Section 171.1012(c)(6). A taxable entity that elects to expense certain depreciable assets under Section 179 on its federal return may also include such amount in its COGS if otherwise qualified under Section 171.1012(c)(6). However, any recovery under Section 197 must be computed under the 2007 IRC.

No. The one-time net depreciation adjustment is not limited to those assets which were disposed of in the accounting period on which the 2026 report is based. The one-time net depreciation adjustment is intended for all taxable entities with qualifying assets, regardless of whether those assets were disposed of in the accounting period used on the 2026 report.

A qualifying asset is not just any asset for which a federal and state basis difference exists. A qualifying asset is an asset that:

• is associated with and necessary for the production of goods under Section 171.1012(c)(6);
• was placed in service prior to the accounting period used on the 2026 report; and
• was not disposed prior to the accounting period used on the 2026 report.

No. The net depreciation adjustment is intended to be prospective while allowing for a "catch-up" adjustment so that on future sales of assets there is no basis differential between federal tax and franchise tax.

No. A taxable entity includes in its COGS the depreciation reported on its federal tax return, to the extent associated with and necessary for the production of goods. Section 171.1012(c)(6). A taxable entity generally must use the same methods it uses on its current federal return. Section 171.1012(h).