The IRS provided additional guidance on the corporate alternative minimum tax (CAMT) last week – including an important update for corporations seeking to take advantage of the One Big Beautiful Bill Act’s more favorable treatment of research and experimental (R&E) expenditures.
An ‘Unanticipated’ Interaction
Under the Tax Cuts and Jobs Act, as of 2022 certain R&E expenditures were required to be capitalized and amortized ratably over 5 years (15 years for foreign research) under IRC § 174. The OBBB reversed course, adding IRC § 174A and allowing an immediate deduction for domestic R&E expenditures paid or incurred in 2025 or later.
The OBBB also provided three options for taxpayers with prior domestic R&E expenditures:
- deduct the entire unamortized amount in 2025,
- deduct the unamortized amount ratably over the 2025 and 2026,
- or continue to amortize the costs over the remainder of the original five-year period.
While corporate taxpayers welcomed the OBBB changes, they soon began to raise concerns about how the transition provisions could impact their CAMT liability. The National Foreign Trade Council, R&D Coalition, and other trade groups have cautioned that the OBBB’s R&E expensing provisions interactions with CAMT can lead to unintended consequences due to impacts on adjusted financial statement income (AFSI).
The National Foreign Trade Council, in a September letter, urged Treasury to “consider regulatory guidance that would allow taxpayers to adjust their AFSI for CAMT purposes for any domestic R&D expenditures paid or incurred in taxable years beginning after 12/31/2021 and before 1/1/2025.”
IRS Offers Relief to Corporations
Notice 2026-7, issued February 18, took up this suggestion. The IRS explains in the notice that during the 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.”
The agency notes that neither the statutory provisions on calculating AFSI under IRC § 56A nor the CAMT proposed regulations “provide an adjustment to AFSI to account for the transition to the § 174A regime.”
Under the new guidance, for tax years beginning after December 31, 2024, CAMT entities can adjust their AFSI in three ways. They can:
- reduce AFSI by domestic § 174 amortization, to the extent of the amount taken into account in computing taxable income for the tax year;
- adjust AFSI to disregard book research or software development amortization; and
- increase or decrease AFSI by a tax research capitalization method change AFSI adjustment.
PwC’s Brett York explained that the notice “deals with a really significant issue that was being faced by a lot of companies that have significant domestic research expenditures.” In broad strokes, the notice “allows taxpayers to take the same kind of deductions for those previously capitalized R&E expenditures when they’re calculating their CAMT liability,” according to York.
York noted “a couple other minor pieces of the adjustment” spelled out in the notice. That includes a requirement to “reverse any book research or software development amortization for financial statement purposes that relates to the same domestic R&E expenditures.” York described this as a provision “to prevent a double counting.”
“There are certain types of R&E expenditures that are amortized for book purposes,” York added. “Most are immediately expensed, but the notice has you back those out.”
York said Notice 2026-7 is “probably the last piece of CAMT guidance that will be released before the government releases proposed regulations.” He added that those proposed CAMT regulations aren’t expected until October 15 or later.
As a result, York said, “the rules are going to be fairly static for a little bit of time, so [taxpayers] can analyze and make the best decisions for their situations.”
The notice indicates that Treasury and the IRS anticipate issuing modified proposed regulations providing for an adjustment to AFSI for certain domestic research amortization. The forthcoming proposed regulations are also expected to address how AFSI is determined for purposes of the average annual AFSI test.
Not All Welcome the Relief
“This is a massive win for the billionaire corporations that lobbied Donald Trump so they wouldn’t have to pay their fair share,” said Senator Elizabeth Warren (D-MA) of the latest guidance. “And it’s a slap in the face to every American who thought Trump would lower their costs — not pad the pockets of wealthy CEOs.”
Warren had urged Treasury in a December letter not to adopt the carveout proposed by the National Foreign Trade Council and others. In her view, this “would clearly undermine the purpose of CAMT: to ensure that no billionaire corporation pays a lower tax rate than 15% on the income it reports to shareholders.” Warren, joined by eight other congressional Democrats, argued that subtracting past R&E expensing from AFSI amounts to a “giant new tax loophole.”
NYU’s Tax Law Center issued a statement in December amid chatter about the IRS allowing corporations to account for the R&E transition provisions in calculating CAMT. “Such a carveout would continue the recent trend of guidance that grants taxpayers CAMT tax cuts that are not contemplated by the statute,” according to the Tax Law Center.
And the Tax Law Center contends that Congress “had a clear chance” to address the interaction during the enactment of the OBBB. “Any industry lobbyists saying that this consequence was unanticipated failed to see the clear and obvious impact of the statute.”
After the release of Notice 2026-7, Miles Johnson, senior attorney advisor at the Tax Law Center, told Checkpoint that “as expected, the R&E provisions of the guidance violate the purposes of the statute and are yet another tax cut to large corporations that Congress elected not to provide in OBBBA.”
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
