Notice 2026-7 provides "additional interim guidance regarding the application of the corporate alternative minimum tax (CAMT) under §§ 55, 56A, and 59 of the Internal Revenue Code (Code)". Following the release of the CAMT Proposed Regulations and subsequent notices, the Treasury Department and the Internal Revenue Service (IRS) received numerous comments from tax professionals and stakeholders. Commenters highlighted specific situations where rigid adherence to financial statement income (FSI) without corresponding adjustments would result in severe compliance burdens, artificial acceleration of CAMT liabilities, and potential discouragement of domestic investment.

Relying on the authority granted under § 56A(c)(15), which allows the Secretary "to issue regulations or other guidance to provide for such adjustments to AFSI as the Secretary determines necessary to carry out the purposes of § 56A, including adjustments to prevent the omission or duplication of any item," the IRS issued this Notice to provide specific technical adjustments to Adjusted Financial Statement Income (AFSI).

AFSI Adjustments for Tax Repair Deductions

A significant compliance issue identified by practitioners involved the differing treatment of repair and maintenance costs for § 168 property. Often, these costs are deducted for regular tax purposes under § 1.162-4 but are capitalized and depreciated for Applicable Financial Statement (AFS) purposes. Without relief, CAMT entities would be forced to "create separate CAMT records for each item of AFS property to track the portion of AFS basis that corresponds to section 168 property and the portion that corresponds to repair and maintenance costs that are deducted for regular tax purposes".

To alleviate this burden, the IRS allows an entity’s AFSI to be "reduced by deductible tax repairs with respect to eligible repair assets, but only to the extent of the amount taken as a deduction in computing taxable income for the taxable year". Conversely, to prevent duplication, AFSI must be "adjusted to disregard book COGS repair depreciation and book repair depreciation expense with respect to eligible repair assets".

Relief for Eligible Intangibles and § 197 Amortization

Another major discrepancy addressed by the Notice involves the amortization of goodwill and certain other intangibles. For regular tax purposes, § 197 generally allows for a ratable 15-year amortization period. However, for AFS purposes, these costs are "recoverable to the extent the goodwill is impaired (in which case an impairment loss would be recognized) or upon disposition of the goodwill". Because these intangibles are not amortizable for book purposes, a CAMT liability could inappropriately arise in the taxable year the amortization is deducted for regular tax purposes.

The Notice provides that AFSI may be "reduced by deductible intangible tax amortization with respect to an eligible intangible, but only to the extent of the amount allowed as a deduction in computing taxable income for the taxable year". Upon the taxable disposition of such an asset, the CAMT entity must "adjust AFSI for the taxable year in which the disposition occurs to redetermine any gain or loss taken into account in the CAMT entity’s FSI with respect to the disposition for the taxable year (including a gain or loss of zero) by reference to the CAMT basis (in lieu of the AFS basis) of the eligible intangible".

Domestic Research Amortization Transition Adjustments

The enactment of § 174A by the One, Big, Beautiful Bill Act (OBBBA) introduced immediate expensing for domestic research and experimental expenditures for tax years beginning after December 31, 2024. However, this created a transition period where regular taxable income takes into account "two layers of recovery for domestic research or experimental expenditures: the deduction of current year expenditures under § 174A and the continued amortization of prior year expenditures under § 174". Because AFSI otherwise remained unchanged, this dual-layer recovery created a mismatch.

The IRS guidance permits AFSI for taxable years beginning after December 31, 2024, to be "reduced by TCJA domestic § 174 amortization, but only to the extent of the amount taken into account in computing taxable income for the taxable year". Additionally, AFSI must be "adjusted to disregard book research or software development amortization" to accurately align book and tax recoveries.

Qualified Production Costs Under Section 181

Under § 181, taxpayers may elect to deduct the costs of qualified film, television, live theatrical, and sound recording productions in the year incurred. However, FSI generally capitalizes and depreciates these costs as a single asset. The IRS recognized that tracking the bifurcated AFS asset for CAMT purposes led to undue complexity.

The Notice standardizes treatment by allowing AFSI to be "reduced by the amount of deductible qualified production costs, but only to the extent allowed as a deduction in computing taxable income for the taxable year". Consequently, CAMT entities must disregard "qualified production book COGS depreciation and qualified production book expense with respect to any qualified production costs paid or incurred in any taxable year".

Eligible Materials and Supplies

Entities with substantial core business assets consisting of tangible property with an acquisition cost of $200 or less may deduct these items currently under § 1.162-3(c)(1)(iv). For AFS purposes, however, they are often capitalized and depreciated, resulting in artificially elevated AFSI compared to taxpayers whose primary assets qualify for adjustments as § 168 property. Notice 2026-7 levels the playing field by stating AFSI is "reduced by deductible eligible materials and supplies, but only to the extent of the amount allowed as a deduction in computing taxable income for the taxable year".

Financially Troubled Companies

Addressing questions regarding the attribute reduction interim guidance from Notice 2025-46, the IRS clarified that the consolidated return rules under "§ 1.1502-28 applies". For fresh start accounting resulting from a non-transactional bankruptcy emergence, a CAMT entity determines its consequences by "disregarding any resulting gain or loss that is reflected in the FSI of the CAMT entity" and computing its CAMT basis by "disregarding any adjustment to the AFS basis of those assets resulting from the emergence from bankruptcy".

Section 358 Anti-Avoidance Rules and Section 367(d) Intangibles

Practitioners previously noted that the per se application of the proposed two-year rule under proposed § 1.56A-4—which dictated full AFSI inclusion of the excess of regular basis over hypothetical CAMT basis if a single dollar of foreign stock basis was "taken into account" within two years—was overly broad.

The IRS modified this into a rebuttable presumption. Under the Notice, such a transaction is "presumed to have a principal purpose to avoid treatment of such CAMT entity as an applicable corporation or to reduce or otherwise avoid a liability under § 55(a)". However, this "presumption may be rebutted by facts and circumstances clearly establishing that the covered asset transaction was not undertaken with such a principal purpose".

Finally, addressing concerns over double taxation in outbound transfers of intangible property under § 367(d), the IRS provided matching entity-level adjustments. A foreign corporation that properly treats a deemed payment as an allowable deduction "reduces its adjusted net income or loss... for such year by the amount of the deemed payment or the amount of the reduction in gross income".

Prepared with assistance from NotebookLM.