Notice 2023-7: Guidelines on the Application of CAMT

The Inflation Reduction Act of 2022 (“IRA”) introduced a corporate alternative minimum tax (“CAMT”) on an “applicable corporation’s” (“Applicable Corporation”) financial statement income. The CAMT is applicable for taxable years beginning after December 31, 2022 and imposes a 15% minimum tax on a corporation’s “applicable financial statement income” (“AFSI”). 

To be an Applicable Corporation, the corporation, together with every person treated as a single employer with that corporation, must have aggregate average annual AFSI for the prior three-taxable years in excess of $1 billion. If the corporation is part of a foreign parented multi-national group, then, for the corporation to be an Applicable Corporation, the overall group must meet the $1 billion test and the corporation must have average AFSI for the prior three-taxable years in excess of $100 million. 

The starting point for determining AFSI is the net income or loss on the “applicable financial statement” (“AFS”), as defined in Section 451(b)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), of the corporation or in the case of a group of entities (the “AFS Group”) the group’s AFS. The net income or loss is then subject to a number of adjustments found in Section 56A of the Code to determine AFSI.

On December 27, 2022, the Treasury Department and Internal Revenue Service published Notice 2023-7 (the “Notice”) announcing that they intend to issue proposed regulations, consistent with the guidance in the Notice, addressing the application of the CAMT. In the interim, the Notice provides guidance on certain “time-sensitive issues” that taxpayers may rely upon. 

Specifically, the Notice provides guidance addressing the treatment of certain nonrecognition transactions, tax consolidated groups, cancellation of debt (“COD”), depreciation of property subject to Section 168 of the Code and certain tax credits. The Notice also provides a simplified “safe harbor” method for determining if a corporation is subject to the CAMT and clarifies how an interest in a partnership is treated for determining whether a taxpayer is subject to the CAMT.

How Taxable and NonTaxable Transactions are Handled When Determining AFSI

Both “Covered Nonrecognition Transactions” and “Covered Recognition Transactions” are defined in the Notice, as are the regulations controlling their impact on AFSI (and any necessary modifications). 

Any sale, donation, distribution, or other disposal of property that results in gain or loss for U.S. federal income tax purposes is a Covered Recognition Transaction, whereas transactions subject to different nonrecognition provisions in the Code are Covered Nonrecognition Transactions. The term “Covered Transactions” refers to both Covered Nonrecognition Transactions and Covered Recognition Transactions taken together.

The financial accounting treatment of a Covered Nonrecognition Transaction must be consistent with the approach for U.S. federal income tax purposes, as required by the Notice, in order to satisfy CAMT requirements. For this reason, AFSI does not consider any benefit or loss in financial accounting as a consequence of the adoption of these standards. 

For purposes of future AFSI computations, the acquirer in a Covered Nonrecognition Transaction will receive a transferred financial accounting basis in the assets obtained and must keep track of these changes for future tax years. Some nonrecognition transactions, such as a split-off that meets the requirements of Section 355 of the Code, are highlighted in the Notice as examples of how the CAMT applies to such transactions.

The compliance burden that firms subject to (and on the cusp of becoming subject to) the CAMT will need to perform may be seen in the dissimilar handling of taxable and non-taxable transactions between financial accounting and CAMT accounting. These businesses will now have to keep separate books and records for financial statement accounting, regular tax accounting, and CAMT accounting.

Covered Nonrecognition Transactions and Covered Recognition Transactions are defined in the Notice, and the Notice specifies that each part of a larger transaction is evaluated separately to determine whether it qualifies as a nonrecognition or recognition transaction, and that the Notice further specifies that the AFSI’s treatment of a transaction as taxable or nontaxable will generally follow the U.S. federal income tax treatment of the transaction. 

When all applicable sections of the Code and general tax principles are considered, however, it adds the caveat that any one component transaction of the larger transaction may have an effect on another (e.g., the step transaction doctrine). Therefore, it would seem that CAMT treatment analysis typically mirrors analysis for non-CAMT tax purposes. 

Effects of Covered Transactions on Determining the Status of the Applicable Corporation

The average AFSI of a company (including the AFSI of certain connected parties) must fulfill the $1 billion test and, in the event of a foreign parented multi-national group, the additional $100 million requirement in order for the corporation to qualify as an Applicable Corporation, as explained above. Importantly, under the Notice’s advice, an acquirer may be transformed into an Applicable Corporation as a result of an acquisition of another corporation or group of businesses.

For purposes of applying the average AFSI criteria, an acquirer would typically include the AFSI of the target company or group of companies in its own AFSI if it buys such a corporation or group of businesses according to the Notice. The Notice uses financial accounting standards rather than tax laws to determine who is the acquirer and who is the target in the transaction. A target group’s AFSI is assigned to the acquired corporation(s) (or assets of such corporations) according to any reasonable allocation mechanism decided by the target group in the event of an acquisition of a corporation(s) (or assets of such corporations) from another testing group. 

To calculate whether or whether the AFSI has been earned over a three-taxable-year period, this AFSI is added to the AFSI of the acquirer. However, for the purpose of the test conducted on the target group, such allocation does not lower the AFSI of the target group. This means that both the acquiring and target groups must consider the AFSI of the taxpayer in question when deciding whether or not the taxpayer is an Applicable Corporation. When a company is removed from a test group, the same distribution principles apply.

Any method that works for allocating AFSI will be accepted until the future proposed rules specify an allocation method that must be used, as stated in the Notice. 

Treatment of Tax Consolidated Groups

For purposes of calculating AFSI for the group’s position as an Applicable Corporation and for purposes of calculating AFSI for CAMT liability, a consolidated group is considered as a single company, as provided for in the Notice.

Effects of Default and Recovery from Insolvency

If the Notice is followed, a financial accounting gain equal to the amount of excluded COD income will not be included in determining the AFSI of the AFS Group for the taxable year in which the discharge of indebtedness occurs. According to Section 108(b) and Section 1017 of the Internal Revenue Code, the AFS Group’s CAMT characteristics must be lowered to the same degree as tax attributes are reduced under U.S. federal income tax laws.

For the purposes of determining the AFSI of the AFS Group for the taxable year of the emergence from bankruptcy, any gain or loss that appears on the appropriate financial statement of the AFS Group as a consequence of the bankruptcy will not be included in the calculation. Changes in the property’s financial accounting basis that aren’t caused by attribute reduction from COD income that isn’t counted as AFSI are also ignored when figuring out AFSI for any tax year. 

Depreciation Modifications and Adjustments

According to Section 56A(c)(13) of the Code, the taxpayer’s AFSI is reduced by the amount of depreciation deductions allowed under Section167 of the Code for property to which Section168 of the Code applies, with the taxpayer’s AFSI being adjusted correspondingly for deductions taken for such property under Section168 of the Code. 

The Notice states that Adjusted For Sales Income (AFSI) should be reduced by the amount of depreciation that is tax deductible, including any depreciation that is capitalized into inventory and recovered as costs of goods sold, and that AFSI should be adjusted to disregard any book depreciation, expenses, and cost of goods sold taken into account for financial accounting purposes. The Notice also serves as a catchall for any additional modifications that may be included in subsequent official documents.

The Notice, however, makes it clear that this adjustment only applies to the portion of the cost of property depreciated under Sections 167 and 168 of the Code, not the percentage deducted under any other Section of the Code. 

Moreover, the adjustments to AFSI do not apply if a property is not property to which Section 168 of the Code applies (for instance, because a taxpayer has opted out of extra first year depreciation deductions under Section 168(k) of the Code).

In addition, the Notice mandates that AFSI be adjusted correspondingly to account for any Section 168 property put into operation prior to January 1, 2023. In most cases, a taxpayer’s AFS depreciation will be lowered and any gain on the dispose of such property will be higher once these adjustments are made for AFSI reasons as opposed to financial accounting purposes.

The Safe Harbor Approach

As was previously mentioned, the applicable test(s) for evaluating whether a company is an Applicable Corporation may be found in Section 59(k) of the Code. By permitting taxpayers to make the decision without making many of the adjustments to net income or loss on the taxpayer’s AFS set out in Section 56(A)(c) and (d) of the Code for computing AFSI, the safe harbor technique outlined in the Notice aims to streamline these tests. 

The threshold average AFSI amounts are reduced from $1 billion to $500 million and from $100 million to $50 million as a cost of these simplifications. Additionally, the Notice simplifies matters for taxpayers whose AFS year differs from their taxable year by enabling them to utilize their AFS year to determine whether or not the average AFSI requirements are fulfilled. In the event that a taxpayer does not pass the safe harbor test, the corporation will be an Applicable Corporation solely if it is judged to be an Applicable Corporation under Section59(k)(1) of the Code without the adjustments given by the safe harbor.

Credit Adjustments in the AFSI

In order to avoid double counting, the Notice states that taxpayers should discard advanced manufacturing credits and certain renewable energy credits that they have elected to use as a payment against their tax burden.

AFSI will also not count as income the receipt of advanced manufacturing credits or clean energy credits that are not taxed, nor will it count as income the transfer of certain clean energy credits that are not taxed. 

In determining whether a company is an applicable corporation, Section 56A(c)(2)(D)(i) may be used.

To determine whether a company qualifies as an Applicable Corporation, AFSI must be calculated differently than when evaluating the tax liabilities of an Applicable Corporation. When calculating a taxpayer’s “distributive share” of AFSI under Section 56A(c)(2)(D)(i) of the Code, for instance, AFSI is only considered in relation to the taxpayer’s interest in a partnership. Only for the purpose of evaluating whether a company is an Applicable Corporation, Section 56A(c)(2)(D)(i) of the Code is ignored under Section 59(k)(1)(D) of the Code. 

For purposes of determining whether a corporation that is a partner in a partnership is an Applicable Corporation if such corporation and such partnership are not aggregated as a single employer under Section 52(a) or 56A(c)(2)(D)(i) of the Code, it was unclear whether the adjustment to AFSI in Section 56A(c)(2)(D)(i) applied (b). The Notice restates the rule in Code Section 59(k)(1)(D) and clarifies that AFSI does not consider the adjustment in Code Section 56A(c)(2(D)(i) when assessing whether or not a company is an Applicable Corporation.


In the Notice, it was stated that further interim advice will be published before the draft rules would be released for public comment. Treasury and the IRS plan to address questions about the financial statement treatment of assets held in separate accounts by insurance companies and certain financial products, the financial statement treatment of items reported in other comprehensive income, and the financial statement treatment of embedded derivatives arising from certain reinsurance contracts in forthcoming guidance. The Notice also requests responses to a wide variety of additional inquiries, some of which are covered in the preceding guidelines.