IRS issues Notice 2026-7 providing long-awaited CAMT relief for OB3’s R&E catch-up adjustment and more-widely available repairs adjustment among other taxpayer favorable updates

Statutory Overview

Section 55, introduced as part of the Inflation Reduction Act of 2022, establishes the CAMT for applicable corporations based on their AFSI for tax years beginning after December 31, 2022. A corporation qualifies as an applicable corporation for a given tax year if it satisfies the average annual AFSI test during one or more prior years that conclude after December 31, 2021. The CAMT liability for an applicable corporation is determined as the excess, if any, of its tentative minimum tax over the aggregate of its regular tax liability and base erosion and anti-abuse tax (BEAT) liability for the same year. In general, the tentative minimum tax is calculated as 15% of the corporation’s AFSI, reduced by its CAMT foreign tax credit (FTC) for the current tax year.

Section 56A generally provides that AFSI is a taxpayer’s net income or loss set forth in its AFS for the current taxable year. Section 56A provides certain adjustments a taxpayer may make to its financial statement income to arrive at AFSI, including, for example, adjustments to AFSI to prevent the omission of duplication of any item, as well as adjustments for depreciation, amortization for qualified wireless spectrum, and certain taxes. Section 56A also provides a number of baseline rules to address taxpayers with consolidated financial statements, taxpayers that are members of consolidated groups, as well as the implications of partnerships and CFCs in AFSI determinations.

While Section 55 established the CAMT and Section 56A clarifies AFSI for purposes of CAMT determinations, Section 59(k) defines an “applicable corporation” and the annual AFSI test a taxpayer must complete to determine whether the taxpayer has a CAMT liability. Generally, Section 59(k)(1)(B)(i) provides that a taxpayer meets the AFSI test if the average annual AFSI of the corporation for the three-taxable-year period ending with that taxable year exceeds $1 billion. To the extent a corporation is a member of a foreign-parented multinational group (FPMG), a corporation meets the average annual AFSI test if the AFSI of the FPMG exceeds $1 billion and the average annual AFSI of that corporation alone exceeds $100 million. The statute also layers in certain aggregation rules for determining applicable corporation status.

CAMT Proposed Regulations and Subsequent Interim Guidance

On September 13, 2024, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released a notice of proposed rulemaking regarding the application of the CAMT). The notice states that taxpayers may rely on the Proposed Regulations, subject to specified terms and conditions. In large part, the Proposed Regulations incorporated preliminary positions set forth in seven earlier notices released by the government with respect to the CAMT. Following the release of the Proposed Regulations, and in response to a myriad of taxpayer comments, the IRS and Treasury issued a series of notices clarifying positions taken and rules created in the Proposed Regulations. For example, Notice 2025-47 provided interim guidance regarding an optional simplified method for determining applicable corporation status and provided a limited waiver of certain additions to tax under Section 6655 with respect to a taxpayer’s CAMT liability for taxable years beginning during 2025.

Notably, and of relevance to the substantive changes provided in Notice 2026-7, Notice 2025-46 provided interim guidance on the application of the CAMT to financially troubled companies, tax consolidated groups, acquired financial statement NOLs, and certain domestic corporate transactions. Notice 2025-49 shortly followed and provided interim guidance on the application of the CAMT, including adjustments to AFSI for, among other items, eligible regulatory assets, certain embedded depreciation deductions, and eligible goodwill amortization. In each of those contexts, relief provided was limited to certain qualifying taxpayers and not widely available to all taxpayers with potential CAMT liability. For example, a repairs AFSI adjustment was provided, but only to certain CAMT entities with regulated operations.

Subsequent to the release of the Proposed Regulations, Congress enacted OB3, which revised Section 174 and introduced Section 174A to the Code, addressing the treatment of domestic R&E expenditures. Neither the CAMT statute nor the Proposed Regulations include provisions to account for the transition to the Section 174A framework. Due to the concurrent recovery mechanisms available under Sections 174 and 174A, taxpayers utilizing both options frequently encountered unanticipated CAMT liabilities arising from the absence of a corresponding AFSI adjustment. Consequently, Treasury and the IRS received numerous comments from taxpayers seeking relief from the unintended results arising from the legislative changes implemented by OB3.

The Notice

More Widely Available AFSI Adjustment for Repairs

Section 3 of the Notice generally permits CAMT entities to lower their AFSI by including deductible repair expenses recognized for Federal income tax purposes, while ignoring corresponding book repair amounts. Specifically, Section 3.04 specifies that a CAMT entity may reduce AFSI by: (1) the tax COGS repairs deduction related to eligible repair assets, but only if that deduction is included as part of COGS when calculating gross income for the tax year or as part of gain/loss calculations from the sale or exchange of non-inventory property included in taxable income for that year; and (2) the deductible tax repairs for eligible repair assets, but again only up to the amount deducted when calculating taxable income for the year. Alongside this reduction, a CAMT entity must also adjust AFSI to disregard any book COGS repair depreciation or book repair depreciation expense concerning eligible repair assets. To the extent that a CAMT entity recognizes a Section 481(a) adjustment arising from a tax repair or tax repair capitalization change in accounting method, a corresponding amount will be incorporated into their AFSI to the extent the adjustment is included in the calculation of taxable income for that year.

With regard to a CAMT entity’s calculation of the book COGS repair depreciation adjustment, Section 3.05(1)(a) stipulates that the entity must apply the same accounting method used for AFS purposes. Conversely, Section 3.05(1)(b) provides that, in determining the tax COGS repair deduction adjustment, the entity should use its Section 263A accounting method adopted for regular tax purposes. Furthermore, Section 3.05(2) permits a CAMT entity to employ any reasonable method to determine book repair inventoriable depreciation within ending inventory for eligible repair assets under AFS purposes, or to identify deductible tax repairs included in ending inventory for regular tax purposes, when calculating the book COGS repair depreciation adjustment or the tax COGS repair deduction adjustment.

Procedurally, if a CAMT entity make the AFSI adjustment provided in Section 3.04, it must attach a statement to its Federal income tax return for such taxable year indicating it is making such adjustment; include the CAMT entity’s name, address, and TIN; and, if using a reasonable method to determine book repair inventoriable depreciation in ending inventory with respect to eligible repair assets for AFS purposes, or to determine deductible tax repairs included in ending inventory for regular tax purposes, or both, for purposes of determining the book (or tax) COGS repair depreciation adjustment provided in Section 3.04, it must indicate so on the statement, explain the reasonable method, and certify that such reasonable method is consistent with the methods of accounting the CAMT entity uses for AFS (or regular tax) purposes.

OB3 Domestic R&E Catch-Up AFSI Adjustment

For tax years beginning after December 31, 2024, Section 5.03 of the Notice provides an AFSI adjustment for CAMT entities, allowing AFSI to be reduced by any amortization taken under Section 174(a)(2)(B) in a taxable year beginning after December 31, 2024, with respect to domestic R&E expenditures that were paid or incurred for regular tax purposes and capitalized under Section 174 in a taxable year beginning after December 31, 2021, and before January 1, 2025, but only to the extent of the amount taken into account in computing taxable income for the taxable year. In addition to this reduction to AFSI, a CAMT entity is required to disregard any book research or software development amortization, and adjust AFSI, as appropriate, by any tax capitalization method change AFSI adjustment.

AFSI Adjustment for Eligible Materials and Supplies

Section 7 of the Notice, similar to the AFSI adjustment for tax repair expenses, provides that a CAMT entity may adjust its AFSI for certain eligible materials and supplies. Specifically, Section 7.03 permits a CAMT entity to reduce its AFSI by the amount of eligible materials and supplies tax COGS, but only up to the amount recovered as part of COGS in computing gross income for the taxable year. Alternatively, this reduction applies to amounts included in gain or loss calculations from the sale or exchange of non-inventory property that are reflected in taxable income, or amounts deducted in determining taxable income, as applicable, for the taxable year. In alignment with the AFSI reduction, a CAMT entity may further decrease its AFSI by deducting eligible materials and supplies; however, this reduction is permitted only to the extent that such deductions are allowable when calculating taxable income for the applicable tax year. Similar to the treatment of book repair expenses, adjustments must be made to AFSI regarding book materials and supplies to disregard both book COGS depreciation and book expenses associated with eligible materials and supplies acquired in any tax year, including those ending on or before December 31, 2019. Furthermore, any tax-eligible materials and supplies Section 481(a) adjustment should be incorporated, but solely to the degree that the adjustment impacts the computation of taxable income for the relevant tax year.

Broader AFSI Adjustment for Section 197 Intangibles Amortization

Section 4 of the Notice modifies the interim guidance provided in Notice 2025-49 to allow a CAMT entity to adjust AFSI for Section 197 amortization attributable to goodwill and certain other intangibles, the cost of which is capitalized for AFS purposes and such cost is not permitted to be amortized for AFS purposes such that the cost is only recoverable for AFS purposes to the extent the corresponding intangible asset is impaired or disposed of. The adjustment in Section 4.04 for such amortization mimics the various adjustments provided in other sections of the Notice with respect to repairs and materials and supplies. Specifically, the AFSI of a CAMT entity may be reduced by eligible intangible tax COGS amortization, but only to the extent of the amount recovered as part of COGS in computing gross income for the taxable year, or as part of the gain/loss computation from the sale or exchange of non-inventory property that is included in taxable income, or deducted in computing taxable income, respectively, for the taxable year at issue. In concert with that AFSI reduction, a CAMT entity may also reduce their AFSI by deductible intangible tax amortization, but only to the extent of the amount allowed as a deduction in computing taxable income for the taxable year. As with the treatment of book repair and materials and supply expense, with respect to covered book intangible amortization expense, AFSI must be adjusted to disregard covered book intangible amortization expense, covered book intangible COGS amortization, and covered book intangible expense, as well as take into account any tax intangible amortization section 481(a) adjustment taken into account in computing taxable income for the taxable year.

Additional Guidance Provided in the Notice

In addition to these four significant and frequently requested modifications to AFSI, the Notice offered several other elements of interim guidance intended to assist taxpayers in achieving greater clarity regarding their CAMT determinations. For example, Section 6 of the Notice provides an AFSI adjustment for certain qualified production costs under Section 181, a favorable adjustment for the film, theater, and music industries. Consistent with prior adjustments, the guidance permits eligible taxpayers to consider their qualified production tax COGS and tax-deductible qualified production costs, excluding the corresponding book amounts. This approach reflects a broader trend in the Notice, emphasizing adjustments to align AFSI calculations more closely with tax principles rather than book accounting.

Section 8 of the Notice clarified certain provisions implicating financially troubled companies, particularly the attribute reduction interim guidance provided in Notice 2025-46 as well as guidance concerning fresh start accounting gain and loss on non-transactional bankruptcy emergences. With respect to attribute reduction, Section 8.02 confirms that Treas. Reg. §1.502-28 applies. Whereas with regard to the emergence from bankruptcy of a CAMT entity, Section 8.03 provides that the CAMT entity determines its CAMT consequences resulting from that emergence by disregarding any resulting gain or loss that is reflected in the FSI of the entity, and determining the CAMT basis of any assets of the CAMT entity by disregarding any adjustment to the AFS basis of those assets resulting from the emergency from bankruptcy. Notably, these adjustments again appear to reflect the government's intention to align CAMT calculations with tax rather than book adjustments and alleviate the creation of any additional burdensome calculations.

Eversheds Sutherland Observation: Taxpayers will appreciate the advantageous AFSI adjustments introduced by the Notice. The Notice addresses the unintended impact of OB3’s adjustment for unamortized domestic R&E expenditures—namely, the substantial fluctuations in CAMT liability experienced by certain taxpayers—and the relief it provides represents a positive development. Additionally, the inclusion of similar adjustments for tax repairs, materials and supplies, as well as Section 197 amortization amounts relating to goodwill and specific other intangibles, is likely to be well received. These changes not only reduce AFSI but also streamline the application of CAMT, minimizing additional CAMT calculations by permitting taxpayers to use their regular tax determinations for CAMT purposes. While the Notice generally makes constructive adjustments, it explicitly prevents double-counting and ensures that all pertinent subcomponents are comprehensively included. For this reason, taxpayers should thoroughly review Notice provisions to ensure correct implementation of these changes. Additionally, it is crucial to recognize the consistency requirement stipulated by each section of the Notice. According to the Notice, taxpayers applying any of the AFSI adjustments must also continue to make that adjustment for all subsequent tax years, or until final regulations are issued. In the absence of guidance allowing revisions to these adjustments or a change in accounting method for AFSI adjustments, it is advisable to exercise caution when determining whether to make any such adjustments.

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