12 June 2025 US Treasury Department and IRS issue new CAMT interim guidance
In interim guidance (Notice 2025-27), the Treasury Department and the IRS revised the safe harbor for determining applicable corporation status (interim simplified method) for purposes of the corporate alternative minimum tax (CAMT). The guidance also includes relief from certain additions to tax under IRC Section 6655 with respect to an applicable corporation's underpayment of estimated CAMT liability for the 2025 tax year. Additionally, the Treasury Department and the IRS announced that they (1) intend to issue additional interim guidance on several aspects of the proposed CAMT regulations (future interim guidance), and (2) anticipate issuing new proposed CAMT regulations that modify the existing proposed CAMT regulations to incorporate the interim simplified method and the future interim guidance. For more information on the proposed CAMT regulations, see Tax Alert 2024-1798. The CAMT applies to corporations that meet the definition of an "applicable corporation" under IRC Section 59(k)(1). In general, a corporation (other than an S corporation, regulated investment company, or real estate investment trust) is an applicable corporation for a tax year if the corporation's average annual adjusted financial statement income (AFSI) exceeds $1 billion for any three consecutive tax years that end after December 31, 2021, but before such tax year (Average Annual AFSI Test). For this purpose, a corporation's AFSI includes the AFSI of other entities in the corporation's IRC Section 52 controlled group and is determined without regard to certain AFSI adjustments described in IRC Section 56A. A corporation that is a member of an international financial reporting group with a foreign parent (i.e., a foreign-parented multinational group or FPMG, as defined in IRC Section 59(k)(2)(B)) (an FPMG corporation), however, is an applicable corporation if it satisfies both a $1 billion Average Annual AFSI Test and a separate $100 million Average Annual AFSI Test. For purposes of the $1 billion Average Annual AFSI Test, the FPMG corporation's AFSI includes the AFSI of all members of the corporation's FPMG and IRC Section 52 controlled group. For purposes of the $100 million Average Annual AFSI Test, the FPMG corporation's AFSI includes the AFSI of all entities in the corporation's IRC Section 52 controlled group. For both tests, AFSI is determined without regard to certain AFSI adjustments described in IRC Section 56A; AFSI for the $1 billion Average Annual AFSI Test, however, includes worldwide income whereas AFSI for the $100 million Average Annual AFSI Test includes only income within the US tax net (including, for example, effectively connected income and income attributable to ownership of controlled foreign corporations). IRC Section 59(k)(3) authorizes the Treasury Department to establish a simplified method for determining whether a corporation is an applicable corporation. Both Notice 2023-7 and Prop. Reg. Section 1.59-2(g) offer simplified methods for determining whether a corporation is an applicable corporation. Notice 2023-7, however, only applied to the first tax year beginning after December 31, 2022, while Prop. Reg. Section 1.59-2(g) is generally proposed to apply to the tax year ending after September 13, 2024 (and later tax years). Those simplified methods generally reduce the testing thresholds (to $500 million and $50 million, respectively), limit the adjustments that are made to financial statement income in determining AFSI, and provide other simplifying conventions. See Tax Alerts 2023-0091, 2025-0305 and 2025-0306 for additional details. To use the interim simplified method in Notice 2025-27, a corporation applies the rules under IRC Section 59(k)(1) and (2) with the following modifications:
Like the simplified method in Prop. Reg. Section 1.59-2(g), the interim simplified method modifies the AFSI determination for purposes of the above-referenced AFSI tests by specifying which AFSI adjustments to take into account and which AFS adjustments to disregard. The AFSI determination rules under the interim simplified method largely follow the AFSI determination rules under the simplified method in Prop. Reg. Section 1.59-2(g), which would generally disregard all AFSI adjustments other than the adjustments for federal and foreign income taxes, exempt organizations, and, in the case of the $100 million Average Annual AFSI Test, income that is not effectively connected with the conduct of a US trade or business. The following are the notable differences between the way AFSI is determined under the interim simplified method and the simplified method in Prop. Reg. Section 1.59-2(g):
If AFSI exceeds the relevant thresholds under the interim simplified method, a corporation is not automatically an applicable corporation but rather will be an applicable corporation for the tax year only if it is an applicable corporation under IRC Section 59(k)(1) or, if the corporation follows the proposed CAMT regulations, Prop. Reg. Section 1.59-2(c). A corporation may use the interim simplified method for any tax year ending on or before the date final regulations adopting a simplified method are published in the Federal Register and for which the original income tax return has not been filed as of the date Notice 2025-27 is published in the Internal Revenue Bulletin. If a corporation uses the interim simplified method to determine it is not an applicable corporation for a tax year, the corporation will not be subject to, or violate, the reliance rules (including the consistency requirements) in the proposed CAMT regulations. In other words, the use of the interim simplified method has no effect on a corporation's ability to apply or not apply the proposed CAMT regulations. The IRS plans to update the instructions to Form 4626, Alternative Minimum Tax — Corporations, and Schedule K of Form 1120, US Corporation Income Tax Return, (or other appropriate instructions in the Form 1120 series) to reflect the availability of the interim simplified method. Consistent with prior CAMT notices that waive estimated tax penalties (see Tax Alerts 2024-0802, 2024-1179 and 2024-1688), and because of the uncertainty around tax positions determined by applicable corporations following the publication of the proposed CAMT regulations, Notice 2025-27 waives the addition to tax under IRC Section 6655 for a corporation's CAMT liability under IRC Section 55 for any tax year beginning after December 31, 2024, and before January 1, 2026 (Covered CAMT Year). Therefore, a corporation's required installments of estimated tax for a Covered CAMT Year do not need to include amounts attributable to the corporation's CAMT liability "to prevent the imposition of an addition to tax under [IRC Section] 6655." The IRS noted it will modify the instruction for Form 2220, Underpayment of Estimated Tax by Corporations, to clarify that no addition to tax will be imposed under IRC Section 6655 because a corporation failed to make an estimated tax payment of its CAMT liability for any Covered CAMT Year. To avail themselves of this relief and avoid receiving a penalty notice, taxpayers must file Form 2220 with their federal income tax return, even if they do not owe an estimated tax penalty. Form 2220 must not include the CAMT liability from Schedule J of Form 1120. Taxpayers also must include an estimated tax penalty on line 34 of Form 1120, even if that amount is zero. Although corporations will not be penalized under IRC Section 6655 for failing to make estimated payments attributable to CAMT, other additions to tax could apply if a corporation fails to timely pay its CAMT liability when due. For example, penalties could be imposed under IRC Section 6651 (failure to file tax return or to pay tax) if the CAMT liability is not paid by the due date (excluding extensions) of the corporation's return. According to Notice 2025-27, the Treasury Department and the IRS intend to issue additional interim guidance on several issues, including:
Additionally, Notice 2025-27 notes that the Treasury Department and the IRS expect to issue new proposed regulations revising the proposed CAMT regulations to incorporate the interim simplified method and additional interim guidance. The interim simplified method is a welcome development for corporations that do not satisfy the simplified method under Prop. Reg. Section 1.59-2(g) because of the lower AFSI testing thresholds or the way the relevant AFSI tests are applied under that method. Taxpayers will likely favor the interim simplified method over the simplified method in Prop. Reg. 1.59-2(g) because the interim simplified method:
However, consistent with the simplified methods in Notice 2023-7 and Prop. Reg. Section 1.59-2(g), the interim simplified method does not allow for the application of AFSI adjustments under IRC Section 56A(c)(15), relating to importation of nonrecognition principles under subchapter C and subchapter K of the Code for certain corporate and partnership activity. This could cause taxpayers undertaking third-party M&A activities to exceed the relevant testing thresholds under the interim simplified method. Taxpayers that are not treated as applicable corporations under the interim simplified method will benefit from a reduced CAMT compliance burden as they will not be required to complete Form 4626. The estimated tax penalty relief in Notice 2025-27 is a timely and welcome development for applicable corporations that expect to have a CAMT liability for their 2025 tax year. Corporations in the process of determining their second quarter estimated tax payments should consider the estimated tax relief provided by Notice 2025-27 before submitting payment. Corporations should also follow the procedural filing requirements for Form 2220 and Form 1120 as provided by Notice 2025-27. IRC Section 56A(c)(12) requires tax-exempt organizations to adjust AFSI to only take into account AFSI from (i) an unrelated trade or business (as defined in [IRC] Section 513) of the organization, or (ii) debt-financed property (as defined in [IRC] Section 514) to the extent that income from that property is treated as unrelated business taxable income (the Exempt Organization AFSI Adjustment). The proposed CAMT regulations would interpret the Exempt Organization AFSI Adjustment under IRC Section 56A(c)(12) as limiting the AFSI of a tax-exempt organization to UBTI. Consistent with the simplified method under Prop. Reg. Section 1.59-2(g), AFSI under the interim simplified method is determined by taking into account the Exempt Organization AFSI Adjustment, making it more likely that tax-exempt organizations will fall below the relevant AFSI thresholds under the interim simplified method. It remains prudent for tax-exempt organizations to diligently monitor the application of the CAMT and potential Form 4626 filing obligations. Tax-exempt organizations should ensure the Exempt Organization AFSI Adjustment is taken into account when applying the interim simplified method. Notice 2025-27 sets the stage for future CAMT guidance, including new interim CAMT guidance on several controversial provisions in the proposed CAMT regulations. The Treasury Department and the IRS received several comments that were critical of certain provisions in the proposed CAMT regulations, including (1) provisions addressing the treatment of unrealized gains and losses, (2) the determination of a partner's distributive share of partnership AFSI, and (3) the treatment of certain corporate and partnership transactions that receive nonrecognition (or partial nonrecognition) treatment for regular tax purposes. The announcement that the Treasury Department and the IRS intend to issue additional interim guidance on these topics and repropose the proposed CAMT regulations is significant and signals that the government is possibly open to making changes recommended by commenters to make the CAMT rules more administrable, more predictable and less distortive of commercial transactions. This announcement also suggests that certain provisions in the proposed regulations may be amended significantly before finalization and that those final regulations may be deferred. Taxpayers should continue to monitor the development of CAMT interim guidance and assess whether decisions to rely on the proposed CAMT regulations are affected.
Document ID: 2025-1244 | ||||||||
