Your Q2 2026 tax provision is being calculated now. If your company is an applicable corporation subject to the 15% corporate alternative minimum tax, Notice 2026-7, issued February 18, 2026, changed the AFSI adjustments you are permitted to take in ways that directly affect your Q2 estimated tax calculation, your Q2 provision, and your 10-Q income tax disclosures.
Notice 2026-7 is the fifth CAMT notice issued since early 2025 and the most substantive of that series for companies with significant book-tax differences in three specific areas: repair and maintenance costs on depreciable property, goodwill and other Section 197 intangible amortization, and domestic research and experimental expenditures transitioning from the TCJA Section 174 amortization regime to OBBBA's Section 174A expensing. In all three areas, the notice expands available AFSI reductions, shifting the CAMT computation closer to regular taxable income and away from book income.
Treasury and the IRS have stated that forthcoming proposed regulations will be consistent with Notice 2026-7. Taxpayers can rely on the guidance in the notice for taxable years beginning before those proposed regulations are published. That reliance window covers Q2 2026 and the full 2026 tax year.
This post explains what each of the three new AFSI adjustments does, what changed from prior guidance, and what the Q2 2026 provision and 10-Q disclosure implications are.
What Is the Corporate Alternative Minimum Tax and Who Pays It?
The CAMT was enacted as part of the Inflation Reduction Act of 2022. It imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of applicable corporations. The tax applies to taxable years beginning after December 31, 2022.
An applicable corporation is any corporation whose average annual AFSI exceeds $1 billion over the three taxable years preceding the determination year. For foreign-parented multinational groups, the threshold structure is different: the CAMT applies if the group's total AFSI exceeds $1 billion and the US members' AFSI is at least $100 million. Notice 2025-27 provides a simplified safe harbor for the applicable corporation determination: the $1 billion threshold is treated as $800 million for general domestic corporations and $80 million for US members of foreign-parented groups for purposes of the safe harbor, reducing compliance burden for companies near the threshold.
The CAMT operates as follows: a company first computes its regular corporate income tax liability. It then computes 15% of its AFSI, net of any CAMT foreign tax credits. If the CAMT amount exceeds the regular tax liability for the year, the company pays the CAMT. Any CAMT paid in excess of regular tax liability in a given year generates a minimum tax credit that can be used to reduce regular tax liability in future years, so the CAMT is effectively a timing acceleration of tax payments rather than an incremental permanent tax for companies that remain taxpayers over time.
The CAMT liability calculation is particularly sensitive to book-tax timing differences. When book income is higher than taxable income in a given year due to different capitalization and expensing rules, the CAMT can create a tax liability even in years where the company owes no regular tax. Notice 2026-7 addresses three categories of book-tax timing difference where that mismatch was creating unanticipated CAMT exposure.
What Is Adjusted Financial Statement Income?
AFSI is the starting point for the CAMT calculation. Section 56A(c) of the Internal Revenue Code defines AFSI as a corporation's net income or loss as set forth on its applicable financial statement (AFS), which is typically the consolidated GAAP financial statements prepared for financial reporting purposes. The AFS is generally the most recent audited financial statement that the corporation filed with the SEC or prepared for reporting to shareholders.
AFSI is not simply book income. Section 56A(c) specifies 14 statutory adjustments to AFS net income to arrive at AFSI, and it grants Treasury broad regulatory authority to provide additional adjustments necessary to carry out the purposes of the CAMT. That regulatory authority is the source of all the adjustments in Notice 2026-7.
The single most significant statutory AFSI adjustment for capital-intensive companies is the Section 168 depreciation adjustment: AFSI is adjusted so that tax depreciation under Section 168 replaces book depreciation for Section 168 property. This adjustment is why companies that placed property in service and claimed 100% bonus depreciation under Section 168(k) generally saw a favorable AFSI reduction in the placed-in-service year: the tax deduction was higher than the book depreciation for that year, reducing AFSI below book income.
What the Section 168 adjustment does not cover is where the three adjustments in Notice 2026-7 become relevant. There is no statutory equivalent of the Section 168 adjustment for repairs on Section 168 property, for Section 197 intangible amortization, or for domestic R&E expenditure amortization. In each of those areas, AFSI would otherwise reflect the book treatment: capitalize and depreciate (repairs), not amortize (goodwill and indefinite-lived intangibles), or recognize expense over the useful life if capitalized. The new adjustments in Notice 2026-7 replace book treatment with tax treatment in all three areas, reducing AFSI and reducing CAMT exposure.
What Did Notice 2026-7 Change About AFSI Adjustments?
Notice 2026-7 modified or added AFSI adjustments in five areas. The three most significant for most corporate taxpayers are repairs, Section 197 intangibles, and domestic R&E amortization. The notice also added adjustments for Section 181 qualified production costs (film, television, live theatrical productions, and sound recordings) and for low-cost tangible property treated as materials and supplies under Section 1.162-3. This post focuses on the three major adjustments that apply broadly.
The notice's core approach in all three areas is the same: AFSI is reduced by the relevant tax deduction or amortization amount taken into account in taxable income for the year (including amounts recovered through cost of goods sold), and the corresponding book depreciation, amortization, or other basis recovery reflected in AFS income is disregarded. Crowe describes this as a "replace-book-with-tax" rule. The practical effect is that whenever the tax treatment of an item produces a larger deduction than the book treatment in a given year, AFSI decreases and CAMT exposure decreases.
The notice is effective February 18, 2026. For the repairs and intangibles adjustments, a transition option is available: taxpayers may rely on the rules under Notice 2025-49 as originally published for tax years beginning before February 18, 2026. For tax years beginning on or after that date, the modified rules in Notice 2026-7 apply. For calendar-year corporations, this means the Notice 2026-7 rules govern the full 2026 taxable year.
The notice imposes two cross-cutting requirements on all taxpayers adopting these adjustments: a consistency requirement and a reporting requirement. The consistency requirement means that once a taxpayer adopts an AFSI adjustment (for repairs, intangibles, or domestic R&E amortization), it must continue to make that same adjustment in all subsequent taxable years. The reporting requirement means that taxpayers using the repairs adjustment, the eligible intangibles adjustment, the Section 181 production cost adjustment, or the materials and supplies adjustment must attach a statement to their return disclosing the adjustment amount and the method used to compute it.
The R&E Expense Adjustment: How OBBBA's Section 174A Interacts With CAMT
This is the newest of the three adjustments in Notice 2026-7, addressing a timing mismatch created specifically by the OBBBA's changes to domestic research and experimental expenditure treatment.
Under the TCJA, domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025, were required to be capitalized and amortized over five years (15 years for foreign R&E). Companies that had accumulated capitalized domestic R&E costs under the TCJA Section 174 regime in 2022 through 2024 carried those costs as assets being amortized over the five-year window. That amortization continues into 2025 and 2026 as those prior-year costs run off over the five-year period.
The OBBBA, effective for taxable years beginning after December 31, 2024, enacted Section 174A, which allows companies to elect to immediately deduct domestic R&E expenditures in the year incurred rather than capitalizing and amortizing them. For the OBBBA catch-up election available for costs capitalized under TCJA Section 174 in pre-2025 years, companies could elect to accelerate the deduction of remaining unamortized pre-2025 domestic R&E costs in 2025 or spread that catch-up deduction over 2025 and 2026.
The CAMT problem this created: during 2025 and 2026, many companies' regular taxable income is reduced by ongoing Section 174 amortization of TCJA-regime costs (the costs that were capitalized in 2022 through 2024 and are still being amortized out), and potentially also by catch-up deductions under the OBBBA transition election. Book income, and therefore AFSI, does not reflect those same tax deductions if the costs were already expensed for book purposes when incurred. The result is that AFSI is higher than taxable income in those years, potentially triggering CAMT liability.
Notice 2026-7 Section 5 addresses this by providing an AFSI adjustment for domestic research amortization for taxable years beginning after December 31, 2024. The adjustment reduces AFSI by the amount of TCJA Section 174(a)(2)(B) amortization taken into account in computing regular taxable income for the year, including catch-up amortization amounts accelerated under the OBBBA transition election. Corresponding book amortization is disregarded from AFSI.
BDO's analysis notes that this adjustment may provide a double benefit in some cases: to the extent costs were previously deducted for financial statement purposes in the year incurred (fully expensed under book accounting), those costs both reduced book income in the original year and now reduce AFSI again in a subsequent year when amortized for regular tax purposes. The notice does not appear to restrict the adjustment in this scenario.
The domestic R&E AFSI adjustment does not carry the same transition option as the repairs and intangibles adjustments. It is available for taxable years beginning after December 31, 2024, which includes all of 2025 and 2026 for calendar-year filers.
The Repair and Maintenance Adjustment: What Changed From Prior Guidance?
Section 3 of Notice 2026-7 modifies the repair and maintenance AFSI adjustment that was first introduced in Notice 2025-49. The modification addresses a specific recordkeeping burden that had made the adjustment difficult to apply in practice.
Under prior Notice 2025-49 guidance, an AFSI adjustment was available for certain repair and maintenance costs on Section 168 property that were deductible for regular tax purposes under Section 162 but capitalized and depreciated for book purposes. The conceptual basis is the same as the Section 168 depreciation adjustment: when the tax rule produces a current deduction that book accounting defers through capitalization, the AFSI should reflect the tax deduction rather than the book capitalization.
The practical complication flagged by commenters: when book accounting treats a repaired asset and the underlying depreciable property as a single combined asset, isolating the portion of the book depreciation attributable specifically to the repair component for CAMT purposes required granular asset-by-asset tracking that was burdensome to implement. Some companies had capitalized repair costs at the asset level in their fixed asset subledger with sufficient detail to perform this isolation, but many had not.
Notice 2026-7 simplifies this. 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. 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, which commenters flagged as a major recordkeeping burden.
The adjustment is elective, meaning a taxpayer must choose to adopt it. Once adopted, the consistency requirement applies: the adjustment must be made for all eligible repair assets in all subsequent taxable years. A repair cost qualifies as an "eligible repair asset" under the notice if it relates to Section 168 property and is deductible for regular tax purposes under Section 162 but is capitalized and depreciated for book purposes.
The transition option for the repairs adjustment: for tax years beginning before February 18, 2026, companies can rely on the original Notice 2025-49 rules rather than the modified Notice 2026-7 rules. For the 2026 calendar year (beginning January 1, 2026), the modified rules apply.
The Section 197 Intangibles Adjustment: What's New?
Section 4 of Notice 2026-7 expands the intangibles AFSI adjustment that was first introduced in Notice 2025-49. The expansion is significant for M&A-active companies because it removes the prior limitation that restricted the adjustment to goodwill acquired before specific dates.
Under prior Notice 2025-49 guidance, an AFSI adjustment was available for what the notice called "eligible goodwill," defined as Section 197 intangibles (not only goodwill proper) acquired in transactions announced on or before October 28, 2021, or closed on or before that date if not publicly announced. This pre-announcement grandfathering window effectively limited the adjustment to intangibles acquired in transactions predating the first public discussion of CAMT legislation.
Notice 2026-7 replaces this with a general rule covering all "eligible intangibles," defined as goodwill and other intangibles that are amortizable over 15 years for regular tax purposes under Section 197 but are not amortized for AFS purposes until impaired or sold. The acquisition date restriction from Notice 2025-49 is eliminated.
The breadth of this relief is noteworthy. The elective AFSI adjustment is no longer limited to goodwill, and there is no longer a requirement that the intangible be acquired before a specific date. This materially affects M&A-active companies across every industry, who generally have Section 197 intangibles from both recent and historical acquisitions sitting on their balance sheets with no book amortization.
The mechanics: AFSI is reduced by the deductible Section 197 amortization taken into account in computing taxable income for the year (including amounts recovered through cost of goods sold). Corresponding book items are disregarded from AFSI. The notice also adds a disposition rule: when eligible intangibles are disposed of, the book gain or loss is recomputed by reference to a CAMT basis adjusted for tax amortization taken and book basis recoveries. This disposition rule matters for companies that may sell businesses or individual intangibles, and Crowe specifically flags it as important in M&A integration and internal reorganization contexts where tax and book dispositions may not align in timing.
One exclusion that remains: intangibles that are not amortizable under Section 197 for regular tax purposes are not eligible intangibles for this adjustment. Intangibles falling under the Section 197(f)(9) anti-churning rule remain ineligible. Holland Knight confirms that this anti-churning exclusion is a continuing trap for the unwary and was carried forward from prior guidance without modification.
For the applicable corporation determination specifically: the proposed regulations will provide that AFSI is computed without regard to the Section 197 intangibles AFSI adjustment for purposes of the three-year average annual AFSI test used to determine applicable corporation status. In other words, a company cannot use the intangibles adjustment to fall below the $1 billion AFSI threshold and thereby escape applicable corporation status.
What Does This Mean for Your Q2 2026 Estimated Tax and Provision?
For calendar-year applicable corporations, all three Notice 2026-7 adjustments apply to the full 2026 taxable year. The Q2 estimated tax payment due September 15, 2026, incorporates these adjustments into the annualized income installment method or the prior-year safe harbor calculation.
The specific Q2 provision implications depend on whether the company adopted the new adjustments when computing its Q1 provision, or whether the adjustments are being adopted starting in Q2.
If the adjustments were adopted in Q1 2026. The Q2 provision continues to reflect those adjustments and updates the annual effective CAMT rate as year-to-date amounts become known. No catch-up adjustment for Q1 is required in Q2.
If the adjustments were not reflected in Q1 2026 (because the company was still evaluating Notice 2026-7 at Q1 close). The Q2 provision needs to reflect the full year-to-date benefit of all three adjustments, producing a potential catch-up reduction in Q2 for the Q1 period not yet reflected. This catch-up is recognized in Q2 as a discrete item in the estimated annual effective tax rate calculation, consistent with ASC 740-270's treatment of changes in estimated annual effective tax rates.
The magnitude of the Q2 provision impact depends on three company-specific variables: the amount of TCJA Section 174 domestic amortization still running off (including any OBBBA catch-up deduction), the amount of eligible repair costs capitalized for book but deducted for tax, and the amount of Section 197 amortization on eligible intangibles acquired in any transaction (not just pre-October 2021 transactions as under prior guidance).
For companies with significant goodwill from recent acquisitions, the Section 197 expansion is likely the largest single adjustment. Goodwill acquired in a $500 million acquisition might carry Section 197 amortization of approximately $33 million per year (at a 15-year straight-line rate). If that goodwill had no prior book amortization and was not eligible for the adjustment under the prior pre-October 2021 cutoff, the Q2 2026 provision can now reflect approximately $16.5 million of year-to-date 2026 amortization as an AFSI reduction, potentially producing a meaningful decrease in CAMT liability for the first half of 2026.
What ASC 740 and 10-Q Disclosures Are Affected?
CAMT interacts with ASC 740 in ways that require specific disclosure attention in the Q2 2026 10-Q. The Notice 2026-7 adjustments affect both the current tax provision and potentially the deferred tax positions.
Current period CAMT liability. The Q2 income tax provision must reflect the current-period CAMT liability after applying all available AFSI adjustments including the Notice 2026-7 changes. If CAMT exceeds regular tax in Q2, the excess produces a minimum tax credit carryforward. If regular tax exceeds CAMT, no CAMT is owed for the period.
Effective tax rate reconciliation. Under ASU 2023-09, the income tax rate reconciliation must separately quantify line items meeting the 5% threshold. If CAMT is a material driver of the company's effective tax rate, it warrants a separate reconciling line. If the Notice 2026-7 adjustments materially reduce CAMT liability compared to Q2 2025, the results of operations discussion in MD&A should explain that reduction.
CAMT minimum tax credit carryforward. CAMT paid in excess of regular tax liability generates a minimum tax credit under Section 53. This credit is a deferred tax asset under ASC 740. The realizability of the credit must be assessed at each reporting date: if it is more-likely-than-not that the credit will be realized in future years (because the company expects to owe regular tax in excess of CAMT in future years), the full credit is recognized as a deferred tax asset. If realization is not more-likely-than-not, a valuation allowance is required. The Notice 2026-7 adjustments affect the magnitude of the CAMT credit carryforward but do not change the realizability assessment framework.
Disclosure of accounting method for CAMT. Where CAMT is material, the income tax footnote should identify the company's accounting policy for CAMT, including whether it is accounted for as a current-period cost or through recognition of deferred taxes related to AFSI-taxable income differences, and how the available AFSI adjustments under Notice 2026-7 are being applied.
SAB 74 disclosures for forthcoming CAMT regulations. The IRS has stated that it intends to issue proposed CAMT regulations by the end of 2026. When those proposed regulations are issued, they may modify the current Notice 2026-7 guidance in ways that affect the CAMT calculation. Companies that have adopted the Notice 2026-7 adjustments should monitor for the proposed regulations and assess whether any changes require disclosure as a subsequently enacted or proposed regulatory change. This is not a formal SAB 74 situation for a not-yet-effective accounting standard, but it is the type of regulatory uncertainty that an income tax footnote should acknowledge where material.
What Should Your Tax Director Be Doing Before the Q2 Close?
Four actions worth completing before Q2 books close.
Update the CAMT AFSI model for all three Notice 2026-7 adjustments. Confirm whether the model currently reflects the expanded eligible intangibles adjustment (removing the pre-October 2021 cutoff), the modified repairs adjustment (reducing the book-depreciation isolation burden), and the domestic R&E amortization adjustment. Each adjustment requires identifying the relevant tax deduction amounts from the regular tax provision model and confirming the corresponding book amounts that will be disregarded from AFSI.
Assess whether to adopt the adjustments in Q2 if not adopted in Q1. The Notice 2026-7 adjustments are available for the full 2026 tax year, not just from the date of the notice. A company that did not reflect the adjustments in Q1 should evaluate adopting them in Q2 with a year-to-date catch-up. The decision to adopt should be made with awareness of the consistency requirement: once adopted, the adjustment must continue in all subsequent years.
Confirm the Section 197 eligible intangibles population. The expansion from pre-October 2021 goodwill to all eligible intangibles is the most significant scope change in Notice 2026-7. Run a complete analysis of all Section 197 intangibles held by the company, including those from transactions closed after October 28, 2021, and assess which are now eligible for the AFSI adjustment. Pay specific attention to the Section 197(f)(9) anti-churning exclusion.
Build the Q2 10-Q income tax footnote disclosures. The Q2 10-Q should explain the CAMT accounting policy, quantify the CAMT liability or credit generated year-to-date, and, where the Notice 2026-7 adjustments materially changed the Q2 position compared to Q2 2025, include specific MD&A language explaining those drivers. If the company is now reflecting AFSI adjustments it was not using in the prior comparable period, the rate reconciliation comparison will show a change that requires explanation.
Frequently Asked Questions
What is CAMT and who does it apply to?
The corporate alternative minimum tax is a 15% minimum tax on the adjusted financial statement income (AFSI) of applicable corporations, enacted by the Inflation Reduction Act of 2022 and effective for taxable years beginning after December 31, 2022. An applicable corporation is generally one with average annual AFSI exceeding $1 billion over the prior three years (with different thresholds for foreign-parented groups). The tax applies to the extent it exceeds regular corporate income tax liability for the year, with excess CAMT generating a minimum tax credit for future use.
What does Notice 2026-7 change about CAMT?
Notice 2026-7, issued February 18, 2026, adds or modifies three primary AFSI adjustments: it expands the Section 197 intangibles adjustment to cover all eligible intangibles (removing the prior pre-October 2021 acquisition date cutoff), it modifies the repairs adjustment to reduce the book-depreciation isolation burden, and it adds a new domestic R&E amortization adjustment for the TCJA-to-OBBBA transition period. All three adjustments reduce AFSI relative to prior guidance, reducing CAMT exposure for companies with material book-tax differences in these categories.
How does the R&E expense adjustment affect AFSI?
For taxable years beginning after December 31, 2024, companies can reduce AFSI by the amount of TCJA Section 174 amortization on domestic R&E expenditures taken into account in computing regular taxable income for the year, including catch-up amortization accelerated under the OBBBA transition election. The corresponding book amortization is disregarded. This adjustment prevents AFSI from being inflated by ongoing tax amortization of pre-2025 domestic R&E costs that were already expensed in an earlier period for book purposes.
Does Notice 2026-7 affect Q2 2026 estimated tax payments?
Yes. The September 15, 2026, Q2 estimated tax payment should reflect AFSI as computed with the Notice 2026-7 adjustments, to the extent the company has adopted those adjustments. Adopting all three adjustments could materially reduce the CAMT component of the Q2 estimated tax payment for companies with significant eligible repair costs, Section 197 intangibles, or TCJA domestic R&E amortization still running through the regular tax provision.
What disclosures are required in my 10-Q for CAMT?
The Q2 2026 10-Q income tax footnote should disclose the company's CAMT accounting policy, the current-period CAMT liability or credit generated, the CAMT minimum tax credit carryforward balance and its realizability assessment, and, where CAMT is a material component of the effective tax rate, the AFSI adjustments being applied. The rate reconciliation under ASU 2023-09 should separately quantify the CAMT line item where it meets the 5% threshold. MD&A should explain any material change in CAMT liability compared to Q2 2025, including the effect of Notice 2026-7 adjustments where applicable.
Key Takeaways
- IRS Notice 2026-7, issued February 18, 2026, expands AFSI adjustments available to applicable corporations computing CAMT. Taxpayers can rely on the guidance for taxable years beginning before forthcoming proposed CAMT regulations are published. The adjustments apply to the full 2026 calendar year.
- Three primary adjustments affect most companies with significant book-tax differences: Section 197 intangibles (expanded from pre-October 2021 acquisitions to all eligible intangibles with no date restriction), repairs on Section 168 property (with reduced book-depreciation isolation burden), and domestic R&E amortization (addressing the TCJA-to-OBBBA transition in years beginning after December 31, 2024).
- All three adjustments follow the same replace-book-with-tax framework: AFSI is reduced by the relevant tax deduction or amortization amount, and the corresponding book amount is disregarded. Whenever the tax treatment produces a larger current deduction than book treatment, AFSI decreases and CAMT exposure decreases.
- Adopting each adjustment triggers a consistency requirement: once adopted, the adjustment must be made in all subsequent taxable years. A reporting statement must be attached to the return for the repairs, intangibles, Section 181, and materials and supplies adjustments.
- For Q2 2026 provisions, companies that did not reflect Notice 2026-7 adjustments in Q1 should evaluate adopting them in Q2 with a year-to-date catch-up. The Q2 10-Q should explain any material CAMT reduction compared to Q2 2025.
- The Section 197 intangibles expansion is particularly significant for M&A-active companies: all goodwill and eligible intangibles from any acquisition, not just pre-October 2021 transactions, can now be reflected in AFSI at the tax amortization rate rather than at zero (which is the book treatment for indefinite-lived intangibles held until impairment or sale).
- The domestic R&E adjustment may produce a double benefit in some cases where costs were expensed for book in the original year and now also reduce AFSI in a later year when amortized for tax purposes. Notice 2026-7 does not appear to restrict this result.
