Tax professionals advising corporate clients must grapple with the complexities introduced by the Corporate Alternative Minimum Tax (CAMT), enacted by the Inflation Reduction Act of 2022. The CAMT, imposed under Internal Revenue Code (Code) § 55, applies to "applicable corporations" and is based on their "adjusted financial statement income" (AFSI) for taxable years beginning after December 31, 2022. The determination of "applicable corporation" status and the calculation of AFSI have been areas of significant focus for both taxpayers and the Internal Revenue Service (IRS). Notice 2025-27 provides further interim guidance on these matters, including an optional simplified method for determining applicable corporation status and critical relief from certain additions to tax under § 6655 related to CAMT liability.

The Corporate Alternative Minimum Tax Framework

The CAMT liability for an applicable corporation is the excess, if any, of the tentative minimum tax for the taxable year over the sum of the regular tax for the taxable year plus the tax imposed under § 59A. For an applicable corporation, the tentative minimum tax is 15 percent of its AFSI for the taxable year, less the CAMT foreign tax credit. Corporations that are not applicable corporations have a tentative minimum tax of zero.

A corporation is considered an "applicable corporation" for a taxable year if it is not an S corporation, regulated investment company, or real estate investment trust, and it meets either of the two average annual AFSI tests under § 59(k)(1)(B) for one or more taxable years prior to the current year that end after December 31, 2021.

The two average annual AFSI tests are:

The General AFSI Test (§ 59(k)(1)(B)(i)): For a corporation that is not a member of a foreign-parented multinational group (FPMG), this test is met if its average annual AFSI (determined without regard to the FSNOL adjustment under § 56A(d)) for the three-taxable-year period ending with such taxable year exceeds $1 billion.
The FPMG AFSI Test (§ 59(k)(1)(B)(ii)): For a corporation that is a member of an FPMG, this test is met if both of the following conditions are satisfied:
- The corporation meets the general AFSI test (determined after applying the FPMG rule under § 59(k)(2)).
- The average annual AFSI of the corporation (determined without regard to the FPMG rule under § 59(k)(2) and without regard to the FSNOL adjustment under § 56A(d)) for the three-taxable-year period ending with such taxable year is $100 million or more.

AFSI is generally the net income or loss reported on the taxpayer's applicable financial statement (AFS), subject to various adjustments outlined in § 56A. Relevant adjustments mentioned in the source include those for certain Federal and foreign income taxes (§ 56A(c)(5)), certain tax credits (§ 56A(c)(9)), and income from unrelated trade or business or debt-financed property for organizations subject to tax under § 511 (§ 56A(c)(12)). Section 56A(c)(15) also provides the Secretary with authority to issue regulations or guidance for necessary AFSI adjustments.

Prior Guidance and Proposed Regulations Context

Before Notice 2025-27, the Treasury Department and the IRS issued several notices providing interim guidance on the CAMT, including Notice 2023-7 (which announced the intent to issue proposed regulations and provided a safe harbor), Notice 2023-20, Notice 2023-64, and Notice 2024-10.

Proposed regulations addressing the CAMT (CAMT Proposed Regulations, REG-112129-23) were published on September 13, 2024. These proposed regulations included a simplified method for determining applicable corporation status under proposed § 1.59-2(g). This proposed simplified method involved applying the average annual AFSI tests with reduced thresholds ($500 million and $50 million). Importantly, under the proposed simplified method, AFSI was to be determined with adjustments only for certain taxes (proposed § 1.56A-8(b)) and tax-exempt entities (proposed § 1.56A-14), and solely for the FPMG test, income effectively connected to a U.S. trade or business (proposed § 1.56A-7). Consolidation entries on a consolidated AFS were generally taken into account, with exceptions. The proposed regulations also allowed the use of the AFS year if it differed from the taxable year.

Comments on the proposed simplified method suggested raising the thresholds to reduce compliance burdens for corporations expected to fall below the statutory thresholds. Comments also requested that AFSI adjustments for certain tax credits (under proposed § 1.56A-12) be included in the simplified method AFSI calculation, as their exclusion could cause corporations not expected to be applicable corporations to exceed the lower proposed thresholds.

The CAMT Proposed Regulations generally apply to taxable years ending after September 13, 2024, with reliance rules allowing taxpayers to apply certain proposed rules for earlier taxable years under specific consistency requirements.

Interim Simplified Method for Determining Applicable Corporation Status

In response to comments and to reduce compliance burdens, Notice 2025-27 provides an optional interim simplified method for determining applicable corporation status under § 59(k)(1). This method may be used for any taxable year ending on or before the date final regulations adopting a simplified method are published, provided the original Federal income tax return for that year has not been filed as of the notice's publication date in the Internal Revenue Bulletin.

Under this interim simplified method, a corporation determines applicable corporation status by applying the rules in § 59(k)(1) and (2) with the following modifications to the thresholds:

For the general AFSI test (§ 59(k)(1)(B)(i)), $800 million is substituted for $1 billion.
For the second prong of the FPMG AFSI test (§ 59(k)(1)(B)(ii)(II)), $80 million is substituted for $100 million.

For purposes of this interim simplified method, AFSI is determined with specific adjustments. It includes adjustments set forth in § 56A(c)(2)(A) (related party transactions), § 56A(c)(2)(B) (covered taxes), § 56A(c)(5) (Federal and foreign income taxes), § 56A(c)(9) (certain tax credits), and § 56A(c)(12) (tax-exempt entities). Solely for purposes of applying the second prong of the FPMG AFSI test (§ 59(k)(1)(B)(ii)(II)), the adjustment set forth in § 56A(c)(4) (effectively connected income) is also included. Importantly, under the interim simplified method, AFSI is determined without regard to any other adjustments set forth in § 56A(c) and (d).

Additionally, AFSI under the interim simplified method is adjusted to disregard (to the extent not already disregarded under § 56A(c)(9)) amounts related to the transfer or receipt of eligible credits under § 6418 or amounts treated as tax-exempt income under §§ 48D(d)(2) or 6417(c), as well as amounts paid as consideration for the transfer of a credit and increases in net income from utilizing a credit, provided such amounts are not otherwise disregarded under § 56A(c)(5).

The interim simplified method calculation of AFSI takes into account "AFS Consolidation Entries," which are financial accounting journal entries made to present a financial statement group as a single economic entity, including entries to eliminate intercompany transactions, report unrecorded amounts, and correct/adjust amounts. However, consolidation entries that eliminate transactions between persons not treated as a single employer under § 52(a) or (b) or between entities not included in an FPMG are disregarded.

If a corporation uses the interim simplified method and determines its AFSI (as calculated under this method) exceeds the modified thresholds, it is an applicable corporation only if it is determined to be an applicable corporation under the statutory rules of § 59(k)(1) or, if applicable, under proposed § 1.59-2(c). Using the interim simplified method to determine that a corporation is not an applicable corporation does not violate the consistency requirements of the reliance rules for the CAMT Proposed Regulations.

For corporations whose AFS year differs from their taxable year, the interim simplified method permits the use of a 3-AFS-year period ending during the taxable year for the average annual AFSI tests.

Estimated Tax Relief for CAMT Liability

Section 6655 generally imposes an addition to tax for failure by a corporation to make sufficient and timely estimated income tax payments. Required installments are typically 25 percent of the required annual payment, which is generally the lesser of 100 percent of the tax shown on the current year's return or 100 percent of the tax shown on the preceding year's return (with restrictions for large corporations).

Recognizing the continued uncertainty surrounding CAMT liability calculations, Notice 2025-27 provides a waiver of the addition to tax under § 6655 specifically with respect to a corporation's CAMT liability under § 55 for any taxable year that begins after December 31, 2024, and before January 1, 2026 (referred to as a "Covered CAMT Year"). This means that for a Covered CAMT Year, a corporation's required estimated tax installments do not need to include amounts attributable to its CAMT liability under § 55 to avoid a § 6655 addition to tax. However, this waiver does not relieve a corporation from its obligation to pay the CAMT liability itself when due, and other penalties, such as the failure-to-pay penalty under § 6651, could still apply if the CAMT is not paid by the return's due date (without regard to extensions).

This waiver builds upon prior relief provided in Notice 2023-42 (for taxable years beginning in 2023) and Notice 2024-66 (for taxable years beginning in 2024), which obsoleted earlier notices related to estimated tax waivers.

To properly claim this relief and avoid receiving a penalty notice that would require abatement, affected taxpayers must file Form 2220, Underpayment of Estimated Tax by Corporations, with their Federal income tax return, even if no estimated tax penalty is ultimately owed. Form 2220 must be completed without including the CAMT liability from Schedule J of Form 1120 (or the appropriate line on other Form 1120 series returns). Furthermore, affected taxpayers must report an amount of estimated tax penalty on Line 34 of Form 1120 (or equivalent), even if that amount is zero.

Future Guidance

The notice indicates that the Treasury Department and the IRS intend to issue additional interim guidance on various CAMT issues based on comments received, including the interaction of CAMT with the tonnage tax, treatment of unrealized gains/losses on investment assets, partnership AFSI rules, corporate transaction adjustments, and reliance rules. It is anticipated that new proposed regulations revising the current CAMT Proposed Regulations will incorporate rules similar to the interim simplified method detailed in Notice 2025-27, as well as other interim guidance.

Conclusion

Notice 2025-27 offers valuable clarity and relief for tax professionals and their corporate clients. The interim simplified method provides an optional, potentially less burdensome, approach for determining applicable corporation status, particularly for corporations near the statutory thresholds, by incorporating comments regarding threshold levels and specific AFSI adjustments for tax credits. Furthermore, the extension of estimated tax penalty relief for CAMT liability for taxable years beginning in 2025 provides necessary breathing room as taxpayers and practitioners continue to navigate the implementation of this complex new tax regime. Careful adherence to the instructions for claiming the estimated tax relief is crucial to ensure proper processing by the IRS.

Prepared with assistance from NotebookLM.