The American Institute of CPAs (AICPA) has recommended that the Treasury and the IRS revise how the corporate alternative minimum tax applies to financially troubled companies, urging them to align the treatment of debt discharge income with the Tax Code and provide new exclusions for bankruptcy related income.
Background
The corporate alternative minimum tax (CAMT), enacted by the Inflation Reduction Act of 2022, P.L. 117-169, imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of corporations with average annual AFSI above $1 billion. Treasury and the IRS issued proposed regulations in 2024 but, after taxpayers raised concerns about complexity, said they intend to partially withdraw those rules and issue revised proposed regulations.
The IRS has issued guidance previewing the expected rules. Notice 2025-46 provides interim guidance on the application of the CAMT to domestic corporate transactions, troubled companies, and tax consolidated groups. Notice 2026-7 offers additional interim guidance that clarifies and modifies the treatment of troubled companies.
In a September 24 letter, the AICPA commented on this recent guidance, focusing on how the CAMT applies to companies in financial distress.
Aligning CODI with the Tax Code
A central recommendation asks Treasury and the IRS to completely align the AFSI treatment of cancellation of debt income (CODI) with the treatment of CODI under IRC § 108. The interim guidance creates a parallel regime in which financial statement CODI is excluded from AFSI and CAMT attributes are reduced based on concepts in § 108.
The letter argues that the parallel regime “would create significant administrative complexity on taxpayers and tax practitioners” because financial statement CODI and tax CODI may not align in timing and amount. For example, a taxpayer could have significant AFSI from CODI if it is not insolvent when the income is triggered for financial statement purposes but is insolvent when it is triggered for tax purposes.
To address timing and amount differences, the AICPA recommends a true up mechanism under which taxpayers would maintain a cumulative register tracking the difference between excluded CODI considered for CAMT purposes and excluded CODI taken into account for regular tax purposes.
The group also recommends refining the ordering of the CAMT CODI attribute reduction rule. The interim guidance places the reduction of foreign tax credit carryforwards midway through the ordering, which differs from § 108(b)(2), where foreign tax credit carryovers are reduced last. The AICPA recommends that the carryforwards be reduced after all CAMT basis reductions to align more closely with the regular tax ordering.
The letter further asks that the liability floor limitation be refined to align with IRC § 1017(b)(2) and § 108(b)(5), which it says would ensure that both the CAMT and regular tax systems apply the limitation in a coordinated and consistent manner.
Relief sought for bankrupt companies
The AICPA recommends an exclusion from AFSI for bankruptcy related income, arguing that the absence of such a rule can result in “CAMT applying at a moment when companies are financially vulnerable and undergoing restructuring.” The letter notes that this rationale extends beyond the specific categories of income identified in the proposed regulations.
On the insolvency exclusion, the group asks the agencies to adopt tax insolvency as a safe harbor and to address situations in which a taxpayer has no tax CODI, noting that financial statements and the Tax Code measure assets and liabilities differently.
The letter also recommends aligning the “debtor” rule with § 108(d)(2) by removing any additional requirement that the taxpayer be “the debtor,” which the group says imposes a condition not found in the existing exclusion rules. It asks for confirmation that bankruptcy exclusion eligibility is determined on a member by member basis within financial statement consolidated groups, consistent with the insolvency approach.
Other recommendations include excluding onetime financial statement deconsolidation effects that can arise when a bankrupt subsidiary later rejoins the financial statement consolidated group, and clarifying the AFSI consequences of fresh start accounting on emergence from bankruptcy.
Finally, the AICPA asks that emergence from bankruptcy be treated as a qualifying ownership change that resets the three year AFSI testing period. Without such treatment, the letter says, a reorganized company “may remain subject to CAMT solely due to prebankruptcy AFSI levels that no longer reflect the reorganized entity’s operations or ownership.”
For more on the treatment of AFSI adjustments under current IRS guidance, see Checkpoint’s Federal Tax Coordinator 2d ¶ A-8967.1.
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