The IRS has announced in Notice 2025-28 that it intends to partially withdraw proposed regulations on the application of the corporate alternative minimum tax (CAMT) to partnerships and CAMT entity partners and to issue new revised proposed regulations. Pending publication of the revised proposed regulations, the Notice provides interim guidance.
The modified guidance is intended “to reduce burdens and costs” in applying the CAMT to applicable corporations with financial statement income (FSI) attributable to investments in partnerships. The Notice includes interim guidance on simplified methods to determine an applicable corporation’s adjusted financial statement income (AFSI) with respect to an investment in a partnership, reporting by partnerships of information needed to compute ASFI, and rules for partnership contributions and distributions.
Key changes in the revised guidance include:
- Adding two alternative methods for calculating a CAMT entity partner’s distributive share of modified FSI (e.g., the top-down election and the limited taxable-income election),
- Loosening requirements for requesting information, and
- Introducing modifications to the AFSI adjustments that apply certain partnership principles in current proposed regulations (i.e., Prop. Reg. §1.56A-20).
CAMT Background
For tax years beginning after December 31, 2022, the CAMT imposes a 15% minimum tax on the AFSI of applicable corporations (generally, those with average annual AFSI exceeding $1 billion). Under Section 56A, AFSI means, with respect to any corporation for any tax year, the net income or loss of the taxpayer set forth on the taxpayer's applicable financial statement for that tax year, adjusted as further provided within that Code section.
Regarding partnerships, Section 56A(c)(2)(D) states that, except as provided by the Secretary, if the taxpayer is a partner in a partnership, the taxpayer's AFSI with respect to such partnership is adjusted to take into account only the taxpayer’s distributive share of such partnership’s AFSI. Under Section 56A(c)(2)(D), the AFSI of a partnership is the partnership’s net income or loss set forth on that partnership’s applicable financial statement, as adjusted under rules similar to the rules set forth in Section 56A.
Previous IRS CAMT Guidance Relating to Partnership Interests
In January 2023, the IRS announced, in Notice 2023-7, its intention to issue proposed regulations addressing the application of the CAMT. Notice 2023-7 included interim guidance on certain issues relating to the CAMT, including issues regarding contributions to, and distributions from, partnerships. See BDO’s Tax Alert, “IRS, Treasury Release Corporate AMT Interim Guidance.”
In September 2024, the IRS issued proposed regulations on the CAMT that included significant new provisions for partnerships. The proposed regulations set out rules for determining and identifying AFSI, including applicable rules for partnerships with CAMT entity partners. For a general discussion of the proposed rules, see BDO’s Tax Alert, “Treasury Publishes Proposed Corporate Alternative Minimum Tax Regulations.”
The 2024 proposed regulations, in Prop. Reg. §1.56A-5, set out rules under Section 56A(c)(2)(D) regarding a partner's distributive share of partnership AFSI. Treasury and the IRS explained in the preamble to the proposed rules that they were proposing adopting a “bottom-up” method, which they believed was consistent with the statute and more conducive to taking into account Section 56A adjustments. Under the proposed “bottom-up” method, a partnership would calculate its AFSI and provide this information to its partners. Each partner would then need to determine its “distributive share” of the partnership's AFSI. Under the proposed rules, the CAMT entity partner would undertake a four-step calculation to arrive at its distributive share amount.
The 2024 proposed regulations also included, in Prop. Reg. §1.56A-20, rules to provide for adjustments to carry out the principles of subchapter K regarding partnership contributions, distributions, and interest transfers. For both contributions and distributions of property, the IRS proposed a deferred sale method. Thus, for contributions, the proposed rules generally provide that, if property (other than stock in a foreign corporation) is contributed by a CAMT entity to a partnership in a non-taxable transaction, any gain or loss reflected in the contributor’s financial statement income from the property transfer is included in the contributor’s AFSI in accordance with the deferred sale approach set forth in the proposed rules.
New Interim Guidance and Planned Proposed Regulations
Pending new proposed regulations, Notice 2025-28 describes interim guidance intended to simplify the rules set out in the 2024 proposed regulations, as further described below. The IRS stated that comments received on 2024 Prop. Reg. §1.56A-5 described the rules as “unduly complex and burdensome” and requested that alternative methods be provided for computing a CAMT entity partner’s distributive share of partnership AFSI. In addition, the IRS noted, comments on 2024 Prop. Reg. §1.56A-20 requested either that changes be made to the deferred sale approach and the deferred distribution gain or loss approach or that different approaches be permitted.
The IRS expects that the forthcoming proposed regulations will provide rules consistent with the interim guidance described in the Notice, and it anticipates such rules will apply for tax years beginning on or after the date final regulations are published. For tax years beginning before the forthcoming proposed regulations are issued, taxpayers may choose to apply the guidance described in the Notice.
Top-Down Election
The interim guidance allows a CAMT entity partner to make a “top-down election” to determine its amount of AFSI from a partnership investment for each tax year (starting with the first tax year for which the election is in effect) by reference to the amount the CAMT entity partner reflects in its FSI for the tax year with respect to the partnership investment. Under this election, the four-step calculation of a CAMT entity partner’s AFSI under the 2024 proposed regulations would be replaced by a simplified calculation. This alternative calculation equals the sum of (i) 80% of the “top-down amount,” which is defined as “any amounts reflected in the CAMT entity partner’s FSI for the taxable year that are attributable to the partnership investment for which the top-down election is in effect,” (ii) amounts included in AFSI from sales or exchanges, and (iii) certain adjustments described in section 3.02 of the Notice. The numerous adjustments not enumerated in section 3.02 of the Notice are excluded from an electing partner’s AFSI calculation.
Different CAMT Entity Partners in the Same Partnership Can Take Different Approaches
If a CAMT entity partner makes a top-down election, the partnership is no longer required to report its modified FSI to that partner. But if a CAMT entity partner has not made the election, the partnership is still required to compute and report its FSI to a non-electing partner that gives the partnership notice that it requires the partnership to compute and report its modified FSI. A partnership may have both electing and non-electing partners.
Who Can Elect the Top-Down Approach?
Any CAMT entity partner can make the top-down election, provided it is not a partnership. If a CAMT entity is a partner in multiple partnerships, it can choose where it would like to make the election.
Alternative Approaches for Calculating Partnership AFSI
The IRS is also considering a “limited taxable-income election,” pursuant to which some CAMT entity partners may use taxable-income amounts to determine their AFSI from a partnership investment. The Notice provides a formula for this, which, broadly speaking, is the sum of taxable income, AFSI attributable to sales/exchanges, and AFSI inclusions attributable to foreign stock.
Calculating a CAMT Entity Partner’s Distributive Share Under the Bottom-Up Approach
New rules will provide greater flexibility in determining a CAMT entity partner’s distributive share. The 2024 proposed regulations set out a rather formulaic approach that was outside of typical subchapter K concepts. The new rules would provide for certain “reasonable methods” for determining distributive share by using existing subchapter K concepts, such as net Section 704(b) income or loss.
Requesting Information from Partnerships
The Notice gives a CAMT entity more time to request necessary information from the partnership if the “top-down election” is not made. If a partnership fails to provide the requested information, the partner may use its books and records rather than applying required estimate rules.
Contributions and Distributions
The IRS provides additional rules on how to account for partnership contributions and distributions. Under the Notice, CAMT entities may choose from two additional methods to determine AFSI adjustments for partnership contributions and distributions (other than partnership contributions and distributions involving stock of a foreign corporation): the “modified -20 method” and the “full subchapter K method.”
Under the modified -20 method, a CAMT entity partner may apply Prop. Reg. §1.56A-20 with certain modifications provided by the Notice. These modifications include (1) applying Sections 752 and 707 in determining whether Sections 721(a) or 731(b) apply to partnership contributions and distributions of property subject to liabilities and (2) changes to recovery period rules for property to which Section 168 applies as well as property for which there is no applicable recovery period.
Under the full subchapter K method, a partnership may apply the principles of Sections 721 and 731 to determine its partners’ distributive shares of partnership AFSI resulting from contributions or distributions. If a partnership adopts this method, it must also apply the principles of other relevant subchapter K provisions (e.g., Sections 704(c), 732, 734, and 737).
BDO Insights
Notice 2025-28 provides CAMT entity partners with new approaches for determining their AFSI from partnership investments. These approaches are intended to streamline the calculation process and reduce administrative complexity, particularly for taxpayers seeking alternatives to the current more burdensome distributive share rules. Taxpayers should consider the calculations underlying each approach to determine which would best serve their interests.
While taxpayers may apply the Notice’s interim guidance for tax years before new proposed regulations are issued, the Treasury and IRS anticipate further modifications to be reflected in the anticipated proposed regulations, particularly regarding partnership distributive share and contribution/distribution rules. Accordingly, practitioners should watch for new guidance and be prepared to adjust their approaches as the rules evolve.
Please visit BDO’s Partnership Tax Services and Corporate Tax Services pages for more information on how BDO can help.