Texas Ties Its Franchise Tax to Current Federal Law, Colorado Doubles Down on Addbacks: What Houston and Denver Business Owners Should Know

For nearly twenty years, the Texas Comptroller calculated franchise tax using a version of the Internal Revenue Code frozen on January 1, 2007 — meaning federal tax law passed in 2017, 2020, or this year technically didn’t apply to how a Texas business computed total revenue, cost of goods sold, or depreciation for the franchise tax. That changed this year. At roughly the same time, Colorado’s legislature went the opposite direction: rather than let the federal One Big Beautiful Bill Act’s changes flow automatically into the state’s tax base, lawmakers called a special session to decouple from parts of it and tighten several others. Two states, one federal law, two very different responses — and for Texas business owners, the clock on this one is short: 2026 franchise tax reports filed under extension are due November 16.

Texas Retires Its 2007 Conformity Freeze

Since the Texas franchise tax (also called the margin tax) was enacted, the Comptroller has required taxable entities to compute amounts drawn from their federal tax return using the Internal Revenue Code as it existed on January 1, 2007, regardless of how many times Congress has amended it since. On December 19, 2025, the Comptroller’s Tax Policy Division issued guidance, later clarified on March 12, 2026, retiring that freeze for most purposes. Beginning with the 2026 franchise tax report, total revenue, cost of goods sold, and apportioned gross receipts are generally computed under federal tax law as currently in effect rather than the 2007 version, except for a short list of provisions, such as Sections 78 and 951-964 of the Internal Revenue Code, that remain pinned to 2007 — which means GILTI, added to the federal tax code after 2007, still doesn’t apply to the Texas calculation.

The most immediate impact is on depreciation. Federal bonus depreciation claimed on assets placed in service on or after January 19, 2025 can now be included in a taxable entity’s cost of goods sold. The Comptroller is also allowing a one-time net depreciation adjustment on the 2026 report — a true-up for the gap between what a business depreciated for federal purposes and what it was allowed to depreciate for franchise tax cost of goods sold in prior years — which can be carried forward to future reports until it is used up.

Houston and The Woodlands: This Lands Right Before the Nov. 16 Deadline

For Houston and Woodlands businesses that produce or manufacture goods, this conformity shift isn’t just a technical footnote — it can change the cost of goods sold deduction on the return that’s due in one week if you’re filing under extension. Any business that placed production equipment in service on or after January 19, 2025 should confirm whether federal bonus depreciation is now flowing into its cost of goods sold calculation, and whether the one-time net depreciation adjustment under Tax Code Section 171.1012(c)(6) applies before the report is finalized. Businesses that sold depreciable production assets this year should also check how the gain is being reported, since it now carries over from the federal return without the basis adjustment that used to apply.

Denver: Colorado Isn’t Letting the OBBBA Flow Through on Its Own

Colorado is a rolling-conformity state, so changes to the federal tax code normally become part of the state’s tax base automatically. Rather than let that happen uniformly with the One Big Beautiful Bill Act, Colorado’s legislature convened a special session in August 2025 specifically to offset the law’s impact on the state budget. Beyond the permanent QBI add-back we covered recently, lawmakers passed H.B. 25B-1002, which requires C corporations to add back the federal Section 250 deduction for foreign-derived deduction-eligible income for tax years beginning on or after January 1, 2026, and expands the list of jurisdictions presumed to be tax havens for combined-reporting purposes to include Hong Kong, the Republic of Ireland, Liechtenstein, the Netherlands, and Singapore. The same special session produced H.B. 25B-1005, which eliminates the sales tax vendor’s fee — the 4%, up to $1,000 per year, that retailers were allowed to keep for collecting and remitting state sales tax — effective January 1, 2026.

If you’re a Houston or Woodlands business filing your 2026 Texas franchise tax report under extension, confirm with your preparer whether the new IRC conformity rules change your total revenue, cost of goods sold, or depreciation figures before the November 16 deadline.
If your business placed production equipment in service on or after January 19, 2025, ask whether federal bonus depreciation now flows into your cost of goods sold deduction and whether the one-time net depreciation adjustment under Tax Code Section 171.1012(c)(6) applies to you.
If you sold depreciable production assets this year, revisit how the gain is reported on your 2026 franchise tax report before you file.
If you’re a Colorado retailer, update your point-of-sale and bookkeeping now — the sales tax vendor’s fee disappears January 1, 2026.
If your Colorado C corporation has foreign-derived income eligible for the federal Section 250 deduction, or an affiliate incorporated in Hong Kong, Ireland, Liechtenstein, the Netherlands, or Singapore, talk to us before year-end about the new add-back and combined-reporting rules.

At Petry Tax & Advisory, we help business owners across Houston, The Woodlands, and Denver sort out which federal changes actually reach their state return — and which ones their state has decided not to let through. Contact us for a consultation before you file your 2026 franchise tax report or close out your Colorado year-end planning.

This post is for general informational purposes only and does not constitute legal or tax advice. Consult with a qualified professional about your specific situation.

Source: Texas Comptroller of Public Accounts — STAR Accession No. 202603002M, Conformity of Texas Franchise Tax to the Internal Revenue Code | Colorado General Assembly — H.B. 25B-1002, Corporate Income Tax Foreign Jurisdictions | Colorado General Assembly — H.B. 25B-1005, Eliminate State Sales Tax Vendor Fee