TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER V. FRANCHISE TAX

The Comptroller of Public Accounts adopts amendments to §3.588, concerning margin: cost of goods sold, without changes to the proposed text as published in the April 3, 2026, issue of the Texas Register (51 TexReg 2237). The rule will not be republished. The comptroller amends the section to implement Senate Bill 263 and Senate Bill 1405, 89th Legislature, 2025; Senate Bill 1243, 88th Legislature, 2023; and House Bill 1195, 87th Legislature, 2021; to address the policy change to conform the franchise tax to the current-year federal income tax provisions; and to add definitions to the provision on costs allowed to movie theaters.

The comptroller also amends the section to add titles to statutory references and makes non-substantive changes to improve readability.

The comptroller received comments from Jennifer Rabb, President, Texas Taxpayers and Research Association (TTARA), and Brandon Newton, Whitley Penn, LLP, concerning subsection (d)(6)(B) allowing a taxable entity to include on its 2026 report a one-time net depreciation adjustment for qualifying assets placed in service prior to its 2025 accounting period. The comptroller will address the comments after discussion of that section.

The comptroller amends subsection (b) to add new paragraph (5) and renumbers subsequent paragraphs accordingly. New paragraph (5) defines the term "Internal Revenue Code" based on the statutory definition in Tax Code, §171.0001(9) (General Definitions). Throughout the section, where the term "Internal Revenue Code" is used, the definition in new paragraph (5) applies.

The comptroller amends subsection (c) to add new paragraphs (2) and (4). Subsequent paragraphs, and any reference to the subsequent paragraphs, are renumbered.

The comptroller adds new paragraph (2) to implement Senate Bill 1243 and Senate Bill 1405 concerning expenses paid with qualifying grant proceeds received for broadband deployment in Texas. Senate Bill 1243 and Senate Bill 1405 enact Tax Code, §171.10132 (Provisions Related to Certain Grants Received for Broadband Deployment in Texas).

The comptroller adds new paragraph (4) to implement House Bill 1195 concerning expenses paid with qualifying loan or grant proceeds received for COVID-19 relief. House Bill 1195 enacts Tax Code, §171.10131 (Provisions Related to Certain Money Received for COVID-19 Relief).

The comptroller amends renumbered paragraph (5) to add the $1 million deduction method of calculating margin that was effective January 1, 2014.

The comptroller amends renumbered paragraph (7) to implement Senate Bill 263, clarifying that the cost of goods sold allowed under this paragraph applies to television or radio broadcasting and providing a definition for television or radio broadcasting. Senate Bill 263 enacts Tax Code, §171.1012(o) (Determination of Cost of Goods Sold).

The comptroller amends renumbered paragraph (10) regarding the cost of goods sold allowed for movie theaters to add two definitions. New subparagraph (A) provides the definition for "movie theater," derived from the membership definition of the National Association of Theatre Owners. New subparagraph (B) provides the definition for "motion picture," taken directly from the Copyright Law of the United States, 17 U.S. Code §101 (Definitions).

The comptroller amends paragraph (d)(6), and adds subparagraphs (A), (B), (C), and (D) regarding the federal tax law used when determining allowable depreciation amounts taken from a federal tax return. The comptroller deletes the reference to Internal Revenue Code, §179 (Election to expense certain depreciable assets) as Chapter 171 does not specifically reference §179. The comptroller adds language to make clear that when a taxable entity elects to expense certain depreciable assets, the amount may be included in cost of goods sold if otherwise qualified under Tax Code, §171.1012(c)(6).

New subparagraph (A) addresses which year's federal tax law is used for 2026 and later franchise tax reports. Beginning with the 2026 franchise tax report, utilize the then-current federal tax law instead of the 2007 Internal Revenue Code, except where the statute and rule specifically reference the Internal Revenue Code. For example, beginning with the 2026 franchise tax report, a taxable entity may include in its cost of goods sold the bonus depreciation claimed on its federal return, to the extent associated with and necessary for the production of the goods. However, recovery claimed under Internal Revenue Code §197 must be determined under the 2007 Internal Revenue Code, as the statutory provision authorizing such recovery specifically references the Internal Revenue Code.

New subparagraph (B) allows a taxable entity, on the 2026 franchise tax report, to also include a one-time net depreciation adjustment for each qualifying asset in its cost of goods sold. Qualifying assets are those placed in service prior to the accounting year begin date on the 2026 report, provided that the assets have not been disposed of prior to this date and are associated with and necessary for the production of the goods.

New subparagraph (C) provides the proper order of application when a one-time net depreciation adjustment is taken with other allowable costs and procedures addressing when said adjustment results in a taxable entity's margin being reduced below zero.

New subparagraph (D) clarifies that for franchise tax reports prior to the 2026 report, the 2007 Internal Revenue Code is used when determining allowable depreciation amounts.

In the comments received, Ms. Rabb expresses concern that a taxable entity will lose the benefit of bonus depreciation for qualifying assets placed in service in its 2025 accounting period. She elaborates that the comptroller's policy change occurred after the qualifying assets had been purchased and placed in service that year, leaving little time for an entity's business decisions to respond to tax policies. To address the concern, Ms. Rabb requests expanding the one-time net depreciation adjustment to include bonus depreciation for qualifying assets placed in service during the 2025 accounting year, which would allow any unused bonus depreciation associated with such assets to be carried forward until exhausted.

The comptroller declines to make the requested change. The rule adequately addresses what property is allowed to be included in the one-time depreciation adjustment. The one-time net depreciation adjustment is meant to bring an asset's federal basis and Texas COGS basis in line to offset future gains from sales of assets previously placed in service. For assets placed in service in 2025 the asset's federal basis and Texas COGS basis will be the same. Because there is not a carryforward provision in COGS for unused costs, this change would require a legislative change.

Mr. Newton states that the one-time net depreciation adjustment does not make all entities whole and asks that the comptroller consider the amount of franchise tax paid, not just the COGS deduction allowed, over the life of the assets. Mr. Newton gives two examples involving a taxable entity that previously claimed a COGS deduction but uses the 30% deduction on its 2026 report. Lastly Mr. Newton poses that if the apportionment in prior years is higher than the apportionment for the 2026 report, the bonus depreciation disallowed in prior years had a higher tax effect than the proposed one-time net depreciation adjustment. Mr. Newton asks that the agency allow a one-time adjustment to the gain reported on a federal return and included in total revenue on the 2026 report.

The comptroller declines to make any changes regarding these comments. The catch-up is an equity provision related to the historic difference in allowable COGS depreciation deductions for federal tax and Texas franchise tax; it is not a mechanism to make all taxpayers whole. The rule addresses the basis differential under the COGS deduction rather than in total revenue. The requested change would require modification of a different rule. Additionally, the disparities identified by Mr. Newton are a consequence of only having one deduction applicable when calculating margin and are equally true for any other deduction. The comment regarding apportionment is a consequence of apportionment itself and is equally true under the old rule.

These amendments are adopted under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

The amendments implement Tax Code, §§171.1012 (Determination of Cost of Goods Sold), 171.10131 (Provisions Related to Certain Money Received for COVID-19 Relief), and 171.10132 (Provisions Related to Certain Grants Received for Broadband Deployment in Texas).

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on June 1, 2026.

TRD-202602254

Jenny Burleson

Director, Tax Policy

Comptroller of Public Accounts

Effective date: June 21, 2026

Proposal publication date: April 3, 2026

For further information, please call: (512) 475-2220