Background
The threshold determination on whether the CAMT under section 55 applies to a taxpayer is whether such taxpayer is an “applicable corporation” within the meaning of section 59(k). The Notice provides interim guidance regarding the “applicable corporation” determination with the goal of “reduc[ing] compliance burdens and costs.” Specifically, the Notice introduces an optional “interim simplified method” (ISM) for determining “applicable corporation” status for CAMT purposes as well as updates to the calculation of “adjusted financial statement income” (AFSI) using this approach.
The Notice further provides relief from penalties related to underpayment of estimated tax under section 6655 for applicable corporations with tax years beginning after December 31, 2024, and ending prior to January 1, 2026 (“Covered CAMT Year”). Therefore, an applicable corporation’s estimated tax payments for a Covered CAMT Year are not required to cover CAMT liability to avoid a section 6655 penalty provided the taxpayer files a Form 2220, Underpayment of Estimated Tax by Corporations, even if they do not owe an estimated tax penalty.
Additional background information regarding CAMT can be found on the dedicated Baker McKenzie website.
Statutory method
In 2022, Congress enacted the Inflation Reduction Act of 2022 (IRA). The IRA amended section 55 to impose the CAMT based on the AFSI of an applicable corporation for taxable years beginning after December 31, 2022. An applicable corporation is any corporation, other than an S corporation, Regulated Investment Company (RIC), or Real Estate Investment Trust (REIT) that meets either of the two average annual AFSI tests, for one or more taxable years that are prior to that taxable year and end after December 31, 2021:
- If a corporation is not a member of a foreign-parented multinational group (FPMG), the corporation meets the average annual AFSI test for a taxable year if its average annual AFSI for the three-taxable-year period ending with that taxable year exceeds USD 1 billion ("General AFSI Test").
- If a corporation is a member of an FPMG for any taxable year, the corporation meets the average annual AFSI test for a taxable year if all members of the FPMG meets the General AFSI Test, and the average annual AFSI of the corporation for the three-taxable-year period ending with such taxable year is USD 100 million or more (“FPMG Test”).
Simplified method under Prop. Reg. § 1.59-2(g)
Although Congress enacted CAMT in 2022, Treasury did not issue proposed regulations on CAMT (“CAMT Proposed Regulations” or “Prop. Reg.”) until 2024. The CAMT Proposed Regulations were over 600 pages long and provided detailed guidance, including on the “applicable corporation” determination. Under Prop. Reg. §1.59-2(g), Treasury exercised the authority granted in section 59(k)(3)(A) to create a “simplified method” for determining whether a corporation is an applicable corporation. Under the simplified method, the thresholds for the average annual AFSI tests are lowered from USD 1 billion to USD 500 million and from USD 100 million to USD 50 million, respectively. The calculation of AFSI is also streamlined by excluding the majority of the general adjustments specified in section 56A(c). As such, AFSI is determined with adjustments limited to certain taxes,i tax-exempt entities,ii and, solely for the FPMG Test, income effectively connected to a US trade or business.iii Applicable Financial Statement (AFS) consolidation entries between group members are generally not disregarded. The simplified method also allows a corporation with an AFS year different from its taxable year to determine its AFSI based on its AFS year. The simplified method is extended to apply for any taxable year for which applicable corporation status is relevant.
Even if a corporation applies the simplified method and determines that its AFSI exceeds the simplified method threshold, the corporation is an applicable corporation only if it meets the standard annual average AFSI test. In other words, the simplified method can only help a taxpayer by giving effectively two bites at the apple. These rules were meant to reduce the burden on smaller taxpayers that would be required to complete the more complicated calculations otherwise applicable under the statute.
Interim simplified method under Notice 2025-27
The ISM under Notice 2025-27 expands the range of taxpayers eligible for relief by modifying the simplified method in the CAMT Proposed Regulations. Under the ISM, the thresholds used for the average annual AFSI tests are reduced from USD 1 billion to USD 800 million and from USD 100 million to USD 80 million, respectively.
| AFSI testing thresholds |
Statutory method
(Section 59(k))
Applicable corporation if average annual AFSI is |
Simplified method
(CAMT Proposed Regulations)
Applicable corporation if average annual AFSI is |
Interim simplified method
(Notice 2025-27)
Applicable corporation if average annual AFSI is
|
General
AFSI Test |
> USD 1 billion |
> USD 500 million |
> USD 800 million |
| FPMG Test |
≥ USD 100 million |
≥ USD 50 million |
≥ USD 80 million |
The ISM also modifies the calculation of AFSI. Although the ISM closely mirrors the simplified method in Prop. Reg. § 1.59-2(g), the ISM refers solely to the statute (rather than the rules provided in the proposed regulations). The ISM generally disregards all AFSI adjustments except for the following statutory adjustments:
- Financial statement consolidation entries;iv
- Certain taxes;v
- Direct pay credits;vi
- Tax-exempt entities;vii and
- Solely for the FPMG Test, income effectively connected to a US trade or business.viii
The ISM further allows for the exclusion of certain direct pay amounts under section 48D or section 6417, amounts received and paid for transferred credits under section 6418, and any net income increases from transferred credit utilization, all of which are not disregarded in determining AFSI under the simplified method.
The ISM specifies that consolidation adjustments should be taken into account except for those that eliminate transactions between entities not treated as a single employer or not included in an FPMG. Similar to the simplified method, the ISM allows the use of the AFS year for the three-year testing period if a corporation has an AFS year that differs from its taxable year. If AFSI exceeds the relevant thresholds under the ISM, 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 the statutory method (or under the simplified method if the corporation chooses to apply the CAMT Proposed Regulations).
A corporation may use the ISM for any taxable year ending on or before the date final regulations adopting the simplified method are published in the Federal Register and for which the original income tax return has not been filed as of June 23, 2025, the date the Notice was published in the Internal Revenue Bulletin. Critically, the use of the ISM does not cause the corporation to become subject to, or to violate, the reliance rules, including the consistency requirements, provided in the preamble of the CAMT Proposed Regulations for such taxable year.
Conclusion
Government officials have publicly announced that final CAMT regulations are not expected in the immediate future. Instead, Treasury is expected to continue to provide updated CAMT guidance in the form of notices, while Treasury undertakes a complete review of the CAMT Proposed Regulations with a goal of relieving compliance burdens. Consistent with this objective, the Notice provides welcome relief to taxpayers in determining applicable corporation status by offering a second simplified option in addition to the option available under the CAMT Proposed Regulations.
i Prop. Reg. § 1.56A-8(b).
ii Prop. Reg. § 1.56A-14.
iii Prop. Reg. § 1.56A-7.
iv Sections 56A(c)(2)(A) and (B).
v Section 56A(c)(5).
vi Section 56A(c)(9).
vii Section 56A(c)(12).
viii Section 56A(c)(4).
