Additional Interim Guidance Regarding the Application of the Corporate Alternative Minimum Tax

Part III – Administrative, Procedural, and Miscellaneous

Additional Interim Guidance Regarding the Application of the Corporate Alternative

Minimum Tax

Notice 2026-7

SECTION 1. OVERVIEW

This notice 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).1 Prior to the publication of any final regulations relating to the

CAMT, the Department of the Treasury (Treasury Department) and the Internal Revenue

Service (IRS) intend to issue proposed regulations (forthcoming proposed regulations)

that are anticipated to include rules similar to the interim guidance provided in sections

3 through 10 of this notice, Notice 2025-27, 2025-26 I.R.B. 1611 (June 23, 2025), Notice

2025-28, 2025-34 I.R.B. 316 (August 18, 2025), Notice 2025-46, 2025-43 I.R.B. 533

(October 20, 2025), and Notice 2025-49, 2025-44 I.R.B. 627 (October 27, 2025).

Section 3 of this notice modifies the interim guidance provided in section 4 of Notice

2025-49 and addresses an adjustment to adjusted financial statement income (AFSI)2

1 Unless otherwise provided, all "section" or "§" references are to sections of the Code or the Income Tax

Regulations (26 CFR part 1).

2 Unless otherwise specified, terms used in this notice have the same meaning as in the CAMT Proposed

Regulations described in section 2.03 of this notice.

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for deductible tax repairs with respect to section 168 property. Section 4 of this notice

modifies the interim guidance provided in section 9 of Notice 2025-49 and addresses an

adjustment to AFSI for § 197 amortization attributable to certain intangibles. Section 5

of this notice addresses an adjustment to AFSI for amortization of domestic research or

experimental expenditures

ce.

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for deductible tax repairs with respect to section 168 property. Section 4 of this notice

modifies the interim guidance provided in section 9 of Notice 2025-49 and addresses an

adjustment to AFSI for § 197 amortization attributable to certain intangibles. Section 5

of this notice addresses an adjustment to AFSI for amortization of domestic research or

experimental expenditures. Section 6 of this notice addresses an adjustment to AFSI

for certain production costs attributable to film, television, live theatrical, and sound

recording productions. Section 7 of this notice addresses an adjustment to AFSI for

certain low acquisition cost tangible property treated as materials and supplies. Section

8 of this notice clarifies and modifies the interim guidance for financially troubled

companies provided in section 4 of Notice 2025-46. Section 9 of this notice addresses

modifications to the anti-abuse rule in proposed § 1.56A-4 of the CAMT Proposed

Regulations (as defined in section 2.03(1) of this notice) that would apply to certain

covered asset transactions. Section 10 of this notice addresses certain CAMT

consequences of transactions involving intangible property subject to § 367(d). Section

11 of this notice addresses applicability dates and the ability of taxpayers to rely on the

interim guidance provided in Notice 2025-49 and this notice.

SECTION 2. BACKGROUND

.01 Overview of the CAMT. Section 10101 of Public Law 117-169, 136 Stat. 1818,

1818-1828 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022,

amended § 55 to impose the CAMT based on the AFSI of an applicable corporation for

taxable years beginning after December 31, 2022

y on the

interim guidance provided in Notice 2025-49 and this notice.

SECTION 2. BACKGROUND

.01 Overview of the CAMT. Section 10101 of Public Law 117-169, 136 Stat. 1818,

1818-1828 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022,

amended § 55 to impose the CAMT based on the AFSI of an applicable corporation for

taxable years beginning after December 31, 2022. Section 59(k)(1)(A) provides that, for

purposes of §§ 55 through 59, the term "applicable corporation" means, with respect to

any taxable year, any corporation (other than an S corporation, a regulated investment

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company, or a real estate investment trust) that meets the average annual AFSI test

provided in § 59(k)(1)(B) for one or more taxable years that (1) are prior to that taxable

year, and (2) end after December 31, 2021.

.02 AFSI under § 56A.

(1) General definition of AFSI. For purposes of §§ 55 through 59, § 56A(a)

provides that the term "AFSI" means, with respect to any corporation for any taxable

year, the net income or loss of the taxpayer set forth on the taxpayer's applicable

financial statement (AFS) for that taxable year, adjusted as provided in § 56A.

Section 56A(c) provides general adjustments to be made to AFSI.

(2) Provisions of § 56A relevant to the interim guidance provided in this notice.

(a) Authority of the Secretary to provide necessary adjustments to AFSI. In

addition to the separate delegations of authority provided to the Secretary of the

Treasury or the Secretary’s delegate (Secretary) relating to the adjustments to AFSI

specified in paragraphs (2)(B) through (D), (5), (10), (11), (13), and (14) of § 56A(c),

§ 56A(c)(15) authorizes 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.

y) relating to the adjustments to AFSI

specified in paragraphs (2)(B) through (D), (5), (10), (11), (13), and (14) of § 56A(c),

§ 56A(c)(15) authorizes 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.

(b) General authority of the Secretary. Section 56A(e) authorizes the Secretary

to provide such regulations and other guidance as necessary to carry out the purposes

of § 56A.

.03 CAMT Proposed Regulations.

(1) In general. On September 13, 2024, the Treasury Department and the IRS

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published a notice of proposed rulemaking (REG-112129-23) in the Federal Register

(89 F.R. 75062) that addressed the application of the CAMT and permitted taxpayers to

rely on the proposed regulations contained therein subject to certain conditions and

limitations. On December 26, 2024, the Treasury Department and the IRS published in

the Federal Register (89 F.R. 104909) technical corrections to the proposed regulations

set forth in REG-112129-23, which together with such proposed regulations are referred

to as the “CAMT Proposed Regulations” in this notice. Numerous comments were

submitted in response to the proposed rules in §§ 1.56A-1 through 1.56A-27, 1.59-2

through 1.59-4, 1.1502-2, 1.1502-53, and 1.1502-56A of the CAMT Proposed

Regulations (proposed §§ 1.56A-1 through 1.56A-27, 1.59-2 through 1.59-4, 1.1502-2,

1.1502-53, and 1.1502-56A), which comments the Treasury Department and the IRS

continue to consider and study.

ns” in this notice. Numerous comments were

submitted in response to the proposed rules in §§ 1.56A-1 through 1.56A-27, 1.59-2

through 1.59-4, 1.1502-2, 1.1502-53, and 1.1502-56A of the CAMT Proposed

Regulations (proposed §§ 1.56A-1 through 1.56A-27, 1.59-2 through 1.59-4, 1.1502-2,

1.1502-53, and 1.1502-56A), which comments the Treasury Department and the IRS

continue to consider and study.

(2) Provisions in proposed § 1.56A-4 relevant to the interim guidance provided in

this notice. Proposed § 1.56A-4 would provide rules concerning foreign corporations.

Specifically, proposed § 1.56A-4 would provide rules under § 56A(c)(2)(C) for

determining the amount of AFSI of a CAMT entity that results solely from the CAMT

entity’s ownership of stock of a foreign corporation. As relevant for purposes of this

notice, proposed § 1.56A-4 would also provide rules under § 56A(c)(15)(B) for

determining the AFSI and CAMT basis consequences of certain transactions involving

foreign corporations referred to as “covered asset transactions” and rules for adjusting

AFSI in certain circumstances in which basis in foreign stock received is determined

under § 358. Proposed § 1.56A-4 would define covered asset transactions generally as

including two categories of transactions: (i) those involving a transfer of an asset to, or

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by, a foreign corporation, and (ii) those involving a transfer of foreign stock to, or by, a

domestic corporation. See proposed § 1.56A-4(b)(1)(i) and (ii).

Proposed § 1.56A-4(f) would provide rules that apply to certain cases in which a

CAMT entity receives stock of a foreign corporation in a covered asset transaction and

the CAMT entity’s basis in the stock of the foreign corporation for regular tax purposes

is determined under § 358. These proposed rules would compare the CAMT basis in

the stock of the foreign corporation (which equals its basis for regular tax purposes

under proposed § 1.56A-4(d)(5)) with a hypothetical CAMT basis

ty receives stock of a foreign corporation in a covered asset transaction and

the CAMT entity’s basis in the stock of the foreign corporation for regular tax purposes

is determined under § 358. These proposed rules would compare the CAMT basis in

the stock of the foreign corporation (which equals its basis for regular tax purposes

under proposed § 1.56A-4(d)(5)) with a hypothetical CAMT basis. The hypothetical

CAMT basis is computed by substituting the CAMT basis in the relevant property for the

regular tax basis (see proposed § 1.56A-4(f)(2)). The relevant property is the property

whose basis is used to determine (in whole or in part) the basis of the foreign stock for

regular tax purposes. To the extent a CAMT entity’s basis in the stock of the foreign

corporation received for regular tax purposes exceeds its hypothetical CAMT basis in

that stock, the CAMT entity would increase its AFSI for the taxable year in which the

foreign stock is received by the amount of such excess if either of two requirements is

satisfied. See proposed § 1.56A-4(f)(1).

The first requirement would be satisfied if a principal purpose of the covered asset

transaction is to avoid treatment of the CAMT entity or another CAMT entity as an

applicable corporation or to reduce or otherwise avoid a liability under § 55(a) (proposed

principal purpose rule). The second requirement would be satisfied if within two years

of the date the stock of the foreign corporation is received, the basis in such stock of the

foreign corporation is taken into account, in whole or in part, in determining the AFSI of

the recipient CAMT entity or another CAMT entity (proposed two-year rule). The

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principles of the proposed two-year rule apply with respect to any asset whose basis for

regular tax purposes is determined in whole or in part by reference to the basis of the

foreign stock received

ch stock of the

foreign corporation is taken into account, in whole or in part, in determining the AFSI of

the recipient CAMT entity or another CAMT entity (proposed two-year rule). The

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principles of the proposed two-year rule apply with respect to any asset whose basis for

regular tax purposes is determined in whole or in part by reference to the basis of the

foreign stock received. For example, if stock of the foreign corporation received is

subsequently transferred in a transaction described in § 351(a) to another foreign

corporation in exchange for stock of such other foreign corporation (or if the foreign

stock received is exchanged under § 354 for stock in another foreign corporation), then

the proposed two-year rule applies to both the stock of the foreign corporation received

in the initial transfer as well as the stock of the other foreign corporation received in the

subsequent transfer.

With respect to the ownership of foreign stock generally, proposed § 1.56A-4(c)(1)

would provide for adjustments to a CAMT entity’s AFSI as a result of direct ownership of

stock of a foreign corporation. Specifically, proposed § 1.56A-4(c)(1)(i) would require a

CAMT entity, in calculating AFSI, to disregard any items of income, expense, gain, and

loss resulting from ownership of stock of the foreign corporation, including any such

items that result from acquiring or transferring such stock, reflected in the CAMT entity’s

financial statement income (FSI). Proposed § 1.56A-4(c)(1)(ii) generally would require

the CAMT entity to include in AFSI any items of income, deduction, gain, and loss for

regular tax purposes resulting from ownership of stock of the foreign corporation,

including any items that result from acquiring or transferring such stock, other than any

items of income, deduction, gain, and loss resulting from the application of §§ 78, 250,

951, or 951A

(c)(1)(ii) generally would require

the CAMT entity to include in AFSI any items of income, deduction, gain, and loss for

regular tax purposes resulting from ownership of stock of the foreign corporation,

including any items that result from acquiring or transferring such stock, other than any

items of income, deduction, gain, and loss resulting from the application of §§ 78, 250,

951, or 951A.

Proposed § 1.56A-4(c)(2) would provide for adjustments to a CAMT entity’s AFSI

as a result of a transfer of an asset other than stock of a foreign corporation in a

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covered asset transaction. Specifically, proposed § 1.56A-4(c)(2)(i) would require a

CAMT entity, in calculating AFSI, to disregard any items of income, expense, gain, and

loss with respect to the transferred asset resulting from the covered asset transaction

reflected in the CAMT entity’s FSI. Proposed § 1.56A-4(c)(2)(ii) would require the

CAMT entity to include any items of income, deduction, gain, and loss for regular tax

purposes with respect to the transferred asset resulting from the covered asset

transaction; however, for this purpose, the amount of each such item would be

computed by substituting the CAMT entity’s CAMT basis in the transferred asset for the

CAMT entity’s basis in the transferred asset for regular tax purposes.

(3) Provisions in proposed § 1.56A-6 relevant to the interim guidance provided in

this notice. Proposed § 1.56A-6 would provide rules under § 56A(c)(3) regarding an

adjustment to the AFSI of a CAMT entity for any taxable year in which the CAMT entity

is a U.S. shareholder of one or more controlled foreign corporations (CFC). The

amount of the adjustment generally would be determined by reference to the CAMT

entity's pro rata share of adjusted net income or loss of each such CFC

otice. Proposed § 1.56A-6 would provide rules under § 56A(c)(3) regarding an

adjustment to the AFSI of a CAMT entity for any taxable year in which the CAMT entity

is a U.S. shareholder of one or more controlled foreign corporations (CFC). The

amount of the adjustment generally would be determined by reference to the CAMT

entity's pro rata share of adjusted net income or loss of each such CFC. Proposed

§ 1.56A-6(c)(1) generally would define the term “adjusted net income or loss” with

respect to any CFC, for any taxable year of the CFC, as the FSI of the CFC, adjusted

for all AFSI adjustments provided under the CAMT Proposed Regulations, except as

provided in proposed § 1.56A-6(c)(2) through (5). For this purpose, references to AFSI

in other sections of the CAMT Proposed Regulations, except for references to AFSI in

proposed § 1.56A-1(b)(1) and (e) (which would provide the general definition of AFSI

and general rules for translating AFSI to U.S. dollars, respectively), would be treated as

references to adjusted net income or loss.

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.04 Prior interim guidance issued subsequent to CAMT Proposed Regulations.

(1) Notice 2025-27 provides interim guidance regarding an optional simplified

method for determining applicable corporation status and provides a limited waiver of

certain additions to tax under § 6655 with respect to a corporation's CAMT liability for

taxable years beginning during 2025.

(2) Notice 2025-28 provides interim guidance on determining a CAMT entity’s AFSI

with respect to an investment in a partnership, reporting by partnerships of information

needed to compute AFSI, and the treatment of partnership contributions and

distributions.

certain additions to tax under § 6655 with respect to a corporation's CAMT liability for

taxable years beginning during 2025.

(2) Notice 2025-28 provides interim guidance on determining a CAMT entity’s AFSI

with respect to an investment in a partnership, reporting by partnerships of information

needed to compute AFSI, and the treatment of partnership contributions and

distributions.

(3) Notice 2025-46 provides interim guidance on the application of the CAMT to

domestic corporate transactions, financially troubled companies, tax consolidated

groups, acquired financial statement net operating losses, and certain built-in items.

Section 4.03 of Notice 2025-46 provides interim guidance on the treatment of discharge

of indebtedness income, including interim guidance addressing rules related to attribute

reduction.

(4) Notice 2025-49 provides interim guidance on the application of the CAMT,

including adjustments to AFSI for (a) eligible regulatory assets, (b) certain items

measured at fair value, (c) CAMT entities subject to the tonnage tax regime, (d) certain

embedded depreciation deductions, (e) nonlife insurance company net operating loss

carrybacks, (f) eligible goodwill amortization, and (g) accounting principle changes and

restatements of a prior year AFS. In addition, Notice 2025-49 provides that, for taxable

years beginning before the date the corresponding final regulation is published in the

Federal Register, a taxpayer may rely on a section of the CAMT Proposed Regulations

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without also being required to rely on any other sections of the CAMT Proposed

Regulations, provided the taxpayer consistently follows that section in its entirety for all

taxable years beginning with the first taxable year with respect to which the taxpayer

relies on that section

is published in the

Federal Register, a taxpayer may rely on a section of the CAMT Proposed Regulations

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without also being required to rely on any other sections of the CAMT Proposed

Regulations, provided the taxpayer consistently follows that section in its entirety for all

taxable years beginning with the first taxable year with respect to which the taxpayer

relies on that section.

Further, Notice 2025-49 provided that, for taxable years beginning before the date

the forthcoming proposed regulations are published in the Federal Register, a taxpayer

may rely on any section of the CAMT Proposed Regulations, as modified by any

guidance subsequently published in the Internal Revenue Bulletin, provided the

taxpayer consistently follows that section (as so modified) in its entirety for all taxable

years beginning with the first taxable year with respect to which the taxpayer relies on

that section. However, a taxpayer may rely on proposed § 1.56A-4 (AFSI adjustments

and basis determinations with respect to foreign corporations) or proposed § 1.56A-6

(AFSI adjustments with respect to CFCs of the CAMT Proposed Regulations, as

applicable, for taxable years beginning before the date a corresponding final regulation

section is published in the Federal Register only if the taxpayer also follows certain

other sections of the CAMT Proposed Regulations. Finally, Notice 2025-49 reiterated

that, for a taxable year described in section 3.05 of Notice 2025-27, section 9 of Notice

2025-28, or section 9 of Notice 2025-46, as applicable, a taxpayer may rely on the

guidance described in section 3.03 of Notice 2025-27, sections 3 through 7 of Notice

2025-28, or sections 3 through 6 of Notice 2025-46, without being required to follow any

section, or part thereof, of the CAMT Proposed Regulations (except to the extent

required by, or incorporated into, these notices)

Notice

2025-28, or section 9 of Notice 2025-46, as applicable, a taxpayer may rely on the

guidance described in section 3.03 of Notice 2025-27, sections 3 through 7 of Notice

2025-28, or sections 3 through 6 of Notice 2025-46, without being required to follow any

section, or part thereof, of the CAMT Proposed Regulations (except to the extent

required by, or incorporated into, these notices).

.05 Comments received on the CAMT Proposed Regulations or prior interim

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guidance relevant to interim guidance provided in this notice.

(1) Tax repair and maintenance costs attributable to section 168 property. Neither

§ 56A(c) nor the CAMT Proposed Regulations provide an adjustment to AFSI for repair

and maintenance costs with respect to section 168 property. However, section 4 of

Notice 2025-49 provides a limited adjustment to AFSI for repair and maintenance costs

that are capitalized and depreciated for AFS purposes under certain GAAP rules

applicable to CAMT entities with regulated operations. Comments submitted in

response to the CAMT Proposed Regulations and Notice 2025-49 recommended that

an adjustment to AFSI be provided for all CAMT entities for repair or maintenance costs

with respect to section 168 property that are deducted for regular tax purposes but

capitalized and depreciated for AFS purposes. Such an adjustment to AFSI would

include the repair and maintenance costs for which an adjustment to AFSI is permitted

under section 4 of Notice 2025-49 for CAMT entities with regulated operations.

In addition to the comments described in section 2.05(2) of Notice 2025-49,

commenters noted that the AFSI adjustments provided for covered book COGS

depreciation and covered book depreciation expense in proposed § 1.56A-15(d)(1)(iii)

require only that a CAMT entity adjust AFSI to disregard such amounts with respect to

section 168 property

for CAMT entities with regulated operations.

In addition to the comments described in section 2.05(2) of Notice 2025-49,

commenters noted that the AFSI adjustments provided for covered book COGS

depreciation and covered book depreciation expense in proposed § 1.56A-15(d)(1)(iii)

require only that a CAMT entity adjust AFSI to disregard such amounts with respect to

section 168 property. Accordingly, if an item of section 168 property and its related

repair and maintenance costs are treated as a single item of property for AFS purposes,

commenters noted that determining the amount of these adjustments would require the

CAMT entity to determine the portion of book depreciation expense in FSI that is

attributable to repair and maintenance costs (incurred during the current taxable year,

as well as prior taxable years) with respect to the section 168 property and to remove

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such amount from book depreciation expense before making the adjustments to AFSI

for covered book COGS depreciation and covered book depreciation expense.

Commenters noted that this additional step would add undue complexity to the

calculation of AFSI by requiring that impacted CAMT entities 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. Commenters noted that one option to

reduce compliance burden would be to allow CAMT entities to disregard the entire

amount of covered book COGS depreciation and covered book depreciation expense,

including amounts attributable to tax repair and maintenance costs deducted for regular

tax purposes; however, the commenters also noted that such an approach would

overstate AFSI

lar tax purposes. Commenters noted that one option to

reduce compliance burden would be to allow CAMT entities to disregard the entire

amount of covered book COGS depreciation and covered book depreciation expense,

including amounts attributable to tax repair and maintenance costs deducted for regular

tax purposes; however, the commenters also noted that such an approach would

overstate AFSI.

Accordingly, commenters suggested that providing an adjustment to AFSI for repair

and maintenance costs with respect to section 168 property that are deducted for

regular tax purposes, including a corresponding adjustment to disregard the book

depreciation expense attributable to the repair or maintenance cost for AFS purposes (if

applicable), would reduce compliance burdens as it would allow a CAMT entity to

disregard the entire amount of covered book COGS depreciation or covered book

depreciation expense in those situations in which a single item of AFS property

corresponds to capitalized section 168 property and deducted repair and maintenance

costs for regular tax purposes. Commenters noted that providing such an adjustment to

AFSI would eliminate the burden and expense of separately tracking and bifurcating

book depreciation expense for an item of AFS property, solely for CAMT purposes,

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between the portion disregarded in determining AFSI (with respect to section 168

property) and the remaining portion (with respect to repair and maintenance costs

deducted for regular tax purposes).

ch an adjustment to

AFSI would eliminate the burden and expense of separately tracking and bifurcating

book depreciation expense for an item of AFS property, solely for CAMT purposes,

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between the portion disregarded in determining AFSI (with respect to section 168

property) and the remaining portion (with respect to repair and maintenance costs

deducted for regular tax purposes).

(2) Intangible amortization. Section 9 of Notice 2025-49 provides an adjustment to

AFSI for amortization under § 197 attributable to goodwill acquired in certain

transactions announced or completed on or before October 28, 2021. As discussed in

section 2.05(7) of Notice 2025-49, for regular tax purposes, amounts paid to another

party to acquire goodwill are generally capitalized in the taxable year paid or incurred

and amortized ratably over a 15-year period beginning with the month in which the

goodwill is acquired. See § 197(a), (c), and (d)(1)(A). For AFS purposes, such

amounts are capitalized in the year incurred but, in general, are not recoverable through

amortization but rather are recoverable to the extent the goodwill is impaired (in which

case an impairment loss would be recognized) or upon disposition of the goodwill.

Accordingly, prior to the issuance of Notice 2025-49, commenters had requested an

adjustment to AFSI for amortization deductions under § 197 attributable to goodwill as,

to the extent the goodwill is not amortizable for AFS purposes, a CAMT liability under

§ 55 could arise in the taxable year such amortization is deducted for regular tax

purposes under § 197

upon disposition of the goodwill.

Accordingly, prior to the issuance of Notice 2025-49, commenters had requested an

adjustment to AFSI for amortization deductions under § 197 attributable to goodwill as,

to the extent the goodwill is not amortizable for AFS purposes, a CAMT liability under

§ 55 could arise in the taxable year such amortization is deducted for regular tax

purposes under § 197. Commenters observed that CAMT entities could not have

considered the consequences of the CAMT, including the treatment of goodwill under

the CAMT, in their financial modeling for business acquisitions or in the allocation of the

purchase price among acquired assets for acquisitions that occurred before the CAMT

was in effect and, therefore, should be allowed an adjustment to AFSI for the

amortization of goodwill acquired prior to that time. In addition, commenters indicated

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that, absent an AFSI adjustment, the CAMT consequences of transactions that result in

the acquisition of goodwill could discourage further domestic investment.

In response to Notice 2025-49, commenters noted that there are other intangibles

subject to amortization under § 197, the costs of which, for AFS purposes, are (i)

required to be capitalized in the year incurred, and (ii) not permitted to be recovered

through amortization but instead are recoverable only to the extent the intangible asset

is impaired or upon disposition of the asset. Accordingly, commenters have requested

an adjustment to AFSI for amortization deductions under § 197 with respect to these

other intangibles. Neither § 56A(c) nor the CAMT Proposed Regulations provide an

adjustment to AFSI for amortization under § 197 with respect to these other intangibles

are recoverable only to the extent the intangible asset

is impaired or upon disposition of the asset. Accordingly, commenters have requested

an adjustment to AFSI for amortization deductions under § 197 with respect to these

other intangibles. Neither § 56A(c) nor the CAMT Proposed Regulations provide an

adjustment to AFSI for amortization under § 197 with respect to these other intangibles.

Commenters requesting this adjustment for these other intangibles explained that, as in

the case of goodwill, because these other intangibles are not amortizable for AFS

purposes, a CAMT liability under § 55 could arise in taxable years in which amortization

of these other intangibles is deducted for regular tax purposes under § 197. In addition,

commenters argued that CAMT entities could not have considered the consequences of

the treatment of other intangibles subject to amortization under § 197 under the CAMT

and, therefore, should be allowed an adjustment to AFSI for the amortization of other

intangibles acquired prior to that time. Finally, commenters noted that the CAMT

consequences of transactions that result in the acquisition of these other intangibles

could deter further domestic investment.

(3) Domestic research and experimental expenditures. Under GAAP, research and

experimental costs generally are expensed in the year in which they are incurred. See,

e.g., Accounting Standards Codification (ASC) 730-10-25. For software developed to

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be sold, leased, or otherwise externally marketed, generally costs incurred to establish

technological feasibility of the software are expensed in the year in which they are

incurred. However, costs incurred after establishing technological feasibility and before

the product is available for general release are capitalized and amortized

on (ASC) 730-10-25. For software developed to

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be sold, leased, or otherwise externally marketed, generally costs incurred to establish

technological feasibility of the software are expensed in the year in which they are

incurred. However, costs incurred after establishing technological feasibility and before

the product is available for general release are capitalized and amortized. Following

general release, costs of enhancements to extend the life or significantly improve the

marketability of the software product are capitalized and amortized and maintenance

costs are expensed in the year in which they are incurred. See, e.g., ASC 985-20. For

software developed for internal use, under current GAAP guidance, costs incurred

during the application development stage generally are capitalized and amortized. All

other costs incurred to develop internal-use software generally are expensed in the year

in which they are incurred. See, e.g., ASC 350-40.3

Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big,

Beautiful Bill Act (OBBBA), added to the Code § 174A, which provides that a deduction

is allowed for any domestic research or experimental expenditures, including domestic

software development expenditures, that are paid or incurred by the taxpayer in a

taxable year beginning after December 31, 2024. In addition, § 174A(c) allows a

taxpayer to make an election to instead charge such expenditures to capital account

and amortize the expenditures ratably over a period of not less than 60 months,

beginning with the month in which the taxpayer first realizes benefits from such

expenditures. Prior to amendment by the OBBBA, under § 174, as amended by Public

3 The FASB issued updated guidance for internal-use software in September 2025. See Accounting

Standards Update No.2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-

40): Targeted Improvements to the Accounting for Internal-Use Software

ch the taxpayer first realizes benefits from such

expenditures. Prior to amendment by the OBBBA, under § 174, as amended by Public

3 The FASB issued updated guidance for internal-use software in September 2025. See Accounting

Standards Update No.2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-

40): Targeted Improvements to the Accounting for Internal-Use Software. This update to ASC 350-40

modifies the accounting for internal-use software to instead apply a principles-based threshold. The

update is effective for annual reporting periods beginning after December 15, 2027; however, early

adoption is permitted as of the beginning of an annual reporting period.

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Law 115-97, 131 Stat. 2054 (Dec. 22, 2017), commonly known as the Tax Cuts and

Jobs Act (TCJA), specified research or experimental expenditures, including both

foreign and domestic expenditures, were required to be charged to capital account and

amortized ratably over a defined period (5 years for domestic research and 15 years for

foreign research) for amounts paid or incurred in taxable years beginning after

December 31, 2021. Accordingly, for taxable years beginning after December 31, 2024,

the enactment of § 174A as part of the OBBBA created a transition period during which

both §§ 174 and 174A determine the treatment and timing of domestic research or

experimental expenditures. During this transition period, regular taxable income for a

taxable year will take 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.

Neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to

AFSI for research or experimental expenditures, including software development

expenditures. Accordingly, such amounts would be reflected in AFSI at the same time,

and in the same amount, as when such amounts are reflected in FSI

er § 174A

and the continued amortization of prior year expenditures under § 174.

Neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to

AFSI for research or experimental expenditures, including software development

expenditures. Accordingly, such amounts would be reflected in AFSI at the same time,

and in the same amount, as when such amounts are reflected in FSI. In addition,

neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to AFSI to

account for the transition to the § 174A regime. Commenters requested that an

adjustment to AFSI be allowed for taxable years beginning after December 31, 2024,

equal to the amount of amortization under § 174 attributable to domestic expenditures

taken in computing regular taxable income for such taxable years. Commenters noted

that while AFSI would otherwise remain unchanged during the transition period, regular

taxable income is decreased for the transition period taxable years (compared to what

- 16 -

regular taxable income would have been if only § 174, or only § 174A, was applicable)

due to the dual layers of recovery for domestic research and experimental expenditures

resulting from the simultaneous application of §§ 174 and 174A.

(4) Qualified production costs under § 181. Commenters requested that an

adjustment to AFSI be allowed for certain production costs paid or incurred by a CAMT

entity for qualified film or television productions, qualified live theatrical productions, or

qualified sound recordings (collectively, eligible production property) allowed as a

deduction under § 181. Under § 181, taxpayers may elect to treat production costs of

eligible production property as an expense deductible for the taxable year in which the

production costs are paid or incurred, subject to dollar limitations that vary based on the

type of production (defined in section 6 as qualified production costs). See § 181(a)(1)

and (2)

oduction property) allowed as a

deduction under § 181. Under § 181, taxpayers may elect to treat production costs of

eligible production property as an expense deductible for the taxable year in which the

production costs are paid or incurred, subject to dollar limitations that vary based on the

type of production (defined in section 6 as qualified production costs). See § 181(a)(1)

and (2). Production costs of eligible production property that exceed the dollar limitation

are charged to capital account and depreciated for regular tax purposes once the

eligible production property is placed in service (excess production costs). The portion

of basis eligible for first year additional depreciation under § 168(k) is depreciated under

§ 168 and any remaining basis is depreciated under § 167. See §§ 167, 168(k), and

168(k)(2)(A)(i)(IV), (V), and (VI). In general, for GAAP and IFRS purposes, both the

qualified production costs and excess production costs attributable to an eligible

production property generally are capitalized in the year incurred and depreciated as a

single asset over its useful life once the asset is placed in service.

Neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to

AFSI for qualified production costs. Accordingly, CAMT entities that elect to deduct

qualified production costs under § 181(a) would need to determine AFSI by (i) including

- 17 -

the amount of such costs included in FSI for such taxable year (generally, the

corresponding amount of book depreciation for such year), and (ii) making adjustments

under proposed § 1.56A-15 for any excess production costs (as excess production

costs are charged to capital account and depreciable under § 168, thus constituting

section 168 property for CAMT purposes)

by (i) including

- 17 -

the amount of such costs included in FSI for such taxable year (generally, the

corresponding amount of book depreciation for such year), and (ii) making adjustments

under proposed § 1.56A-15 for any excess production costs (as excess production

costs are charged to capital account and depreciable under § 168, thus constituting

section 168 property for CAMT purposes). Commenters indicated that this bifurcated

treatment for CAMT purposes with respect to a single eligible production property leads

to compliance burdens as impacted CAMT entities must bifurcate the single AFS asset

attributable to the eligible production property and (i) continue to track the portion of

AFS basis that corresponds to the qualified production costs in order to determine the

appropriate amount of book depreciation or other basis recovery in FSI to include in

AFSI, and (ii) track the portion of AFS basis that corresponds to excess production costs

in order to properly determine the amount of book depreciation in FSI to disregard in

making the adjustments under § 56A(c)(13). Commenters indicated that an adjustment

to AFSI that (i) reduces AFSI by the qualified production costs deducted under § 181,

and (ii) disregards the corresponding depreciation or other basis recovery included in

FSI would reduce compliance burden, resulting in consistent treatment of the single

AFS asset for CAMT purposes.

n in FSI to disregard in

making the adjustments under § 56A(c)(13). Commenters indicated that an adjustment

to AFSI that (i) reduces AFSI by the qualified production costs deducted under § 181,

and (ii) disregards the corresponding depreciation or other basis recovery included in

FSI would reduce compliance burden, resulting in consistent treatment of the single

AFS asset for CAMT purposes.

(5) Materials and supplies costs. Amounts paid or incurred to acquire or produce

materials and supplies, as defined in § 1.162-3(c)(1), are deductible only under § 162 in

accordance with the applicable timing rules provided in § 1.162-3. See generally

§ 1.162-3(a). The definition of “materials and supplies” includes amounts paid or

incurred to acquire certain tangible property that has an acquisition or production cost of

$200 or less. See § 1.162-3(c)(1) and (c)(1)(iv). Thus, amounts paid or incurred for

- 18 -

such low acquisition cost tangible property are deductible only under § 162,

notwithstanding that such property is used in the taxpayer’s business and, absent the

requirement to be treated as materials and supplies under § 1.162-3, would otherwise

be tangible property depreciable under § 168. For AFS purposes, amounts incurred for

such tangible property may be capitalized and depreciated depending on the useful life

of the property.

Neither § 56A(c) nor the CAMT Proposed Regulations provide an adjustment to

AFSI for deductions under § 162 with respect to amounts paid or incurred for materials

and supplies. Accordingly, a CAMT entity would include in its AFSI for a taxable year

the amounts attributable to materials and supplies that are included in the CAMT entity’s

FSI for such taxable year. Commenters noted that CAMT entities in certain industries

for which a majority of the core business assets consist of low acquisition cost materials

are required to capitalize and depreciate the costs of such materials and supplies for

AFS and FSI purposes

I for a taxable year

the amounts attributable to materials and supplies that are included in the CAMT entity’s

FSI for such taxable year. Commenters noted that CAMT entities in certain industries

for which a majority of the core business assets consist of low acquisition cost materials

are required to capitalize and depreciate the costs of such materials and supplies for

AFS and FSI purposes. Commenters noted that these CAMT entities may experience

elevated AFSI compared to other taxpayers for which the majority of core business

assets comprise section 168 property, because those other taxpayers can adjust AFSI

for the section 168 property under § 56A(c)(13). Accordingly, commenters requested

that an adjustment to AFSI be provided for amounts deducted under § 162 with respect

to materials and supplies described in § 1.162-3(c)(1)(iv) that are, for AFS purposes,

capitalized in the year incurred and depreciated once the corresponding asset is placed

in service.

(6) Attribute reduction for, and income from non-transactional bankruptcy

emergences of, financially troubled companies. Commenters have asked whether the

- 19 -

rules in § 1.1502-28 (concerning the application of § 108 to tax consolidated groups)

would apply for purposes of the attribute reduction interim guidance provided in section

4.03(4) and (5) of Notice 2025-46. Commenters also have inquired about the intended

application of fresh start accounting upon the emergence from bankruptcy of a

financially troubled company as provided in section 4.04(2)(a) of Notice 2025-46, noting

that the approach under that section appears to differ from the approach under

proposed § 1.56A-21(d)(2).

terim guidance provided in section

4.03(4) and (5) of Notice 2025-46. Commenters also have inquired about the intended

application of fresh start accounting upon the emergence from bankruptcy of a

financially troubled company as provided in section 4.04(2)(a) of Notice 2025-46, noting

that the approach under that section appears to differ from the approach under

proposed § 1.56A-21(d)(2).

(7) AFSI adjustments required under proposed § 1.56A-4 in certain cases in which

basis in foreign stock is determined under § 358. The Treasury Department and the

IRS received a comment with respect to the per se application of the proposed two-year

rule described in section 2.03(2) of this notice. The commenter noted that the proposed

rule would require a full inclusion in AFSI of the excess of regular basis over

hypothetical CAMT basis if a single dollar of basis in the stock received is “taken into

account” within two years. To address this potential concern, the commenter

recommended converting the per se aspect of the proposed rule into a rebuttable

presumption.

The Treasury Department and the IRS also received a comment with respect to

the application of the proposed two-year rule to taxable years before publication of the

CAMT Proposed Regulations. Specifically, the commenter noted that taxpayers could

not have anticipated the proposed rules for determining basis in assets, including stock

of foreign corporations and, absent knowledge of the CAMT Proposed Regulations,

would not have had the necessary tools to evaluate the impact of certain transactions

for purposes of determining applicable corporation status or CAMT liability.

- 20 -

pecifically, the commenter noted that taxpayers could

not have anticipated the proposed rules for determining basis in assets, including stock

of foreign corporations and, absent knowledge of the CAMT Proposed Regulations,

would not have had the necessary tools to evaluate the impact of certain transactions

for purposes of determining applicable corporation status or CAMT liability.

- 20 -

(8) AFSI adjustments with respect to transactions involving intangible property

subject to § 367(d). One commenter noted that proposed § 1.56A-4 effectively would

incorporate the rules of § 367(d) in the case of a transaction involving intangible

property such that there would be adjustments to a U.S. transferor’s AFSI but would be

no corresponding adjustments with respect to the adjusted net income or loss of a

transferee foreign corporation. Accordingly, the commenter requested that the

transferee foreign corporation in a § 367(d) transaction be permitted to reduce its

adjusted net income or loss by the amount of the deemed royalty for regular tax

purposes to eliminate the double taxation result.

SECTION 3. AFSI ADJUSTMENT FOR CERTAIN TAX REPAIR DEDUCTIONS

.01 Purpose. In response to comments received on the CAMT Proposed

Regulations and Notice 2025-49, this section 3 modifies the interim guidance provided

in section 4 of Notice 2025-49 to allow a CAMT entity to adjust AFSI for certain tax

repair deductions. The Treasury Department and the IRS anticipate that the

forthcoming proposed regulations will include proposed regulations under § 56A(c)(15)

and (e) consistent with the guidance provided in this section 3. In addition, the Treasury

Department and the IRS anticipate that the forthcoming proposed regulations will

propose a modification to proposed § 1.59-2(c) to provide that, for purposes of applying

the average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI would be

determined without regard to the AFSI adjustment provided in this section 3

e guidance provided in this section 3. In addition, the Treasury

Department and the IRS anticipate that the forthcoming proposed regulations will

propose a modification to proposed § 1.59-2(c) to provide that, for purposes of applying

the average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI would be

determined without regard to the AFSI adjustment provided in this section 3.

.02 Definitions. For purposes of this section 3:

(1) Book COGS repair depreciation. The term book COGS repair depreciation

means any of the following items that are taken into account as part of cost of goods

- 21 -

sold (or as part of the computation of gain or loss from the sale or exchange of property

held for sale) in FSI with respect to an eligible repair asset--

(a) Depreciation expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

either:

(i) Prior to the taxable year in which the complete disposition of the eligible

repair asset occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible repair

asset occurs for AFS purposes; or

(c) Impairment loss reversal.

(2) Book repair depreciation expense. The term book repair depreciation expense

means any of the following items, other than book COGS repair depreciation, that are

taken into account in FSI with respect to an eligible repair asset--

(a) Depreciation expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

either:

(i) Prior to the taxable year in which the complete disposition of the eligible

repair asset occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible repair

asset occurs for AFS purposes; or

(a) Depreciation expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

either:

(i) Prior to the taxable year in which the complete disposition of the eligible

repair asset occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible repair

asset occurs for AFS purposes; or

(c) Impairment loss reversal.

(3) Book repair inventoriable depreciation. The term book repair inventoriable

depreciation means any of the following items that are included in inventoriable cost (or

- 22 -

capitalized as part of the cost of non-inventory property held for sale) in the CAMT

entity’s AFS with respect to an eligible repair asset--

(a) Depreciation expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

either:

(i) Prior to the taxable year in which the complete disposition of the eligible

repair asset occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible repair

asset occurs for AFS purposes; or

(c) Impairment loss reversal.

(4) Deductible tax repair. The term deductible tax repair means any amount paid

or incurred for regular tax purposes for repairs and maintenance during a taxable year

and allowed as a deduction in computing taxable income for such taxable year under

§ 1.162-4 with respect to an eligible repair asset, including amounts deductible under

§ 1.162-4 that are capitalized (other than under § 263) and subsequently recovered as a

deduction in computing taxable income (even if the deduction is allowed under a

provision of the Code other than § 162, for example under §§ 616 and 617).

(5) Eligible repair asset. The term eligible repair asset means any cost that meets

the requirements in section 3.03 of this notice.

ble under

§ 1.162-4 that are capitalized (other than under § 263) and subsequently recovered as a

deduction in computing taxable income (even if the deduction is allowed under a

provision of the Code other than § 162, for example under §§ 616 and 617).

(5) Eligible repair asset. The term eligible repair asset means any cost that meets

the requirements in section 3.03 of this notice.

(6) Tax COGS repair deduction. The term tax COGS repair deduction means--

(a) Any amount deducted under § 1.162-4 with respect to an eligible repair asset

that is capitalized to inventory under § 263A and is recovered as part of cost of goods

sold in computing gross income; and

- 23 -

(b) Any amount deducted under § 1.162-4 with respect to an eligible repair asset

that is capitalized under § 263A to the basis of property described in § 1221(a)(1) that is

not inventory and is recovered as part of the computation of gain or loss from the sale or

exchange of such property in computing taxable income.

(7) Tax repair section 481(a) adjustment. The term tax repair section 481(a)

adjustment means an adjustment (or portion thereof) required under § 481(a) for a

change in method of accounting (other than a change in method of accounting

described in section 3.02(8) of this notice) that impacts the timing of taking into account

a deductible tax repair with respect to an eligible repair asset in computing taxable

income (for example, a change in method of accounting involving a change from

deducting a deductible tax repair to capitalizing such deductible tax repair under § 263A

or another capitalization provision, or vice versa).

(8) Tax repair capitalization method change. The term tax repair capitalization

method change means a change in method of accounting for regular tax purposes

involving a change from capitalizing and depreciating a deductible tax repair under

§ 263 to deducting the deductible tax repair under § 1.162-4 (or vice versa).

nder § 263A

or another capitalization provision, or vice versa).

(8) Tax repair capitalization method change. The term tax repair capitalization

method change means a change in method of accounting for regular tax purposes

involving a change from capitalizing and depreciating a deductible tax repair under

§ 263 to deducting the deductible tax repair under § 1.162-4 (or vice versa).

(9) Tax repair capitalization method change AFSI adjustment.

(a) In general. The term tax repair capitalization method change AFSI

adjustment means an adjustment to AFSI that is required under section 3.04(6) of this

notice if a CAMT entity makes a tax repair capitalization method change and previously

made an adjustment to AFSI under section 3 of this notice in a preceding taxable year.

The tax repair capitalization method change AFSI adjustment is computed separately

for each tax repair capitalization method change and equals the difference between the

- 24 -

following amounts computed as of the beginning of the tax year of change--

(i) The cumulative amount of adjustments to AFSI under section 3.04 of this

notice with respect to the cost(s) subject to the tax repair capitalization method change

that were made with respect to the preceding taxable years beginning with the first

taxable year for which the CAMT entity makes an adjustment to AFSI under section 3 of

this notice, and beginning before the tax year of change; and

(ii) The cumulative amount of adjustments to AFSI under section 3.04 of this

notice with respect to the cost(s) subject to the tax repair capitalization method change

that would have been made with respect to the preceding taxable years beginning with

first taxable year for which the CAMT entity makes an adjustment to AFSI under section

3 of this notice, and beginning before the tax year of change, if the new method of

accounting for the cost(s) had been applied for regular tax purposes in those taxable

years.

the tax repair capitalization method change

that would have been made with respect to the preceding taxable years beginning with

first taxable year for which the CAMT entity makes an adjustment to AFSI under section

3 of this notice, and beginning before the tax year of change, if the new method of

accounting for the cost(s) had been applied for regular tax purposes in those taxable

years.

(b) Coordination with proposed § 1.56A-15. The amount of the tax repair

capitalization method change AFSI adjustment is adjusted, as necessary, to prevent the

duplication of any adjustment to AFSI due to a tax repair capitalization method change

also constituting a tax capitalization method change (as described in proposed § 1.56A-

15(b)(10)) with respect to section 168 property.

.03 Eligible repair asset.

(1) In general. For purposes of section 3 of this notice, an eligible repair asset

means any cost that is--

(a) Attributable to repair or maintenance of section 168 property (as defined in

proposed § 1.56A-15(c));

- 25 -

(b) Capitalized and subject to depreciation for AFS purposes;

(c) Not capitalized as section 168 property under § 263 for regular tax purposes;

and

(d) Not capitalized to section 168 property under § 263A or another capitalization

provision for regular tax purposes.

(2) Placed in service in any taxable year. An eligible repair asset includes any

eligible repair asset placed in service by the CAMT entity for AFS purposes in any

taxable year, including taxable years ending on or before December 31, 2019.

.04 AFSI adjustment for eligible repair assets. The AFSI of a CAMT entity for a

taxable year may be adjusted as follows:

(1) Reduced by the tax COGS repair deduction with respect to eligible repair

assets, but only to the extent of the amount taken into account--

(a) As part of cost of goods sold in computing gross income for the taxable year;

or

December 31, 2019.

.04 AFSI adjustment for eligible repair assets. The AFSI of a CAMT entity for a

taxable year may be adjusted as follows:

(1) Reduced by the tax COGS repair deduction with respect to eligible repair

assets, but only to the extent of the amount taken into account--

(a) As part of cost of goods sold in computing gross income for the taxable year;

or

(b) As part of the computation of gain or loss from the sale or exchange of non-

inventory property described in § 1221(a)(1) that is included in taxable income, or

deducted in computing taxable income, respectively, for the taxable year;

(2) 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;

(3) Adjusted to disregard book COGS repair depreciation and book repair

depreciation expense with respect to eligible repair assets;

(4) Reduced by any tax repair section 481(a) adjustment with respect to eligible

- 26 -

repair assets that is negative, but only to the extent of the amount of the adjustment that

is taken into account in computing taxable income for the taxable year;

(5) Increased by any tax repair section 481(a) adjustment with respect to eligible

repair assets that is positive, but only to the extent of the amount of the adjustment that

is taken into account in computing taxable income for the taxable year; and

(6) Increased or decreased, as appropriate, by any tax repair capitalization method

change AFSI adjustment in accordance with section 3.06 of this notice.

.05 Determining the book COGS repair depreciation and tax COGS repair deduction

adjustments.

(1) In general. Except as provided in section 3.05(2) of this notice, a CAMT entity

is required to--

the taxable year; and

(6) Increased or decreased, as appropriate, by any tax repair capitalization method

change AFSI adjustment in accordance with section 3.06 of this notice.

.05 Determining the book COGS repair depreciation and tax COGS repair deduction

adjustments.

(1) In general. Except as provided in section 3.05(2) of this notice, a CAMT entity

is required to--

(a) Apply the method(s) of accounting the CAMT entity uses for AFS purposes to

determine the book COGS repair depreciation adjustment under section 3.04(3) of this

notice; and

(b) Apply the method(s) of accounting under § 263A that the CAMT entity uses

for regular tax purposes (and, in the case of inventory property, the method(s) of

accounting that the CAMT entity uses to identify and value inventories under §§ 471

and 472) to determine the tax COGS repair deduction adjustment under section 3.04(1)

of this notice.

(2) Reasonable method. A CAMT entity is permitted to use any 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

- 27 -

determining the book COGS repair depreciation adjustment under section 3.04(3) of this

notice or the tax COGS repair deduction adjustment under section 3.04(1) of this notice,

provided that such reasonable method is consistent with and reflects the method(s) of

accounting the CAMT entity uses for AFS purposes or regular tax purposes,

respectively. A reasonable method would include a method similar to the simplifying

methods provided in proposed § 1.56A-15(d)(3)(ii)(A) through (C).

or the tax COGS repair deduction adjustment under section 3.04(1) of this notice,

provided that such reasonable method is consistent with and reflects the method(s) of

accounting the CAMT entity uses for AFS purposes or regular tax purposes,

respectively. A reasonable method would include a method similar to the simplifying

methods provided in proposed § 1.56A-15(d)(3)(ii)(A) through (C).

(3) Reporting requirement. If a CAMT entity makes the AFSI adjustment provided

in section 3.04 of this notice for a taxable year, it must attach a statement to its Federal

income tax return for such taxable year. The statement--

(a) Must be titled “AFSI adjustment for tax repair deductions”,

(b) Must include the CAMT entity’s name, address, and taxpayer identification

number,

(c) If a CAMT entity uses a reasonable method under section 3.05(2) of this

notice, it must: include a statement whether the CAMT entity is using such reasonable

method to determine (i) book repair inventoriable depreciation in ending inventory with

respect to eligible repair assets for purposes of determining the book COGS repair

depreciation adjustment, or (ii) deductible tax repairs in ending inventory for purposes of

determining the tax COGS repair deduction adjustment for the taxable year, or (iii) both;

describe such reasonable method(s) used; and certify that such reasonable method(s)

used are consistent with, and reflect, the method(s) of accounting the CAMT entity uses

for AFS purposes or regular tax purposes, as applicable.

.06 Adjustment period for tax repair capitalization method change AFSI adjustments.

The adjustment period for a tax repair capitalization method change AFSI adjustment is

- 28 -

determined in a manner consistent with the proposed rules provided in proposed

§ 1.56A-15(d)(4) (adjustment period for tax capitalization method change AFSI

adjustments with respect to section 168 property).

.07 Consistency requirement

ax repair capitalization method change AFSI adjustments.

The adjustment period for a tax repair capitalization method change AFSI adjustment is

- 28 -

determined in a manner consistent with the proposed rules provided in proposed

§ 1.56A-15(d)(4) (adjustment period for tax capitalization method change AFSI

adjustments with respect to section 168 property).

.07 Consistency requirement. If a CAMT entity relies on section 3 of this notice and

makes the AFSI adjustment provided in section 3 of this notice for a taxable year, it

must continue to make the adjustment provided in section 3 of this notice for all

subsequent taxable years or until such time as prescribed by the Treasury Department

and the IRS in regulations or guidance published in the Internal Revenue Bulletin.

.08 Determining applicable corporation status. For purposes of applying the average

annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without

regard to the AFSI adjustment provided in section 3 of this notice.

SECTION 4. AFSI ADJUSTMENT FOR ELIGIBLE INTANGIBLES

.01 Purpose. In response to comments received on Notice 2025-49, this section 4

modifies the interim guidance provided in section 9 of Notice 2025-49 to allow a CAMT

entity to adjust AFSI for amortization under § 197 attributable to goodwill and certain

other intangibles. The Treasury Department and the IRS anticipate that the forthcoming

proposed regulations will include proposed regulations under § 56A(c)(15) and (e)

consistent with the guidance provided in this section 4. In addition, the Treasury

Department and the IRS anticipate that the forthcoming proposed regulations will

propose modifications to proposed § 1.59-2 to provide that, for purposes of applying the

average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined

without regard to the AFSI adjustments provided in sections 4.04 and 4.07 of this notice.

.02 Definitions

. In addition, the Treasury

Department and the IRS anticipate that the forthcoming proposed regulations will

propose modifications to proposed § 1.59-2 to provide that, for purposes of applying the

average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined

without regard to the AFSI adjustments provided in sections 4.04 and 4.07 of this notice.

.02 Definitions. For purposes of this section 4:

- 29 -

(1) Covered book intangible amortization expense. The term covered book

intangible amortization expense means any of the following items, other than covered

book intangible COGS amortization, that are taken into account in FSI with respect to

an eligible intangible--

(a) Amortization expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

prior to the taxable year in which the disposition of the eligible intangible occurs for

regular tax purposes; or

(c) Impairment loss reversal.

(2) Covered book intangible COGS amortization. The term covered book

intangible COGS amortization means any of the following items that are taken into

account as part of cost of goods sold (or as part of the computation of gain or loss from

the sale or exchange of property held for sale) in FSI with respect to an eligible

intangible--

(a) Amortization expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

prior to the taxable year in which the disposition of the eligible intangible occurs for

regular tax purposes; or

(c) Impairment loss reversal.

(3) Covered book intangible expense. The term covered book intangible expense

means an amount (if any), other than covered book intangible COGS amortization and

covered book intangible amortization expense, that--

(a) Reduces FSI; and

- 30 -

in which the disposition of the eligible intangible occurs for

regular tax purposes; or

(c) Impairment loss reversal.

(3) Covered book intangible expense. The term covered book intangible expense

means an amount (if any), other than covered book intangible COGS amortization and

covered book intangible amortization expense, that--

(a) Reduces FSI; and

- 30 -

(b) Is reflected in the basis for depreciation, as defined in §§ 1.167(g)-1 and

1.197-2(f)(1)(ii) (determined without regard to any basis adjustments described in

§ 1016(a)(2) and (3)), of an eligible intangible for regular tax purposes.

(4) Covered book inventoriable intangible expense. The term covered book

inventoriable intangible expense means any of the following items that are included in

inventoriable cost (or capitalized as part of the cost of non-inventory property held for

sale) in the AFS of a CAMT entity with respect to an eligible intangible--

(a) Amortization expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

prior to the taxable year in which the disposition of the eligible intangible occurs for

regular tax purposes; or

(c) Impairment loss reversal.

(5) Deductible intangible tax amortization. The term deductible intangible tax

amortization means eligible intangible tax amortization, as defined in section 4.02(7) of

this notice, that is allowed as a deduction in computing taxable income.

(6) Eligible intangible. The term eligible intangible means an intangible that meets

the requirements of section 4.03 of this notice.

(7) Eligible intangible tax amortization. The term eligible intangible tax amortization

means amortization deductions allowed under § 197 with respect to an eligible

intangible.

(8) Eligible intangible tax COGS amortization. The term eligible intangible tax

COGS amortization means:

e intangible means an intangible that meets

the requirements of section 4.03 of this notice.

(7) Eligible intangible tax amortization. The term eligible intangible tax amortization

means amortization deductions allowed under § 197 with respect to an eligible

intangible.

(8) Eligible intangible tax COGS amortization. The term eligible intangible tax

COGS amortization means:

(a) The eligible intangible tax amortization capitalized to inventory under § 263A

- 31 -

and recovered as part of cost of goods sold in computing gross income; and

(b) The eligible intangible tax amortization capitalized under § 263A to the basis

of property described in § 1221(a)(1) that is not inventory and is recovered as part of the

computation of gain or loss from the sale or exchange of such property in computing

taxable income.

(9) Tax intangible amortization section 481(a) adjustment. The term tax intangible

amortization section 481(a) adjustment means an adjustment (or portion thereof)

required under § 481(a) for a change in method of accounting that impacts the timing of

taking into account eligible intangible tax amortization in computing taxable income (for

example, a change in method of accounting involving a change from deducting eligible

tax amortization to capitalizing eligible tax amortization under § 263A or another

capitalization provision, or vice versa).

.03 Eligible intangible.

(1) In general. For purposes of section 4 of this notice, an eligible intangible

means an amortizable section 197 intangible under § 197(c) that is either:

(a) Goodwill, or

g involving a change from deducting eligible

tax amortization to capitalizing eligible tax amortization under § 263A or another

capitalization provision, or vice versa).

.03 Eligible intangible.

(1) In general. For purposes of section 4 of this notice, an eligible intangible

means an amortizable section 197 intangible under § 197(c) that is either:

(a) Goodwill, or

(b) An intangible (other than an intangible described in § 56A(c)(14)(B)), 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.

(2) Intangibles that are not depreciable under § 197 for regular tax purposes.

Eligible intangibles do not include an intangible that is not subject to amortization under

§ 197 for regular tax purposes.

- 32 -

.04 AFSI adjustment for eligible intangibles.

(1) In general. The AFSI of a CAMT entity for a taxable year may be adjusted as

follows:

(a) Reduced by eligible intangible tax COGS amortization, but only to the extent

of the amount recovered--

(i) As part of cost of goods sold in computing gross income for the taxable year;

or

(ii) As part of the computation of gain or loss from the sale or exchange of non-

inventory property described in § 1221(a)(1) that is included in taxable income, or

deducted in computing taxable income, respectively, for the taxable year;

(b) 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;

le or exchange of non-

inventory property described in § 1221(a)(1) that is included in taxable income, or

deducted in computing taxable income, respectively, for the taxable year;

(b) 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;

(c) Adjusted to disregard covered book intangible amortization expense, covered

book intangible COGS amortization, and covered book intangible expense, and

amounts described in section 4.07(6) of this notice with respect to an eligible intangible,

including an eligible intangible placed in service for regular tax purposes in a taxable

year subsequent to the taxable year the eligible intangible is treated as placed in service

for AFS purposes;

(d) Reduced by any tax intangible amortization section 481(a) adjustment that is

negative, but only to the extent of the amount of the adjustment that is taken into

account in computing taxable income for the taxable year; and

(e) Increased by any tax intangible amortization section 481(a) adjustment that is

- 33 -

positive, but only to the extent of the amount of the adjustment that is taken into account

in computing taxable income for the taxable year.

(2) Eligible intangibles held by a partnership. If an eligible intangible is held by a

partnership, the CAMT entity applies rules similar to proposed § 1.56A-16(d)(2).

However, if the CAMT entity otherwise applies any proposed modifications to the CAMT

Proposed Regulations in Notice 2025-28, the CAMT entity must apply any applicable

modifications in determining the effect of the partnership’s eligible intangible on AFSI for

the taxable year.

.05 Consistency requirement

partnership, the CAMT entity applies rules similar to proposed § 1.56A-16(d)(2).

However, if the CAMT entity otherwise applies any proposed modifications to the CAMT

Proposed Regulations in Notice 2025-28, the CAMT entity must apply any applicable

modifications in determining the effect of the partnership’s eligible intangible on AFSI for

the taxable year.

.05 Consistency requirement. If a CAMT entity relies on section 4 of this notice and

makes the adjustment to AFSI provided in section 4.04 of this notice for a taxable year,

the CAMT entity must make the adjustment for all eligible intangibles held by the CAMT

entity as of the beginning of such taxable year. This is the case regardless of whether

the eligible intangibles are attributable to one or multiple transactions. In addition, once

a CAMT entity makes the AFSI adjustment provided in this section 4.04 for a taxable

year, such CAMT entity must continue making such adjustment for all subsequent

taxable years until all such eligible intangibles are disposed of for regular tax purposes

or such time as prescribed by the Treasury Department and the IRS in regulations or

guidance published in the Internal Revenue Bulletin.

.06 Determining eligible intangible tax COGS amortization adjustment and covered

book intangible COGS amortization adjustment.

(1) In general. Except as provided in section 4.06(2) of this notice, a CAMT entity

is required to--

(a) Apply the method(s) of accounting the CAMT entity uses for AFS purposes to

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determine the covered book intangible COGS amortization adjustment under section

4.04(1)(c) of this notice; and

on adjustment and covered

book intangible COGS amortization adjustment.

(1) In general. Except as provided in section 4.06(2) of this notice, a CAMT entity

is required to--

(a) Apply the method(s) of accounting the CAMT entity uses for AFS purposes to

- 34 -

determine the covered book intangible COGS amortization adjustment under section

4.04(1)(c) of this notice; and

(b) Apply the method(s) of accounting under § 263A that the CAMT entity uses

for regular tax purposes (and, in the case of inventory property, the method(s) of

accounting that the CAMT entity uses to identify and value inventories under §§ 471

and 472) to determine the eligible intangible tax COGS amortization adjustment under

section 4.04(1)(a) of this notice.

(2) Reasonable method. A CAMT entity is permitted to use any reasonable

method to determine covered book inventoriable intangible expense in ending inventory

for AFS purposes for purposes of determining the covered book intangible COGS

amortization adjustment under section 4.04(1)(c) of this notice, or to determine the

eligible intangible tax amortization included in ending inventory for regular tax purposes

for purposes of determining the eligible intangible tax COGS amortization adjustment

under section 4.04(1)(a) of this notice, or both, provided that such reasonable method is

consistent with and reflects the method(s) of accounting the CAMT entity uses for AFS

purposes or regular tax purposes, as applicable. A reasonable method would include a

method similar to the simplifying methods provided in proposed § 1.56A-15(d)(3)(ii)(A)

through (C).

(3) Reporting requirement. If a CAMT entity makes the AFSI adjustment provided

in section 4.04 of this notice for a taxable year, it must attach a statement to its Federal

income tax return for such taxable year. The statement--

(a) Must be titled “AFSI adjustment for eligible intangibles”,

simplifying methods provided in proposed § 1.56A-15(d)(3)(ii)(A)

through (C).

(3) Reporting requirement. If a CAMT entity makes the AFSI adjustment provided

in section 4.04 of this notice for a taxable year, it must attach a statement to its Federal

income tax return for such taxable year. The statement--

(a) Must be titled “AFSI adjustment for eligible intangibles”,

(b) Must include the CAMT entity’s name, address, and taxpayer identification

- 35 -

number,

(c) If a CAMT entity uses a reasonable method under section 4.06(2) of this

notice, it must: include a statement whether the CAMT entity is using such reasonable

method to determine (i) covered book inventoriable intangible expense in ending

inventory for AFS purposes for purposes of determining the covered book intangible

COGS amortization adjustment under section 4.04(1)(c) of Notice 2026-7 for the taxable

year, or (ii) eligible intangible tax amortization in ending inventory for regular tax

purposes for purposes of determining the eligible tax COGS amortization adjustment

under section 4.04(1)(a) of Notice 2026-7, as applicable, for the taxable year, or (iii)

both.

.07 AFSI adjustment upon disposition of eligible intangibles.

(1) In general. In the case of a CAMT entity that makes the adjustment provided in

section 4.04 of this notice to determine AFSI for any taxable year, except as otherwise

provided in section 4.07(7) of this notice, if such CAMT entity disposes of an eligible

intangible for regular tax purposes, 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 as of the date of the disposition (disposition date), as determined

under section 4.07(2) of this notice

able

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 as of the date of the disposition (disposition date), as determined

under section 4.07(2) of this notice. To the extent the CAMT basis of the eligible

intangible is negative (for example, because of differences between regular tax basis

and AFS basis), this negative amount is required to be recognized as AFSI gain upon

disposition of the eligible intangible.

- 36 -

(2) Adjustments to the AFS basis of eligible intangible. For purposes of applying

section 4.07(1) of this notice, the CAMT basis of the eligible intangible as of the

disposition date is the AFS basis of the eligible intangible as of that date--

(a) Decreased by the full amount of eligible intangible tax amortization with

respect to such eligible intangible as of the disposition date (regardless of whether any

amount of eligible intangible tax amortization was capitalized for regular tax purposes

and not yet taken into account as a reduction to AFSI through an adjustment described

in section 4.04(1)(a) of this notice as of the disposition date);

(b) Increased by the amount of any covered book intangible expense with

respect to the eligible intangible;

(c) Increased by the amount of any covered book intangible amortization

expense and covered book intangible COGS amortization that reduced the AFS basis of

such eligible intangible as of the disposition date;

(d) Decreased by any reduction to the CAMT basis of such eligible intangible

under proposed § 1.56A-21, taking into account the proposed modifications to proposed

§ 1.56A-21 contained in Notice 2025-46 if the CAMT entity otherwise applies such

modifications in determining AFSI for the taxable year; and

t reduced the AFS basis of

such eligible intangible as of the disposition date;

(d) Decreased by any reduction to the CAMT basis of such eligible intangible

under proposed § 1.56A-21, taking into account the proposed modifications to proposed

§ 1.56A-21 contained in Notice 2025-46 if the CAMT entity otherwise applies such

modifications in determining AFSI for the taxable year; and

(e) Increased or decreased, as appropriate, by the amount of any adjustments to

AFS basis that are disregarded for AFSI and CAMT basis purposes under the CAMT

Proposed Regulations with respect to such eligible intangible, taking into account any

proposed modifications to the CAMT Proposed Regulations contained in Notice 2025-

46 if the CAMT entity otherwise applies such modifications in determining AFSI for the

taxable year.

- 37 -

(3) Adjustments to the AFS basis of eligible intangibles. For purposes of

determining the CAMT basis of the eligible intangible under section 4.07(2) of this

notice, the CAMT entity applies rules similar to proposed § 1.56A-16(e)(2)(ii).

(4) Disposition of eligible intangibles by a partnership. If a partnership disposes of

an eligible intangible, the CAMT entity applies rules similar to proposed § 1.56A-

16(e)(3). However, if the CAMT entity otherwise applies any proposed modifications to

the proposed CAMT regulations in Notice 2025-28, the CAMT entity must apply any

applicable modifications in determining the effect of the disposition on AFSI for the

taxable year.

a partnership. If a partnership disposes of

an eligible intangible, the CAMT entity applies rules similar to proposed § 1.56A-

16(e)(3). However, if the CAMT entity otherwise applies any proposed modifications to

the proposed CAMT regulations in Notice 2025-28, the CAMT entity must apply any

applicable modifications in determining the effect of the disposition on AFSI for the

taxable year.

(5) Treatment of amounts recognized in FSI upon the disposition of eligible

intangibles. Except as otherwise provided in the CAMT Proposed Regulations (or as

otherwise provided in Notice 2025-28 or Notice 2025-46 if the CAMT entity applies a

proposed modification to the CAMT Proposed Regulations contained in such notices), if

a CAMT entity disposes of an eligible intangible for regular tax purposes and recognizes

gain or loss from the disposition in its FSI, the gain or loss (as redetermined under

section 4.07(1) of this notice) is recognized for AFSI purposes in the taxable year of

disposition, regardless of whether any gain or loss with respect to the disposition is

realized, recognized, deferred, or otherwise taken into account for regular tax purposes.

(6) Subsequent AFS dispositions. If an eligible intangible is disposed of for regular

tax purposes before it is treated as disposed of for AFS purposes, any AFS basis

recovery with respect to such eligible intangible that is reflected in FSI following the date

such eligible intangible is disposed of for regular tax purposes is disregarded in

determining AFSI.

- 38 -

tax purposes.

(6) Subsequent AFS dispositions. If an eligible intangible is disposed of for regular

tax purposes before it is treated as disposed of for AFS purposes, any AFS basis

recovery with respect to such eligible intangible that is reflected in FSI following the date

such eligible intangible is disposed of for regular tax purposes is disregarded in

determining AFSI.

- 38 -

(7) Intercompany transactions. If a member of a tax consolidated group disposes

of an eligible intangible for regular tax purposes in an intercompany transaction, the

member determines its AFSI with respect to such disposition by applying proposed

§ 1.56A-16(e)(6) or, if the member relies on the guidance provided in section 5 of

Notice 2025-46 in determining AFSI for the taxable year, the guidance contained in

section 5 of Notice 2025-46.

.08 Determining applicable corporation status. For purposes of applying the average

annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without

regard to the AFSI adjustments provided in sections 4.04 and 4.07 of this notice.

SECTION 5. AFSI ADJUSTMENT FOR DOMESTIC RESEARCH AMORTIZATION

.01 Purpose. In response to comments received, the Treasury Department and the

IRS anticipate that forthcoming proposed regulations will include proposed regulations

issued under § 56A(c)(15) and (e) consistent with the guidance in this section 5, which

provides an adjustment to AFSI for certain domestic research amortization for taxable

years beginning after December 31, 2024. In addition, the Treasury Department and

the IRS anticipate that the forthcoming proposed regulations will propose modifications

to proposed § 1.59-2 to provide that, for purposes of applying the average annual AFSI

test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without regard to the

AFSI adjustment provided in section 5.03 of this notice.

.02 Definitions. For purposes of this section 5:

y Department and

the IRS anticipate that the forthcoming proposed regulations will propose modifications

to proposed § 1.59-2 to provide that, for purposes of applying the average annual AFSI

test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without regard to the

AFSI adjustment provided in section 5.03 of this notice.

.02 Definitions. For purposes of this section 5:

(1) Book research or software development amortization. The term book research

or software development amortization means amortization taken into account in

determining FSI for a taxable year beginning after December 31, 2024, with respect to:

- 39 -

(a) Amounts incurred for AFS purposes in a taxable year beginning after

December 31, 2021, and before January 1, 2025;

(b) That are attributable to domestic research or experimental expenditures (as

defined in section 5.02(2) of this notice); and

(c) That are taken into account as TCJA domestic § 174 amortization for regular

tax purposes.

(2) Domestic research or experimental expenditures. The term domestic research

or experimental expenditures has the meaning provided in § 174A(b). In addition, the

term domestic research or experimental expenditures also includes any amount paid or

incurred in connection with the development of any software that is treated as a

research or experimental expenditure under § 174A(d)(3) if such amount is not an

expenditure that is attributable to foreign research (within the meaning of § 41(d)(4)(F)).

has the meaning provided in § 174A(b). In addition, the

term domestic research or experimental expenditures also includes any amount paid or

incurred in connection with the development of any software that is treated as a

research or experimental expenditure under § 174A(d)(3) if such amount is not an

expenditure that is attributable to foreign research (within the meaning of § 41(d)(4)(F)).

(3) TCJA domestic § 174 amortization. The term TCJA domestic § 174

amortization means amortization taken under TCJA § 174(a)(2)(B) in a taxable year

beginning after December 31, 2024, with respect to domestic research or experimental

expenditures that were paid or incurred for regular tax purposes and capitalized under

TCJA § 174 in a taxable year beginning after December 31, 2021, and before January

1, 2025. TCJA domestic § 174 amortization also includes amortization taken under

§ 70302(f)(2)(A) of the OBBBA with respect to domestic research or experimental

expenditures that were paid or incurred for regular tax purposes and capitalized under

TCJA § 174 in a taxable year beginning after December 31, 2021, and before January

1, 2025.

(4) TCJA § 174. The term TCJA § 174 means § 174, as in effect after amendment

- 40 -

by § 13206(a) of the TCJA, and prior to amendment by § 70302(b)(1) of the OBBBA.

(5) Tax research capitalization method change. The term tax research

capitalization method change means a change in method of accounting for regular tax

purposes involving a change from capitalizing and amortizing a cost as a domestic

research or experimental expenditure under TCJA § 174 to capitalizing or deducting the

cost under another section of the Code (or vice versa), or a change in the treatment of

costs that were capitalized and amortized as domestic research or experimental

expenditures under TCJA § 174 (such as a change from amortizing such costs over a

recovery period inconsistent with TCJA § 174(a)(2)(B) to amortizing such costs over a

recovery period consistent

to capitalizing or deducting the

cost under another section of the Code (or vice versa), or a change in the treatment of

costs that were capitalized and amortized as domestic research or experimental

expenditures under TCJA § 174 (such as a change from amortizing such costs over a

recovery period inconsistent with TCJA § 174(a)(2)(B) to amortizing such costs over a

recovery period consistent with TCJA § 174(a)(2)(B)).

(6) Tax research capitalization method change AFSI adjustment. The term tax

research capitalization method change AFSI adjustment means an adjustment to AFSI

that is required under section 5.03(3) of this notice if a CAMT entity makes a tax

research capitalization method change for a taxable year beginning after December 31,

2025, and previously made an adjustment to AFSI under section 5 of this notice in a

preceding taxable year. The tax research capitalization method change AFSI

adjustment is computed separately for each tax research capitalization method change

and equals the difference between the following amounts computed as of the beginning

of the tax year of change--

(a) The cumulative amount of adjustments to AFSI under section 5.03 of this

notice with respect to the cost(s) subject to the tax research capitalization method

change that were made with respect to the preceding taxable years beginning with the

first taxable year for which the CAMT entity makes an adjustment to AFSI under section

- 41 -

5 of this notice, and beginning before the tax year of change; and

tive amount of adjustments to AFSI under section 5.03 of this

notice with respect to the cost(s) subject to the tax research capitalization method

change that were made with respect to the preceding taxable years beginning with the

first taxable year for which the CAMT entity makes an adjustment to AFSI under section

- 41 -

5 of this notice, and beginning before the tax year of change; and

(b) The cumulative amount of adjustments to AFSI under section 5.03 of this

notice with respect to the cost(s) subject to the tax research capitalization method

change that would have been made with respect to the preceding taxable years

beginning with the first taxable year for which the CAMT entity makes an adjustment to

AFSI under section 5 of this notice, and beginning before the tax year of change, if the

new method of accounting for the cost(s) had been applied for regular tax purposes in

those taxable years.

.03 AFSI adjustment for domestic research amortization. For taxable years

beginning after December 31, 2024, the AFSI of a CAMT entity for a taxable year may

be adjusted as follows:

(1) 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;

(2) Adjusted to disregard book research or software development amortization; and

(3) Increased or decreased, as appropriate, by any tax research capitalization

method change AFSI adjustment in accordance with section 5.04 of this notice.

.04 Adjustment period for tax research capitalization method change AFSI

adjustment. The adjustment period for a tax research capitalization method change

AFSI adjustment is determined consistent with the proposed rules provided in proposed

§ 1.56A-15(d)(4) (adjustment period for tax capitalization method change AFSI

adjustments with respect to section 168 property).

.05 Consistency requirement

ment period for tax research capitalization method change AFSI

adjustment. The adjustment period for a tax research capitalization method change

AFSI adjustment is determined consistent with the proposed rules provided in proposed

§ 1.56A-15(d)(4) (adjustment period for tax capitalization method change AFSI

adjustments with respect to section 168 property).

.05 Consistency requirement. If a CAMT entity relies on section 5 of this notice and

makes the AFSI adjustment provided in section 5 of this notice for a taxable year, it

- 42 -

must continue to make the adjustment provided in section 5 of this notice for all relevant

subsequent taxable years or until such time as prescribed by the Treasury Department

and the IRS in regulations or guidance published in the Internal Revenue Bulletin.

.06 Determining applicable corporation status. For purposes of applying the average

annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without

regard to the AFSI adjustment provided in section 5.03 of this notice.

SECTION 6. AFSI ADJUSTMENT FOR QUALIFIED PRODUCTION COSTS UNDER

SECTION 181

.01 Purpose. In response to comments received on the CAMT Proposed

Regulations, the Treasury Department and the IRS anticipate that the forthcoming

proposed regulations will include proposed regulations under § 56A(c)(15) and (e)

consistent with the guidance provided in this section 6 to allow a CAMT entity owner to

adjust AFSI for qualified production costs under § 181. In addition, the Treasury

Department and the IRS anticipate that the forthcoming proposed regulations will

propose a modification to proposed § 1.59-2(c) to provide that, for purposes of applying

the average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is

determined without regard to the AFSI adjustment provided in this section 6.

.02 Definitions. For purposes of this section 6:

the Treasury

Department and the IRS anticipate that the forthcoming proposed regulations will

propose a modification to proposed § 1.59-2(c) to provide that, for purposes of applying

the average annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is

determined without regard to the AFSI adjustment provided in this section 6.

.02 Definitions. For purposes of this section 6:

(1) CAMT entity owner. The term CAMT entity owner means the CAMT entity that

is the owner of a qualified production, as defined in section 6.02(4) of this notice,

determined consistent with the rules provided in § 1.181-1(a)(2).

(2) Deductible qualified production costs. The term deductible qualified production

costs means the qualified production costs, as defined in section 6.02(8) of this notice,

- 43 -

that are allowed as a deduction in computing taxable income.

(3) Production costs. In the case of a qualified film or television production, as

defined in § 1.181-3(a), the term production costs has the same meaning as provided in

§ 1.181-1(a)(3). In the case of qualified live theatrical production, as defined in

§ 181(e), and a qualified sound recording, as defined in § 181(f), the term production

costs means the costs attributable to a qualified live theatrical production and qualified

sound recordings determined consistent with the rules provided in § 1.181-1(a)(3).

(4) Qualified production. The term qualified production means a qualified film or

television production (as defined in § 1.181-3(a)), a qualified live theatrical production

(as defined in § 181(e)), or a qualified sound recording production (as defined in

§ 181(f)).

heatrical production and qualified

sound recordings determined consistent with the rules provided in § 1.181-1(a)(3).

(4) Qualified production. The term qualified production means a qualified film or

television production (as defined in § 1.181-3(a)), a qualified live theatrical production

(as defined in § 181(e)), or a qualified sound recording production (as defined in

§ 181(f)).

(5) Qualified production book COGS depreciation. The term qualified production

book COGS depreciation means any of the following items that are taken into account

as part of cost of goods sold (or as part of the computation of gain or loss from the sale

or exchange of property held for sale) in FSI with respect to qualified production costs--

(a) Depreciation expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

either:

(i) Prior to the taxable year in which the complete disposition of the asset

corresponding to the qualified production costs occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the asset

corresponding to the qualified production costs occurs for AFS purposes; or

(c) Impairment loss reversal.

- 44 -

(6) Qualified production book expense. The term qualified production book

expense means any of the following items, other than qualified production book COGS

depreciation, that are taken into account in FSI with respect to qualified production

costs--

(a) Depreciation expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

either:

(i) Prior to the taxable year in which the complete disposition of the asset

corresponding to the qualified production costs occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the asset

corresponding to the qualified production costs occurs for AFS purposes; or

S basis (including from an impairment loss) that occurs

either:

(i) Prior to the taxable year in which the complete disposition of the asset

corresponding to the qualified production costs occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the asset

corresponding to the qualified production costs occurs for AFS purposes; or

(c) Impairment loss reversal.

(7) Qualified production book inventoriable expense. The term qualified production

book inventoriable expense means any of the following items that are included in

inventoriable cost (or capitalized as part of the cost of non-inventory property held for

sale) in the AFS of a CAMT entity owner with respect to qualified production costs--

(a) Depreciation expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

either:

(i) Prior to the taxable year in which the complete disposition of the asset

corresponding to the qualified production costs occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the asset

corresponding to the qualified production costs occurs for AFS purposes; or

- 45 -

(c) Impairment loss reversal.

(8) Qualified production costs. The term qualified production costs means the

production costs of any qualified production allowed as a deduction under § 181(a).

(9) Qualified production tax COGS. The term qualified production tax COGS

means:

(a) The qualified production costs capitalized to inventory under § 263A and

recovered as part of cost of goods sold in computing gross income; and

ction costs. The term qualified production costs means the

production costs of any qualified production allowed as a deduction under § 181(a).

(9) Qualified production tax COGS. The term qualified production tax COGS

means:

(a) The qualified production costs capitalized to inventory under § 263A and

recovered as part of cost of goods sold in computing gross income; and

(b) Qualified production costs capitalized under § 263A to the basis of property

described in § 1221(a)(1) that is not inventory and is recovered as part of the

computation of gain or loss from the sale or exchange of such property in computing

taxable income.

(10) Tax qualified production costs section 481(a) adjustment. The term tax

qualified production costs section 481(a) adjustment means an adjustment (or portion

thereof) required under § 481(a) for a change in method of accounting (other than a

change in method of accounting described in section 6.02(11) of this notice) that

impacts the timing of taking into account qualified production costs in computing taxable

income (for example, a change in method of accounting involving a change from

deducting qualified production costs to capitalizing such costs under § 263A or another

capitalization provision, or vice versa).

(11) Tax qualified production costs capitalization method change. The term tax

qualified production costs capitalization method change means a change in method of

accounting for regular tax purposes involving a change from capitalizing and

depreciating qualified production costs to deducting such costs (or vice versa). This

- 46 -

term also includes a change in the treatment of qualified production costs due to a

recapture event described in § 1.181-4(a)(1) and (2).

(12) Tax qualified production costs capitalization method change AFSI adjustment.

for regular tax purposes involving a change from capitalizing and

depreciating qualified production costs to deducting such costs (or vice versa). This

- 46 -

term also includes a change in the treatment of qualified production costs due to a

recapture event described in § 1.181-4(a)(1) and (2).

(12) Tax qualified production costs capitalization method change AFSI adjustment.

(a) In general. The term tax qualified production costs capitalization method

change AFSI adjustment means an adjustment to AFSI that is required under section

6.03(1)(f) of this notice if a CAMT entity owner makes a tax qualified production costs

capitalization method change and previously made an adjustment to AFSI under section

6 of this notice in a preceding taxable year. The tax qualified production costs

capitalization method change AFSI adjustment is computed separately for each tax

qualified production costs capitalization method change and equals the difference

between the following amounts computed as of the beginning of the tax year of change:

(i) The cumulative amount of adjustments to AFSI under section 6.03 of this

notice with respect to the cost(s) subject to the tax qualified production costs

capitalization method change that were made with respect to the preceding taxable

years beginning with the first taxable year for which the CAMT entity owner makes an

adjustment to AFSI under section 6 of this notice, and beginning before the tax year of

change; and

justments to AFSI under section 6.03 of this

notice with respect to the cost(s) subject to the tax qualified production costs

capitalization method change that were made with respect to the preceding taxable

years beginning with the first taxable year for which the CAMT entity owner makes an

adjustment to AFSI under section 6 of this notice, and beginning before the tax year of

change; and

(ii) The cumulative amount of adjustments to AFSI under section 6.03 of this

notice with respect to the cost(s) subject to the tax qualified production costs

capitalization method change that would have been made with respect to the preceding

taxable years beginning with the first taxable year for which the CAMT entity owner

makes an adjustment to AFSI under section 6 of this notice, and beginning before the

tax year of change, if the new method of accounting, or treatment, for the cost(s) had

- 47 -

been applied for regular tax purposes in those taxable years.

(b) Coordination with proposed § 1.56A-15. The amount of the tax qualified

production costs capitalization method change AFSI adjustment is adjusted, as

necessary, to prevent the duplication of any adjustment to AFSI due to the qualified

production cost capitalization method change also constituting a tax capitalization

method change (as described in proposed § 1.56A-15(b)(10)).

.03 AFSI adjustment for qualified production costs.

(1) In general. The AFSI of a CAMT entity owner for a taxable year may be

adjusted as follows--

(a) Reduced by qualified production tax COGS, but only to the extent of the

amount recovered--

(i) As part of cost of goods sold in computing gross income for the taxable

year, or

(ii) As part of the computation of gain or loss from the sale or exchange of non-

inventory property described in § 1221(a)(1) that is included in taxable income, or

deducted in computing taxable income, respectively, for the taxable year;

o the extent of the

amount recovered--

(i) As part of cost of goods sold in computing gross income for the taxable

year, or

(ii) As part of the computation of gain or loss from the sale or exchange of non-

inventory property described in § 1221(a)(1) that is included in taxable income, or

deducted in computing taxable income, respectively, for the taxable year;

(b) 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; and

(c) Adjusted to 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, including taxable years ending on or before December 31,

2019.

(d) Reduced by any tax qualified production costs section 481(a) adjustment that

- 48 -

is negative, but only to the extent of the amount of the adjustment that is taken into

account in computing taxable income for the taxable year;

(e) Increased by any tax qualified production costs section 481(a) adjustment

that is positive, but only to the extent of the amount of the adjustment that is taken into

account in computing taxable income for the taxable year; and

(f) Increased or decreased, as appropriate, by any tax qualified production costs

capitalization method change AFSI adjustment in accordance with section 6.05 of this

notice.

.04 Determining qualified production tax COGS adjustment and qualified production

book COGS depreciation adjustment.

(1) In general. Except as provided in section 6.04(2) of this notice, a CAMT entity

owner is required to--

(a) Apply the method(s) of accounting the CAMT entity owner uses for AFS

purposes to determine the qualified production book COGS depreciation adjustment

under section 6.03(1)(c) of this notice; and

ustment and qualified production

book COGS depreciation adjustment.

(1) In general. Except as provided in section 6.04(2) of this notice, a CAMT entity

owner is required to--

(a) Apply the method(s) of accounting the CAMT entity owner uses for AFS

purposes to determine the qualified production book COGS depreciation adjustment

under section 6.03(1)(c) of this notice; and

(b) Apply the method(s) of accounting under § 263A that the CAMT entity owner

uses for regular tax purposes (and, in the case of inventory property, the method(s) of

accounting that the CAMT entity owner uses to identify and value inventories under

§§ 471 and 472) to determine the qualified production tax COGS adjustment under

section 6.03(1)(a) of this notice.

(2) Reasonable method. A CAMT entity owner is permitted to use any reasonable

method to determine qualified production book inventoriable expense in ending

inventory for AFS purposes for purposes of determining the qualified production book

- 49 -

COGS depreciation adjustment under section 6.03(1)(c) of this notice, or to determine

the qualified production costs included in ending inventory for regular tax purposes for

purposes of determining the qualified production tax COGS adjustment under section

6.03(1)(a) of this notice, or both, provided that such reasonable method is consistent

with and reflects the method(s) of accounting the CAMT entity owner uses for AFS

purposes or regular tax purposes, as applicable. A reasonable method would include a

method similar to the simplifying methods provided in proposed § 1.56A-15(d)(3)(ii)(A)

through (C).

(3) Reporting requirement. If a CAMT entity owner makes the AFSI adjustment

provided in section 6.03 of this notice for a taxable year, it must attach a statement to its

Federal income tax return for such taxable year. The statement--

(a) Must be titled “AFSI adjustment for qualified production costs under § 181”,

vided in proposed § 1.56A-15(d)(3)(ii)(A)

through (C).

(3) Reporting requirement. If a CAMT entity owner makes the AFSI adjustment

provided in section 6.03 of this notice for a taxable year, it must attach a statement to its

Federal income tax return for such taxable year. The statement--

(a) Must be titled “AFSI adjustment for qualified production costs under § 181”,

(b) Must include the CAMT entity owner’s name, address, and taxpayer

identification number,

(c) If a CAMT entity owner uses a reasonable method under section 6.04(2) of

this notice, it must: include a statement whether the CAMT entity owner is using such

reasonable method to determine (i) qualified production book inventoriable expense in

ending inventory for AFS purposes for purposes of determining the qualified production

book COGS depreciation adjustment under section 6.03(1)(c) of Notice 2026-7 for the

taxable year, or (ii) qualified production costs in ending inventory for regular tax

purposes for purposes of determining the qualified production tax COGS adjustment

under section 6.03(1)(a) of Notice 2026-7 for the taxable year, or (iii) both; describe

such reasonable method(s) used; and certify that such reasonable method(s) used are

- 50 -

consistent with, and reflect, the method(s) of accounting the CAMT entity owner uses

for AFS purposes or regular tax purposes, as applicable.

.05 Adjustment period for tax qualified production costs capitalization method change

AFSI adjustment. The adjustment period for a tax qualified production costs

capitalization method change AFSI adjustment is determined consistent with the

proposed rules provided in proposed § 1.56A-15(d)(4) (adjustment period for tax

capitalization method change AFSI adjustments with respect to section 168 property).

.06 Consistency requirement

uction costs capitalization method change

AFSI adjustment. The adjustment period for a tax qualified production costs

capitalization method change AFSI adjustment is determined consistent with the

proposed rules provided in proposed § 1.56A-15(d)(4) (adjustment period for tax

capitalization method change AFSI adjustments with respect to section 168 property).

.06 Consistency requirement. If a CAMT entity owner relies on section 6 of this

notice and makes the adjustment to AFSI provided in section 6.03 of this notice for a

taxable year, it must continue to make the adjustment provided in section 6.03 of this

notice for all subsequent taxable years until all AFS assets corresponding to any

qualified production costs are disposed of for AFS purposes or such time as prescribed

by the Treasury Department and the IRS in regulations or guidance published in the

Internal Revenue Bulletin.

.07 Determining applicable corporation status. For purposes of applying the average

annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without

regard to the AFSI adjustments provided in section 6.03 of this notice.

SECTION 7. AFSI ADJUSTMENT FOR ELIGIBLE MATERIALS AND SUPPLIES

.01 Purpose. In response to comments received on the CAMT Proposed

Regulations, the Treasury Department and the IRS anticipate that the forthcoming

proposed regulations will include proposed regulations under § 56A(c)(15) and (e)

consistent with the guidance provided in this section 7 to allow a CAMT entity to adjust

AFSI for eligible materials and supplies. In addition, the Treasury Department and the

- 51 -

IRS anticipate that the forthcoming proposed regulations will propose a modification to

proposed § 1.59-2(c) to provide that, for purposes of applying the average annual AFSI

test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without regard to the

AFSI adjustment provided in this section 7.

.02 Definitions. For purposes of this section 7:

ury Department and the

- 51 -

IRS anticipate that the forthcoming proposed regulations will propose a modification to

proposed § 1.59-2(c) to provide that, for purposes of applying the average annual AFSI

test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without regard to the

AFSI adjustment provided in this section 7.

.02 Definitions. For purposes of this section 7:

(1) Deductible eligible materials and supplies. The term deductible eligible

materials and supplies means the eligible materials and supplies, as defined in section

7.02(2) of this notice, that are allowed as a deduction in computing taxable income.

(2) Eligible materials and supplies. The term eligible materials and supplies means

amounts paid or incurred by a CAMT entity--

(a) To acquire tangible property that is described in § 1.162-3(c)(1)(iv) if such

amounts otherwise meet the definition of materials and supplies in § 1.162-3(c)(1),

(b) That the CAMT entity treats as deductible in accordance with the applicable

rules in § 1.162-3, and

(c) That are capitalized and depreciated over the useful life of the property for

AFS purposes.

(3) Eligible materials and supplies book COGS depreciation. The term eligible

materials and supplies book COGS depreciation means any of the following items that

are taken into account as part of cost of goods sold (or as part of the computation of

gain or loss from the sale or exchange of property held for sale) in FSI with respect to

eligible materials and supplies--

(a) Depreciation expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

- 52 -

either:

(i) Prior to the taxable year in which the complete disposition of the eligible

materials and supplies occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible materials

and supplies occurs for AFS purposes; or

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

- 52 -

either:

(i) Prior to the taxable year in which the complete disposition of the eligible

materials and supplies occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible materials

and supplies occurs for AFS purposes; or

(c) Impairment loss reversal.

(4) Eligible materials and supplies book expense. The term eligible materials and

supplies book expense means any of the following items, other than eligible materials

and supplies book COGS depreciation, that are taken into account in FSI with respect to

eligible materials and supplies--

(a) Depreciation expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

either:

(i) Prior to the taxable year in which the complete disposition of the eligible

materials and supplies occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible materials

and supplies occurs for AFS purposes; or

(c) Impairment loss reversal.

(5) Eligible materials and supplies book inventoriable expense. The term eligible

materials and supplies book inventoriable expense means any of the following items

that are included in inventoriable cost (or capitalized as part of the cost of non-inventory

property held for sale) in the AFS of a CAMT entity with respect to eligible materials and

supplies--

- 53 -

(a) Depreciation expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

either:

(i) Prior to the taxable year in which the complete disposition of the eligible

materials and supplies occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible materials

and supplies occurs for AFS purposes; or

expense;

(b) Other recovery of AFS basis (including from an impairment loss) that occurs

either:

(i) Prior to the taxable year in which the complete disposition of the eligible

materials and supplies occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible materials

and supplies occurs for AFS purposes; or

(c) Impairment loss reversal.

(6) Eligible materials and supplies tax COGS. The term eligible materials and

supplies tax COGS means:

(a) The eligible materials and supplies capitalized to inventory under § 263A and

recovered as part of cost of goods sold in computing gross income; and

(b) The eligible materials and supplies capitalized under § 263A to the basis of

property described in § 1221(a)(1) that is not inventory and is recovered as part of the

computation of gain or loss from the sale or exchange of such property in computing

taxable income.

(7) Tax eligible materials and supplies section 481(a) adjustment. The term tax

eligible materials and supplies section 481(a) adjustment means an adjustment (or

portion thereof) required under § 481(a) for a change in method of accounting (other

than a change in method of accounting described in section 7.02(8) of this notice) that

impacts the timing of taking eligible materials and supplies into account in computing

taxable income (for example, a change in method of accounting involving a change from

deducting eligible materials and supplies to capitalizing such costs under § 263A or

- 54 -

another capitalization provision, or vice versa).

nge in method of accounting described in section 7.02(8) of this notice) that

impacts the timing of taking eligible materials and supplies into account in computing

taxable income (for example, a change in method of accounting involving a change from

deducting eligible materials and supplies to capitalizing such costs under § 263A or

- 54 -

another capitalization provision, or vice versa).

(8) Tax eligible materials and supplies capitalization method change. The term tax

eligible materials and supplies capitalization method change means a change in method

of accounting for regular tax purposes involving a change in the classification of eligible

materials and supplies (for example, a change from treating eligible materials and

supplies as inventory to treating the items as materials and supplies under § 1.162-3, or

a change from capitalizing and depreciating eligible materials and supplies to deducting

such eligible materials and supplies).

(9) Tax eligible materials and supplies capitalization method change AFSI

adjustment.

(a) In general. The term tax eligible materials and supplies capitalization method

change AFSI adjustment means an adjustment to AFSI that is required under section

7.03(6) of this notice if a CAMT entity makes a tax eligible materials and supplies

capitalization method change and previously made an adjustment to AFSI under section

7 of this notice in a preceding taxable year. The tax eligible materials and supplies

capitalization method change AFSI adjustment is computed separately for each tax

eligible materials and supplies capitalization method change and equals the difference

between the following amounts computed as of the beginning of the tax year of change:

nd previously made an adjustment to AFSI under section

7 of this notice in a preceding taxable year. The tax eligible materials and supplies

capitalization method change AFSI adjustment is computed separately for each tax

eligible materials and supplies capitalization method change and equals the difference

between the following amounts computed as of the beginning of the tax year of change:

(i) The cumulative amount of adjustments to AFSI under section 7.03 of this

notice with respect to the cost(s) subject to the tax eligible materials and supplies

capitalization method change that were made with respect to the preceding taxable

years beginning with the first taxable year for which the CAMT entity makes an

adjustment to AFSI under section 7 of this notice, and beginning before the tax year of

- 55 -

change; and

(ii) The cumulative amount of adjustments to AFSI under section 7.03 of this

notice with respect to the cost(s) subject to the tax eligible materials and supplies

capitalization method change that would have been made with respect to the preceding

taxable years beginning with the first taxable year for which the CAMT entity makes an

adjustment to AFSI under section 7 of this notice, and beginning before the tax year of

change, if the new method of accounting for the cost(s) had been applied for regular tax

purposes in those taxable years.

(b) Coordination with proposed § 1.56A-15. The amount of the tax eligible

materials and supplies capitalization method change AFSI adjustment is adjusted, as

necessary, to prevent the duplication of any adjustment to AFSI due to the tax materials

and supplies capitalization method change also constituting a tax capitalization method

change (as described in proposed § 1.56A-15(b)(10)).

.03 AFSI adjustment for eligible materials and supplies costs. The AFSI of a CAMT

entity for a taxable year may be adjusted as follows--

tment is adjusted, as

necessary, to prevent the duplication of any adjustment to AFSI due to the tax materials

and supplies capitalization method change also constituting a tax capitalization method

change (as described in proposed § 1.56A-15(b)(10)).

.03 AFSI adjustment for eligible materials and supplies costs. The AFSI of a CAMT

entity for a taxable year may be adjusted as follows--

(1) Reduced by eligible materials and supplies tax COGS, but only to the extent of

the amount recovered--

(a) As part of cost of goods sold in computing gross income for the taxable year,

or

(b) As part of the computation of gain or loss from the sale or exchange of non-

inventory property described in § 1221(a)(1) that is included in taxable income, or

deducted in computing taxable income, respectively, for the taxable year;

(2) Reduced by deductible eligible materials and supplies, but only to the extent of

- 56 -

the amount allowed as a deduction in computing taxable income for the taxable year;

(3) Adjusted to disregard eligible materials and supplies book COGS depreciation

and eligible materials and supplies book expense with respect to eligible materials and

supplies acquired in any taxable year, including in taxable years ending on or before

December 31, 2019;

(4) Reduced by any tax eligible materials and supplies section 481(a) adjustment

that is negative, but only to the extent of the amount of the adjustment that is taken into

account in computing taxable income for the taxable year;

(5) Increased by any tax eligible materials and supplies section 481(a) adjustment

that is positive, but only to the extent of the amount of the adjustment that is taken into

account in computing taxable income for the taxable year; and

that is negative, but only to the extent of the amount of the adjustment that is taken into

account in computing taxable income for the taxable year;

(5) Increased by any tax eligible materials and supplies section 481(a) adjustment

that is positive, but only to the extent of the amount of the adjustment that is taken into

account in computing taxable income for the taxable year; and

(6) Increased or decreased, as appropriate, by any tax eligible materials and

supplies capitalization method change AFSI adjustment in accordance with section 7.05

of this notice.

.04 Determining eligible materials and supplies tax COGS adjustment and eligible

materials and supplies book COGS depreciation adjustment.

(1) In general. Except as provided in section 7.04(2) of this notice, a CAMT entity

is required to--

(a) Apply the method(s) of accounting the CAMT entity uses for AFS purposes to

determine the eligible materials and supplies book COGS depreciation adjustment

under section 7.03(3) of this notice; and

(b) Apply the method(s) of accounting under § 263A that the CAMT entity uses

for regular tax purposes (and, in the case of inventory property, the method(s) of

- 57 -

accounting that the CAMT entity uses to identify and value inventories under §§ 471

and 472) to determine the eligible materials and supplies tax COGS adjustment under

section 7.03(1) of this notice.

s notice; and

(b) Apply the method(s) of accounting under § 263A that the CAMT entity uses

for regular tax purposes (and, in the case of inventory property, the method(s) of

- 57 -

accounting that the CAMT entity uses to identify and value inventories under §§ 471

and 472) to determine the eligible materials and supplies tax COGS adjustment under

section 7.03(1) of this notice.

(2) Reasonable method. A CAMT entity is permitted to use any reasonable

method to determine the eligible materials and supplies book inventoriable expense in

ending inventory for AFS purposes for purposes of determining the eligible materials

and supplies book COGS depreciation adjustment under section 7.03(3) of this notice,

or to determine the eligible materials and supplies included in ending inventory for

regular tax purposes for purposes of determining the eligible materials and supplies tax

COGS adjustment under section 7.03(1) of this notice, or both, provided that such

reasonable method is consistent with and reflects the method(s) of accounting the

CAMT entity uses for AFS purposes or regular tax purposes, as applicable. A

reasonable method would include a method similar to the simplifying methods provided

in proposed § 1.56A-15(d)(3)(ii)(A) through (C).

(3) Reporting requirement. If a CAMT entity makes the AFSI adjustment provided

in section 7 of this notice for a taxable year, it must attach a statement to its Federal

income tax return for such taxable year. The statement--

(a) Must be titled “AFSI adjustment for eligible materials and supplies”,

(b) Must include the CAMT entity’s name, address, and taxpayer identification

number,

quirement. If a CAMT entity makes the AFSI adjustment provided

in section 7 of this notice for a taxable year, it must attach a statement to its Federal

income tax return for such taxable year. The statement--

(a) Must be titled “AFSI adjustment for eligible materials and supplies”,

(b) Must include the CAMT entity’s name, address, and taxpayer identification

number,

(c) If a CAMT entity uses a reasonable method under section 7.04(2) of this

notice, it must: include a statement whether the CAMT entity is using such a

reasonable method to determine (i) eligible materials and supplies book inventoriable

- 58 -

expense in ending inventory for AFS purposes for purposes of determining the eligible

materials and supplies book COGS depreciation adjustment under section 7.03(3) of

Notice 2026-7 for the taxable year, or (ii) eligible materials and supplies in ending

inventory for regular tax purposes for purposes of determining the eligible materials and

supplies tax COGS adjustment under section 7.03(1) of Notice 2026-7 for the taxable

year, or (iii) both; describe such reasonable method(s) used; and certify that such

reasonable method(s) used are consistent with, and reflect, the method(s) of accounting

the CAMT entity uses for AFS purposes or regular tax purposes, as applicable.

.05 Adjustment period for tax eligible materials and supplies capitalization method

change AFSI adjustment. The adjustment period for a tax eligible materials and

supplies capitalization method change AFSI adjustment is determined consistent with

the proposed rules provided in proposed § 1.56A-15(d)(4) (adjustment period for tax

capitalization method change AFSI adjustments with respect to section 168 property).

.06 Consistency requirement

upplies capitalization method

change AFSI adjustment. The adjustment period for a tax eligible materials and

supplies capitalization method change AFSI adjustment is determined consistent with

the proposed rules provided in proposed § 1.56A-15(d)(4) (adjustment period for tax

capitalization method change AFSI adjustments with respect to section 168 property).

.06 Consistency requirement. If a CAMT entity relies on section 7 of this notice and

makes the adjustment to AFSI provided in section 7.03 of this notice for a taxable year,

it must continue to make the adjustment provided in section 7.03 of this notice for all

subsequent taxable years until all eligible materials and supplies are disposed of for

AFS purposes or such time as prescribed by the Treasury Department and the IRS in

regulations or guidance published in the Internal Revenue Bulletin.

.07 Determining applicable corporation status. For purposes of applying the average

annual AFSI test in § 59(k)(1)(B) or proposed § 1.59-2(c), AFSI is determined without

regard to the AFSI adjustments provided in section 7.03 of this notice.

SECTION 8. TROUBLED COMPANIES

- 59 -

.01 Purpose. In response to comments received on Notice 2025-46, this section 8

clarifies the attribute reduction interim guidance for financially troubled companies

provided in section 4.03 of Notice 2025-46 and clarifies and modifies the interim

guidance provided in section 4.04(2)(a) of Notice 2025-46 regarding fresh start

accounting gain and loss on non-transactional bankruptcy emergences. The Treasury

Department and the IRS anticipate that the forthcoming proposed regulations will

include proposed regulations under § 56A(c)(15) and (e) consistent with the guidance

provided in this section 8.

.02 Application of § 1.1502-28. For purposes of applying the attribute reduction

interim guidance provided in sections 4.03(4) and (5) of Notice 2025-46, § 1.1502-28

applies

ces. The Treasury

Department and the IRS anticipate that the forthcoming proposed regulations will

include proposed regulations under § 56A(c)(15) and (e) consistent with the guidance

provided in this section 8.

.02 Application of § 1.1502-28. For purposes of applying the attribute reduction

interim guidance provided in sections 4.03(4) and (5) of Notice 2025-46, § 1.1502-28

applies.

.03 AFSI consequences resulting from emergence from bankruptcy. Solely with

regard to the emergence from bankruptcy of a CAMT entity, the CAMT entity determines

its CAMT consequences resulting from that emergence (and not from a discharge of

indebtedness or a domestic covered asset transaction, as provided in sections 4.03 and

4.04(3)(a) of Notice 2025-46, respectively) by--

(1) Disregarding any resulting gain or loss that is reflected in the FSI of the CAMT

entity; and

(2) Determining the CAMT basis of any assets (other than the regular tax basis in

the stock of a foreign corporation) of the CAMT entity by disregarding any adjustment to

the AFS basis of those assets resulting from the emergence from bankruptcy.

SECTION 9. PROPOSED COVERED ASSET TRANSACTION SECTION 358 ANTI-

AVOIDANCE RULE

- 60 -

.01 Purpose. The Treasury Department and the IRS anticipate that the forthcoming

proposed regulations will modify the proposed two-year rule in proposed § 1.56A-

4(f)(1)(ii) consistent with the guidance described in this section 9.

.02 Proposed two-year rule rebuttable presumption

m bankruptcy.

SECTION 9. PROPOSED COVERED ASSET TRANSACTION SECTION 358 ANTI-

AVOIDANCE RULE

- 60 -

.01 Purpose. The Treasury Department and the IRS anticipate that the forthcoming

proposed regulations will modify the proposed two-year rule in proposed § 1.56A-

4(f)(1)(ii) consistent with the guidance described in this section 9.

.02 Proposed two-year rule rebuttable presumption. For purposes of proposed

§ 1.56A-4(f)(1), if within two years of the date the stock of a foreign corporation is

received in a covered asset transaction, the basis in such stock is taken into account, in

whole or in part, in determining the AFSI of the recipient CAMT entity or another CAMT

entity, the covered asset transaction would be 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). The presumption described in the preceding

sentence may be rebutted by facts and circumstances clearly establishing that the

covered asset transaction was not undertaken with such a principal purpose.

.03 Procedure for rebutting presumption. In order to rebut the proposed two-year

rule rebuttable presumption described in section 9.02 of this notice, a CAMT entity that

would otherwise be required to take into account the increase to AFSI under proposed

§ 1.56A-4(f) for the taxable year in which the stock of the foreign corporation is received

must attach a statement rebutting the presumption to the Form 4626, Alternative

Minimum Tax – Corporations, filed with the CAMT entity’s return for the taxable year in

which the event triggering application of the proposed two-year rule (as modified by this

notice) occurs. The statement must describe the facts and circumstances supporting

the rebuttal and be in accordance with any procedures set forth in forms, instructions, or

guidance published in the Internal Revenue Bulletin.

SECTION 10

tions, filed with the CAMT entity’s return for the taxable year in

which the event triggering application of the proposed two-year rule (as modified by this

notice) occurs. The statement must describe the facts and circumstances supporting

the rebuttal and be in accordance with any procedures set forth in forms, instructions, or

guidance published in the Internal Revenue Bulletin.

SECTION 10. AFSI ADJUSTMENT WITH RESPECT TO TRANSACTIONS INVOLVING

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INTANGIBLE PROPERTY SUBJECT TO SECTION 367(d)

.01 Purpose. The Treasury Department and the IRS anticipate that the forthcoming

proposed regulations will address certain CAMT consequences of transactions involving

intangible property subject to § 367(d) consistent with the guidance described in this

section 10.

.02 AFSI adjustment for transactions involving the transfer of intangible property

subject to § 367(d).

(1) Shareholder-level adjustment. A CAMT entity that is required to include an

amount in gross income under § 367(d) for regular tax purposes for a taxable year

increases its AFSI for such year by such amount. If regular tax basis is relevant in

determining an amount included in gross income under § 367(d), CAMT basis is

substituted for regular tax basis in determining the amount included in AFSI. This would

be the case, for example, if an election is made under § 1.367(d)-1(g)(2) or 1.367(d)-

1T(g)(2) to treat a transfer of intangible property to a foreign corporation as a sale, or if

there is a disposition of the intangible property by the foreign corporation described in

§ 1.367(d)-1(f)(4)(i)(A).

asis is

substituted for regular tax basis in determining the amount included in AFSI. This would

be the case, for example, if an election is made under § 1.367(d)-1(g)(2) or 1.367(d)-

1T(g)(2) to treat a transfer of intangible property to a foreign corporation as a sale, or if

there is a disposition of the intangible property by the foreign corporation described in

§ 1.367(d)-1(f)(4)(i)(A).

(2) Foreign corporation-level adjustment. A foreign corporation that properly treats

a deemed payment as an allowable deduction under § 1.367(d)-1(c)(2)(ii) or (e)(2)(ii) or

reduces its gross income under § 1.367(d)-1(f)(2)(i) for regular tax purposes for a

taxable year reduces its adjusted net income or loss (or AFSI, if the foreign corporation

is an applicable corporation and the deduction or reduction reduces income described in

§ 882(b)) for such year by the amount of the deemed payment or the amount of the

reduction in gross income. The preceding sentence applies only to the extent such

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amounts increase the AFSI of a CAMT entity under proposed § 1.56A-4 as described in

this section 10.

SECTION 11. APPLICABILITY DATES AND RELIANCE

.01 Applicability dates. It is anticipated that the forthcoming proposed regulations will

propose rules consistent with the guidance described in sections 3 through 10 of this

notice that will apply for taxable years beginning on or after the date the final regulation

addressing the AFSI adjustment or other modification to the CAMT Proposed

Regulations described in a respective section of this notice is published in the Federal

Register.

.02 Reliance.

regulations will

propose rules consistent with the guidance described in sections 3 through 10 of this

notice that will apply for taxable years beginning on or after the date the final regulation

addressing the AFSI adjustment or other modification to the CAMT Proposed

Regulations described in a respective section of this notice is published in the Federal

Register.

.02 Reliance.

(1) In general. Subject to section 11.02(2), (3), and (4) of this notice, for all taxable

years beginning before the date such forthcoming proposed regulations are published in

the Federal Register, taxpayers may rely on the guidance in this notice. In addition,

reliance on section 3, 4, 5, 6 or 7 of this notice is conditioned on the taxpayer meeting

the consistency requirement set forth in that section. A taxpayer’s reliance on any of the

guidance in this notice for a taxable year will not cause the taxpayer to become subject

to, or to violate, the proposed reliance rules, including the consistency requirements,

provided in section 3.02(1) of Notice 2025-49 for such taxable year.

(2) Sections 9 and 10 of this notice.

(a) A taxpayer that relies on proposed § 1.56A-4 may rely on section 9 of this

notice for taxable years beginning before the date the forthcoming proposed regulations

are published in the Federal Register, provided that the requirements described in

section 3.02(1)(b) of Notice 2025-49 are satisfied for all such taxable years beginning

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with the first taxable year with respect to which the taxpayer relies on section 9 of this

notice.

rely on section 9 of this

notice for taxable years beginning before the date the forthcoming proposed regulations

are published in the Federal Register, provided that the requirements described in

section 3.02(1)(b) of Notice 2025-49 are satisfied for all such taxable years beginning

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with the first taxable year with respect to which the taxpayer relies on section 9 of this

notice.

(b) A taxpayer that relies on proposed § 1.56A-4 may rely on section 10 of this

notice for taxable years beginning before the date the forthcoming proposed regulations

are published in the Federal Register, provided that the requirements described in

section 3.02(1)(b) of Notice 2025-49 are satisfied for all such taxable years beginning

with the first taxable year with respect to which the taxpayer relies on section 10 of this

notice. A taxpayer that does not rely on section 10 of this notice may continue to rely on

proposed §§ 1.56A-4 or 1.56A-6, as applicable, subject to the requirements of section

3.02(1) of Notice 2025-49.

(3) Section 4 of Notice 2025-49. As an alternative to relying on section 4 of Notice

2025-49 as modified by section 3 of this notice for all taxable years beginning before the

date the forthcoming proposed regulations are published in the Federal Register, a

taxpayer may instead choose to rely on section 4 of Notice 2025-49 as originally

published for taxable years beginning before February 18, 2026, and rely on section 4

of Notice 2025-49 as modified by section 3 of this notice for taxable years beginning on

or after February 18, 2026, and before the date that the forthcoming proposed

regulations are published in the Federal Register. A taxpayer who chooses to rely on

section 4 of Notice 2025-49 for taxable years beginning on or after February 18, 2026,

may do so only if the taxpayer follows such section as modified by section 3 of this

notice.

on 3 of this notice for taxable years beginning on

or after February 18, 2026, and before the date that the forthcoming proposed

regulations are published in the Federal Register. A taxpayer who chooses to rely on

section 4 of Notice 2025-49 for taxable years beginning on or after February 18, 2026,

may do so only if the taxpayer follows such section as modified by section 3 of this

notice.

(4) Section 9 of Notice 2025-49. As an alternative to relying on section 9 of Notice

2025-49 as modified by section 4 of this notice for all taxable years beginning before the

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date the forthcoming proposed regulations are published in the Federal Register, a

taxpayer may instead choose to rely on section 9 of Notice 2025-49 as originally

published for taxable years beginning before February 18, 2026, and rely on section 9

of Notice 2025-49 as modified by section 4 of this notice for taxable years beginning on

or after February 18, 2026, and before the date that the forthcoming proposed

regulations are published in the Federal Register. A taxpayer who chooses to rely on

section 9 of Notice 2025-49 for taxable years beginning on or after February 18, 2026,

may do so only if the taxpayer follows such section as modified by section 4 of this

notice.

SECTION 12. EFFECT ON OTHER DOCUMENTS

Section 4 of Notice 2025-46 is clarified and modified. Sections 4 and 9 of Notice

2025-49 are modified.

SECTION 13. PAPERWORK REDUCTION ACT

The Paperwork Reduction Act of 1995 (44 U.S.C. §§ 3501-3520) (PRA) requires that

a Federal agency obtain the approval of the Office of Management and Budget (OMB)

before collecting information from the public, whether such collection of information is

mandatory, voluntary, or required to obtain or retain a benefit. An agency may not

conduct or sponsor, and a person is not required to respond to, a collection of

information unless the collection of information displays a valid OMB control number

the approval of the Office of Management and Budget (OMB)

before collecting information from the public, whether such collection of information is

mandatory, voluntary, or required to obtain or retain a benefit. An agency may not

conduct or sponsor, and a person is not required to respond to, a collection of

information unless the collection of information displays a valid OMB control number.

The collections of information in this notice are in sections 3.05(3), 4.06(3), 6.04(3),

7.04(3), and 9.03 of this notice.

Section 3.05(3) of this notice requires a CAMT entity to file a statement with its

Federal income tax return if it makes the AFSI adjustment provided in section 3.04 of

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this notice for a taxable year. The information requested in section 3.05(3) of this notice

is required to obtain the benefit of making the AFSI adjustment described in section 3 of

this notice. This information will be used by the IRS to confirm compliance with the

guidance in section 3 of this notice. The likely respondents are corporations.

Section 4.06(3) of this notice requires a CAMT entity to file a statement with its

Federal income tax return if it makes the AFSI adjustment provided in section 4.04 of

this notice for a taxable year. The information requested in section 4.06(3) of this notice

is required to obtain the benefit of making the AFSI adjustment described in section 4 of

this notice. This information will be used by the IRS to confirm compliance with the

guidance in section 4 of this notice. The likely respondents are corporations.

Section 6.04(3) of this notice requires a CAMT entity owner to file a statement with

its Federal income tax return if it makes the AFSI adjustment provided in section 6.03 of

this notice for a taxable year. The information requested in section 6.04(3) of this notice

is required to obtain the benefit of making the AFSI adjustment described in section 6 of

this notice

nts are corporations.

Section 6.04(3) of this notice requires a CAMT entity owner to file a statement with

its Federal income tax return if it makes the AFSI adjustment provided in section 6.03 of

this notice for a taxable year. The information requested in section 6.04(3) of this notice

is required to obtain the benefit of making the AFSI adjustment described in section 6 of

this notice. This information will be used by the IRS to confirm compliance with the

guidance in section 6 of this notice. The likely respondents are corporations.

Section 7.04(3) of this notice requires a CAMT entity to file a statement with its

Federal income tax return if it makes the AFSI adjustment provided in section 7 of this

notice for a taxable year. The information requested in section 7.04(3) of this notice is

required to obtain the benefit of making the AFSI adjustment described in section 7 of

this notice. This information will be used by the IRS to confirm compliance with the

guidance in section 7 of this notice. The likely respondents are corporations.

Section 9.03 of this notice requires a CAMT entity to file a statement with its Form

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4626 if it chooses to rebut the two-year rebuttable presumption described in section

9.02 of this notice. The information requested in section 9.03 of this notice is required

to obtain the benefit of the two-year rebuttable presumption and will be used by the IRS

to confirm compliance with the guidance in section 9 of this notice. The likely

respondents are corporations.

The reporting requirements in this notice will be included within OMB control number

1545-0123 in accordance with the PRA procedures under 5 CFR § 1320.10. The

recordkeeping requirements are considered general tax records under § 1.6001-1(e).

For PRA purposes, general tax records are already approved by OMB under 1545-0123

for business filers

The likely

respondents are corporations.

The reporting requirements in this notice will be included within OMB control number

1545-0123 in accordance with the PRA procedures under 5 CFR § 1320.10. The

recordkeeping requirements are considered general tax records under § 1.6001-1(e).

For PRA purposes, general tax records are already approved by OMB under 1545-0123

for business filers.

Books or records relating to a collection of information must be retained as long as

their contents may become material in the administration of any internal revenue law.

Generally, tax returns and tax return information are confidential, as required by § 6103.

SECTION 14. EFFECTIVE DATE

This notice is effective on February 18, 2026.

SECTION 15. DRAFTING AND CONTACT INFORMATION

The principal authors of this notice are personnel from the Office of Associate Chief

Counsel (Income Tax & Accounting) and the Office of Associate Chief Counsel

(International). Other personnel from the Treasury Department and the IRS participated

in its development. For further information regarding this notice, contact the Office of

the Associate Chief Counsel (Income Tax & Accounting), Branch 7, at (202) 317-7005

(not a toll-free number). For further information regarding section 8 of this notice,

contact the Office of the Associate Chief Counsel (Corporate), Branch 5, at (202) 317-

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5363 (not a toll-free number). For further information regarding sections 9 and 10 of this

notice, contact the Office of Associate Chief Counsel (International), Branch 4, at (202)

317-6937 (not a toll-free number).