IRS Notice Adds Favorable CAMT AFSI Adjustments

Notice 2026-7 provides additional interim guidance on the CAMT by expanding the permitted adjustments to AFSI when financial accounting capitalizes costs that the tax law allows to be deducted or amortized sooner. The notice also refines CAMT rules for financially troubled companies, eases a proposed anti-avoidance rule for certain foreign covered asset transactions, and addresses CAMT consequences for transfers of intangible property subject to Section 367(d). The notice is effective Feb. 18, 2026, but taxpayers generally can rely on the notice for taxable years beginning prior to the date proposed regulations are published.

Background

The CAMT applies to certain corporations that meet an average annual AFSI threshold and generally starts with net income (or loss) on an applicable financial statement and then applies statutory and regulatory adjustments under Section 56A. The U.S. Department of the Treasury and the IRS issued CAMT proposed regulations in 2024 and followed with multiple interim notices during 2025. Notice 2026-7 provides additional AFSI adjustments to prevent omission or duplication of items.

Crowe observation

Several new adjustments are ignored when testing whether a corporation is an applicable corporation, so the notice is aimed chiefly at computing CAMT liability once a corporation already is within scope.

Notice 2026-7

Cost recovery mismatches are a recurring source of CAMT exposure because book rules may require capitalization with gradual depreciation or amortization, while tax rules sometimes permit immediate deductions (or a different recovery pattern). Notice 2026-7 addresses several of these mismatches with a common framework that reduces AFSI by the relevant tax deduction or amortization taken into account in taxable income (including amounts recovered through cost of goods sold) and disregards the corresponding book depreciation, amortization, or other basis recovery reflected in financial statement income. Specific provisions include:

• Repairs tied to Section 168 property. The notice allows an AFSI reduction for certain deductible repair and maintenance costs that are capitalized and depreciated for book purposes, provided the costs relate to Section 168 property but are not themselves capitalized for tax as Section 168 property (or into Section 168 property). When book treats the repaired asset and the underlying depreciable property as a single combined asset, the adjustment reduces the need to isolate the portion of book depreciation attributable to repairs solely for CAMT computations – an area that commenters flagged as a major recordkeeping burden.
• Section 197 intangibles. The notice broadens earlier goodwill-focused relief to include certain other amortizable Section 197 intangibles when book does not allow systematic amortization, instead requiring recovering cost through impairment or disposition. Additionally, the notice adds a disposition rule for Section 197 intangibles that recomputes the book gain or loss by reference to a CAMT basis adjusted for tax amortization and book basis recoveries.

Crowe observation

A disposition rule is especially important when tax disposition occurs before (or after) book derecognition, a common timing mismatch in merger and acquisition integration and internal reorganizations.

• Domestic research transition. For taxable years beginning after Dec. 31, 2024, the notice provides an AFSI adjustment related to the transition to new Section 174A expensing for domestic research. During the transition, taxable income may reflect both current year domestic research deductions and ongoing amortization of domestic research costs capitalized under the prior Tax Cuts and Jobs Act of 2017 (TCJA) Section 174 regime. The notice allows AFSI to be reduced by the TCJA domestic amortization and requires disregarding related book amortization.
• Qualified production costs and low-cost materials. The notice provides similar relief for taxpayers that elect to deduct qualified film, television, live theatrical, and sound recording production costs under Section 181 and for taxpayers that deduct low-acquisition cost tangible property treated as materials and supplies for tax while capitalizing for book. In both situations, the notice better aligns the book depreciation deductions to the current expensing for tax purposes and reduces the compliance burden for taxpayers.
• Troubled companies. The notice clarifies that consolidated return attribute reduction rules apply when implementing earlier CAMT guidance for debt discharge situations and provides a targeted rule for bankruptcy emergence. Fresh-start gains or losses reflected in book income as well as related book basis adjustments are disregarded for CAMT purposes.
• International provisions. The notice changes a proposed per se two-year trigger for certain covered asset transactions into a rebuttable presumption of a tax-avoidance purpose, which could reduce uncertainty for business-driven restructurings. Additionally, the notice coordinates Section 367(d) transfers by increasing AFSI for the U.S. transferor’s deemed royalty inclusions while allowing a corresponding reduction to the transferee foreign corporation’s adjusted net income or loss, addressing the double-counting concern raised in comments.

Looking ahead

Taxpayers still are awaiting final, comprehensive guidance implementing the CAMT. However, this interim guidance provides welcome relief for taxpayers. Corporations should consult their tax advisers to model the impact of the CAMT adjustments under the notice, including how those adjustments coordinate with accounting method changes and Section 481(a) items. Additionally, compliance teams should update workflows to capture required return statement disclosures and retain documentation for meeting the reasonable method criteria used for inventory-related computations.