What You Need to Know About the New Corporate Alternative Minimum Tax Rules: AFSI Calculation for R&D and Tax Repairs
Tax season is always a whirlwind, and if you are dealing with the Corporate Alternative Minimum Tax (CAMT) this year, you know exactly what I mean! 😊 Between tracking GAAP differences and tax depreciation, it’s enough to make anyone’s head spin. Recently, the IRS and Treasury Department dropped a crucial piece of the puzzle: Notice 2026-7.
This notice provides additional interim guidance on how to calculate your Adjusted Financial Statement Income (AFSI) under Sections 55, 56A, and 59 of the Internal Revenue Code. Whether you’re dealing with tax repairs, intangible amortization, or the new rules for domestic R&D, this post will serve as your roadmap. Let’s dive into the details and make sense of these complex regulations together!
The Big Picture: What is the CAMT? 🤔
Before we get into the nitty-gritty of Notice 2026-7, let’s take a quick step back. The CAMT was enacted by the Inflation Reduction Act of 2022 and imposes a minimum tax based on the AFSI of an applicable corporation for taxable years beginning after December 31, 2022. But what exactly is an “applicable corporation”?
In simple terms, it generally applies to large corporations that meet a specific average annual AFSI test for one or more taxable years ending after December 31, 2021. However, it’s important to note that S corporations, regulated investment companies (RICs), and real estate investment trusts (REITs) are explicitly excluded from this definition.
The core of the CAMT calculation lies in Section 56A, which defines AFSI as the net income or loss set forth on the taxpayer’s applicable financial statement (AFS), adjusted as required. Because financial accounting (GAAP/IFRS) and tax accounting have different rules, the Treasury is authorized to issue regulations to prevent omissions or duplications. That’s exactly where Notice 2026-7 comes in—to bridge the gap before final regulations are published.
Taxpayers are allowed to rely on the interim guidance provided in Notice 2026-7 for taxable years beginning before the forthcoming proposed regulations are published in the Federal Register. Just remember, you must apply the rules consistently!
Section 3: Tax Repairs and Section 168 Property 🛠️
One of the biggest headaches commenters pointed out with previous CAMT rules involved repair and maintenance costs. For regular tax purposes, many of these costs are deducted immediately. However, for AFS purposes, they are often capitalized and depreciated.
If you have a single piece of property for AFS purposes that includes both capitalized Section 168 property and deducted repair costs, previously, you would have to meticulously track and bifurcate the book depreciation just for CAMT purposes. That was an administrative nightmare! To reduce this compliance burden, Notice 2026-7 provides a much-needed adjustment.
Under the new guidance, a CAMT entity can adjust its AFSI by doing the following:
- Reducing AFSI by the tax COGS repair deduction to the extent it’s recovered as part of cost of goods sold or computation of gain/loss.
- Reducing AFSI by deductible tax repairs to the extent allowed as a deduction in computing taxable income.
- Adjusting AFSI to disregard book COGS repair depreciation and book repair depreciation expense.
To qualify as an “eligible repair asset,” the cost must be attributable to the repair or maintenance of Section 168 property, capitalized and depreciated for AFS purposes, but NOT capitalized for regular tax purposes under Section 263 or 263A.
Section 4: Navigating Intangible Amortization 📊
Now, let’s talk about goodwill and other intangibles. For regular tax purposes, amounts paid to acquire goodwill are capitalized and amortized ratably over a 15-year period under Section 197. However, for AFS purposes, goodwill is capitalized but NOT recovered through amortization; instead, it’s only recovered if the goodwill is impaired or disposed of.
Because of this discrepancy, companies could face a sudden CAMT liability in years where amortization is deducted for regular tax purposes, which could discourage domestic investment. Notice 2026-7 modifies previous guidance to allow an adjustment for eligible intangibles.
| Adjustment Type | Action Required for AFSI |
|---|---|
| Eligible Intangible Tax COGS Amortization | Reduce AFSI by the amount recovered in COGS or gain/loss computation. |
| Deductible Intangible Tax Amortization | Reduce AFSI by the amount allowed as a deduction in computing taxable income. |
| Covered Book Intangible Expense/Amortization | Disregard these amounts from your AFSI calculation. |
If you make the adjustment for eligible intangibles, you must make it for ALL eligible intangibles held by the CAMT entity at the beginning of the taxable year, and you must continue to do so for all subsequent years until the assets are disposed of. No cherry-picking!
Section 5: The Shift in Domestic Research Amortization 🔬
If your company invests heavily in R&D or software development, pay close attention to this section. Historically, GAAP allows research and experimental costs to be expensed as incurred. However, the tax landscape has been shifting rapidly.
Under the TCJA, specified research expenditures paid in taxable years beginning after December 31, 2021, had to be capitalized and amortized (5 years for domestic, 15 years for foreign). Then, the One, Big, Beautiful Bill Act (OBBBA) introduced Section 174A, allowing a full deduction for domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024.
This created a messy “transition period” where regular taxable income takes a hit from two layers of recovery: current year deductions under Section 174A AND continued amortization of prior year expenditures under Section 174. To prevent unfair CAMT results during this period, Notice 2026-7 provides a specific AFSI adjustment for taxable years beginning after December 31, 2024.
You can reduce your AFSI by the legacy domestic Section 174 amortization taken into account for the taxable year, while simultaneously disregarding the corresponding book research or software development amortization. This ensures your AFSI properly reflects the tax benefits you are entitled to during the transition.
Sections 6 & 7: Film Productions and Materials/Supplies 🎬🧰
The IRS also listened to commenters in the entertainment and manufacturing sectors. For qualified film, television, live theatrical, and sound recording productions, Section 181 allows taxpayers to expense certain production costs. However, GAAP capitalizes and depreciates them. Tracking these components separately was causing massive compliance burdens. Notice 2026-7 fixes this by allowing you to reduce AFSI by deductible qualified production costs and disregard the book depreciation.
Similarly, for low-cost materials and supplies (items costing $200 or less), tax rules under Section 162 allow for immediate deduction, whereas AFS might require capitalization. Companies where core assets are predominantly low-cost materials were facing elevated AFSI compared to traditional manufacturers. The notice now permits AFSI to be reduced by deductible eligible materials and supplies to level the playing field.
Interactive AFSI Adjustment Estimator 🔢
To help you visualize how these adjustments affect your bottom line, try out this simple estimator based on the concepts we’ve discussed!
AFSI Adjustment Calculator
Other Notable Updates 👩💼👨💻
Notice 2026-7 doesn’t stop there. It also touches on a few other critical areas:
- Financially Troubled Companies (Section 8): Clarifies the attribute reduction interim guidance and confirms that upon emergence from bankruptcy, any resulting gain or loss reflected in FSI is disregarded for CAMT.
- Covered Asset Transactions (Section 9): If a CAMT entity receives stock of a foreign corporation and its basis is taken into account within two years, it creates a rebuttable presumption that the transaction was designed to avoid CAMT liability. You can rebut this by attaching a detailed statement to Form 4626.
- Section 367(d) Intangibles (Section 10): Ensures that a CAMT entity including an amount in gross income under Section 367(d) increases its AFSI, while providing a corresponding offset for the foreign transferee corporation to avoid double taxation.
Notice 2026-7 Key Takeaways
Frequently Asked Questions ❓
That wraps up our deep dive into IRS Notice 2026-7! While the CAMT rules are undoubtedly complex, these interim adjustments offer practical relief for common pain points like tax repairs, R&D amortization, and intangible assets. As always, consult with your tax advisor to apply these rules to your specific situation.
What are your thoughts on the new guidance? Are there any specific AFSI adjustments that are still causing you headaches? Let me know in the comments below! 😊
