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On Feb. 13, the IRS issued Notice 2026‑07 (PDF - 276.92KB), providing interim guidance on the corporate alternative minimum tax (CAMT). The notice focuses on adjustments to adjusted financial statement income (AFSI) under Sections 55, 56A and 59 and was issued in response to comments on the CAMT proposed regulations released Sept. 12, 2024.
One of the most important changes in the notice is the expansion of the AFSI adjustment for repair and maintenance costs. Unlike the proposed regulations, which generally require taxpayers to recover repair costs that were included in book depreciation, the interim guidance allows a reduction to AFSI for tax-deductible repair and maintenance costs related to Section 168 property that are capitalized and depreciated for adjusted financial statement purposes.
Similarly, the notice provides targeted relief for qualified production costs under Section 181, another area where the proposed regulations relied on the book treatment. Under the interim guidance, CAMT entities may reduce AFSI for qualified production costs recovered through cost of goods sold, dispositions or current deductions, while disregarding related book depreciation and book expenses.
Grant Thornton insight:
Both of these changes address concerns that the proposed regulations required taxpayers to follow book capitalization and depreciation for costs that are immediately deductible for tax purposes — either as a repairs expense or an immediate deduction of qualified production costs. The net effect is to reduce AFSI and any potential CAMT liability to more closely align with the computation of federal taxable income. Additionally, by matching the AFSI adjustment to the taxable income adjustment, taxpayers may be able to simplify tracking of separate asset-level repairs adjustments solely for CAMT purposes.
Beyond repairs and qualified production costs, the notice introduces a series of additional targeted AFSI adjustments for items similar to depreciation, including eligible Section 197 intangibles, domestic research amortization under TCJA Section 174, and eligible materials and supplies. In each case, the interim guidance allows AFSI to reflect tax recovery while disregarding related book expense or amortization, with appropriate adjustments for method changes, dispositions and differences in book and tax basis, similar to the adjustments for Section 168 property in the proposed regulations.
These provisions collectively respond to concerns that the proposed regulations would cause persistent CAMT distortions by defaulting to financial statement timing for these items.
Grant Thornton insight:
Like the modifications for repairs and qualified production costs, the new adjustments in Notice 2026‑07 reflect a shift toward aligning AFSI with tax cost recovery principles. This will help reduce compliance burdens by simplifying asset-level tracking and allowing taxpayers to rely upon the methods and elections they have chosen for computing federal taxable income.
Taxpayers wishing to rely on any of these five provisions must attach the required statement to the return for which the adjustment is made. Additionally, each is subject to a consistency requirement under which the adjustment once made in a taxable year must be made for each subsequent taxable year.
In addition to the changes to the treatment of repair and maintenance costs, the notice provides three other updates to CAMT guidance related to corporate transactions.
Troubled company guidance
The notice provides updated guidance related to the application of the attribute reduction provided in the interim guidance in Notice 2025-46. For purposes of applying the attribute reduction interim guidance, the Service has instructed taxpayers to apply the rules under Treas. Reg. Section 1.1502-28.
Additionally, the new notice provides that for purposes of determining their CAMT consequences resulting from emergence from bankruptcy, a CAMT entity 1) disregards any resulting gain or loss that is reflected in its financial statement income, and 2) determines the CAMT basis of an asset of the CAMT entity by disregarding any adjustment to the audited financial statement basis of those assets resulting from the emergence from bankruptcy.
Section 358 anti-avoidance guidance
Prop. Treas. Reg. Section 1.56A-4(f)(1) provides that if a CAMT entity receives stock of a foreign corporation as part of a “covered asset transaction” (specified transfers of assets governed by certain provisions in subchapter C of the Code) in which the basis in such stock is determined under Section 358, the CAMT entity will increase its AFSI for the taxable year to the extent that its basis in the stock for regular tax purposes exceeds the hypothetical CAMT basis if either:
- The principal purpose of the covered asset transaction was to avoid treatment of the CAMT entity as an applicable corporation, or
- The basis of the stock of the foreign corporation is taken into account in determining the AFSI of the CAMT entity within two years of the receipt of the stock
The notice creates a two-year rebuttable presumption that if, within two years of the date the stock of a foreign corporation is received in a covered asset transaction, the basis of such stock is taken into account for AFSI of the recipient, the covered asset transaction would be presumed to have a principal purpose to avoid the treatment of such CAMT entity as an applicable corporation, or to reduce or otherwise avoid liability under section 55(a). This presumption, however, may be rebutted by showing facts and circumstances clearly establishing that the covered asset transaction was not undertaken for such a principal purpose.
A statement rebutting the presumption would need to be filed as a statement to Form 4626 (Alternative Minimum Tax — Corporations).
Section 367(d) inclusion
Section 367(d) provides that if a U.S. person transfers any intangible property to a foreign corporation in a Section 351 contribution or a Section 361 reorganization, the U.S. person will be treated as having sold the property in exchange for payments contingent on the productivity, use or disposition of such property, and receiving amounts that reasonably reflect the amounts that would have been received annually in the form of such payments over the useful life of such property.
As Section 367(d) is a special provision in the Code, these amounts are not included in the AFSI of an applicable corporation. The notice provides that a CAMT entity required to include an amount in gross income by reason of Section 367(d) increases its AFSI for the year by that amount. To compute this amount, CAMT basis is substituted for regular tax basis.
Additionally, a foreign corporation that is deemed to make a payment under Section 367(d) reduces its adjusted net income or loss by the amount of an allowable deduction under either Treas. Reg. Section 1.367(d)-1(c)(2)(ii) or (e)(2)(ii), or for the amount that it reduces its gross income under Treas. Reg. Section 1.367(d)-1(f)(2)(i).
Treasury and the IRS intend to issue proposed regulations that will include rules consistent with the interim guidance provided in the latest notice. Taxpayers may rely on the interim guidance for all taxable years beginning before the date of such proposed regulations with some limitations. Generally, reliance on the notice is conditioned on taxpayers meeting a consistency requirement specified each section respectively.
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