Definitions — 2025 Inst 4626 (PDF)

Applicable Corporation An applicable corporation is, with respect to any tax year, any corporation (other than an S corporation, a RIC, or a REIT) that satisfies an average annual adjusted financial statement income test (the AFSI Test) for 1 or more tax years which are prior to the current tax year and end after December 31, 2021. See section 59(k)(1)(A). Also, see the instructions for Part I—Applicable Corporation Determination.

Adjusted Financial Statement Income (AFSI) AFSI is, with respect to any corporation for any tax year, the corporation’s net income or loss on its applicable financial statement (AFS) (defined later) for that tax year with specific adjustments including those noted below. See sections 56A and 59(k) for more information. Also, see the instructions for Part I—Applicable Corporation Determination, and Part II—Corporate Alternative Minimum Tax (CAMT).

• Section 56A(c)(1) provides that appropriate adjustments to AFSI shall be made in any case in which an AFS covers a period other than the tax year.

If the corporation is part of a tax consolidated group for any tax year, the AFSI for that group for that tax year must take into account items on the group’s AFS that are properly allocable to the group’s members.
For any corporation that is not included on a consolidated return with the taxpayer corporation, the taxpayer corporation’s AFSI with respect to the other corporation is determined by only taking into account the dividends received from that corporation and other amounts which are includible in gross income or deductible as a loss under Chapter 1 of the Internal Revenue Code (other than amounts required to be included under sections 951 and 951A) with respect to that corporation.

Corporate Alternative Minimum Tax Entity The term “CAMT entity” means any entity identified in section 7701 and the related regulations, other than a disregarded entity. See Proposed Regulations section 1.56A-1(b)(8).

If a CAMT entity is a partner in a partnership, the CAMT entity’s AFSI with respect to that partnership is adjusted to consider only the CAMT entity’s distributive share of that partnership’s AFSI. A partnership’s AFSI is the net income or loss on that partnership’s AFS adjusted under rules similar to those in section 56A.
A disregarded entity or branch and the CAMT entity that owns the disregarded entity or branch (including through other disregarded entities or branches) are treated as a single CAMT entity for purposes of determining AFSI. See Proposed Regulations section 1.56A-9.
If the CAMT entity is a U.S. shareholder of one or more controlled foreign corporations (CFCs), its AFSI with respect to the CFCs is adjusted to take into account its pro-rata share (determined under rules similar to the rules

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in section 951(a)(2)) of items taken into account in calculating the net income or loss set forth on each CFC’s AFS, as adjusted under rules similar to those that apply in determining AFSI. This amount is referred to as a CFC’s adjusted net income or loss.

Proposed Regulations section 1.56A-6(c) provides that a CFC’s adjusted net income or loss is not limited to effectively connected income.

If the AFSI adjustment is negative, no adjustment is made for that tax year. However, any adjustment in a succeeding tax year is reduced by that negative amount.

A foreign corporation’s AFSI is generally determined under the principles of section 882, which provides that a foreign corporation is subject to CAMT only on income that is effectively connected with the conduct of a trade or business in the United States.

Note: Proposed Regulations section 1.56A-7 provides that a foreign corporation’s AFSI is adjusted to take into account only amounts and items that would be included in income effectively connected with the conduct of a trade or business within the United States or allowable as a deduction by such corporation for purposes of section 882(c) had such amount or item accrued for regular tax purposes in the tax year.

AFSI is adjusted to disregard federal income taxes, and income, war profits, and excess profits taxes (within the meaning of section 901), with respect to a foreign country or U.S. territory which are taken into account on the corporation’s AFS.
A section 1381 cooperative’s AFSI excludes section 1382(b) cooperative patronage dividends and per-unit retain allocations not otherwise used in calculating AFSI.
An Alaska native corporation’s AFSI is adjusted to allow:

Cost recovery and depletion attributable to property with a basis determined by the Alaska Native Claims Settlement Act (the Act) (43 U.S.C. section 1602(c)); and
Deductions for amounts payable under section 7(i) or 7(j) of the Act (43 U.S.C. section 1602(i) and (j)) only when the deductions are allowed for federal income tax purposes. “Federal income tax purposes” as used in these instructions excludes CAMT.
Decreases for any covered benefit plan deduction allowed to the CAMT entity for federal income tax purposes.

A covered benefit plan under section 56A(c)(11)(B) is a defined benefit plan (other than a multiemployer plan described in section 414(f)) that is qualified under section 401(a) with a trust exempt under section 501(a), any qualified foreign plan as defined in section 404A(e), or any other defined benefit plan which provides post-employment benefits other than pension benefits.

The AFSI of a tax-exempt entity subject to the section 511 unrelated business income tax is adjusted to only take into account AFSI (if any) of an unrelated trade or business (as defined in section 513) of the organization, subject to the modifications to unrelated business taxable income described in section 512(b). AFSI determined under the preceding sentence includes any unrelated debt-financed income determined under section 514. See section 512(b)(4).
AFSI is reduced by section 167 depreciation deductions on section 168 property that are allowed in calculating taxable income for the tax year and adjusted to remove any book expense, depreciation expense, or other cost recovery expense included in the CAMT entity’s AFS for the section 168 property.
AFSI is reduced by any qualified wireless spectrum amortization deductions allowed under section 197 in calculating taxable income for the tax year and adjusted to remove any book expense, amortization expense, or other cost recovery expense included in the CAMT entity’s AFS for the qualified wireless spectrum. For AFSI purposes, qualified wireless spectrum is wireless spectrum that is used in the trade or business of a wireless telecommunications carrier and was acquired after December 31, 2007, and before August 16, 2022.
Proposed Regulations section 1.56A-27(b) provides that AFSI of a foreign government is adjusted so as not to take into account any amount of FSI that, if it were properly treated as gross income for regular tax purposes, would be excluded from gross income and exempt from taxation under subtitle A pursuant to section 892.
Section 56A(c)(15) authorizes guidance providing for additional adjustments to AFSI, including those necessary to prevent the duplication or omission of an item. Proposed Regulations section 1.56A-17 provides for additional adjustments to AFSI available to corporations who rely on the interim guidance. See Interim Guidance, earlier.

Applicable Financial Statement (AFS) Proposed Regulations section 1.56A-2 defines a corporation’s “AFS” as the corporation’s highest priority financial statement of the following financial statements which are listed in descending order of priority: either a certified generally accepted accounting principles (GAAP) statement, a certified international financial reporting standards (IFRS) statement, a certified financial statement prepared in accordance with other generally accepted accounting standards or an “other statement” filed with a federal, state, or foreign government agency thereof or a self-regulatory organization, as provided in Proposed Regulations section 1.56A-2(c)(1) through (4). For this purpose, Proposed Regulations section 1.56A-2(d)

AFSI excludes amounts treated as payments against a federal income tax pursuant to an election under section 48D(d) or section 6417 or, in the case of a CAMT entity that relies on Proposed Regulations section 1.56A-12(b) (2), certain amounts received from the transfer of an eligible credit, as defined in section 6418(f)(1)(A).
AFSI is adjusted to not include any item of income in connection with a mortgage servicing contract prior to the amount being included in income for federal income tax purposes.
AFSI adjustments for covered benefit plans are:

Adjustments to disregard any income, cost, or expense that would otherwise be included on the AFS in connection with any covered benefit plan;
Increases for any covered benefit plan income that is included in the CAMT entity’s gross income for federal income tax purposes; and

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defines a financial statement as “certified” if an independent financial statement auditor has provided an unqualified or unmodified clean opinion; a qualified or modified except for opinion or an adverse opinion (but only if the auditor for such adverse opinion discloses the amount of the disagreement with the statement). For a corporation that is relying on the proposed regulations, and does not have a certified financial statement or an “other statement,” the AFS is an “unaudited external statement,” or a federal income tax return or information return filed with the IRS, as provided in Proposed Regulations section 1.56A-2(c)(5) and (6). These statements are described in more detail below in their descending order of priority.

A GAAP statement is an audited financial statement, other than a tax return, that is certified as being prepared in accordance with U.S. generally accepted accounting principles and is:

A Form 10-K (or successor form), or annual statement to shareholders, filed with the U.S. Securities and Exchange Commission (SEC);
A financial statement that is used for credit purposes; reporting to shareholders, partners, or other proprietors, or to beneficiaries; or any other substantial nontax purpose; or
A financial statement filed with the federal government or any federal agency, other than the SEC or the IRS.

An IFRS statement is an audited financial statement, other than a tax return, that is certified as being prepared in accordance with international financial reporting standards and is:

Filed with the SEC or an agency of a foreign government that is equivalent to the SEC;
A financial statement that is used for credit purposes; reporting to shareholders, partners, or other proprietors, or to beneficiaries; or any other substantial nontax purpose; or
A financial statement filed with the federal government, any federal agency, a foreign government, or agency of a foreign government, other than the SEC, the IRS, or an agency that is equivalent to the SEC or the IRS.

An audited financial statement that is certified as being prepared in accordance with accepted accounting standards other than GAAP and IFRS that are issued by an accounting standards board charged with developing accounting standards for one or more jurisdictions and is:

government or state agency, a foreign government or foreign agency, or a self-regulatory organization including, for example, a financial statement filed with a state agency that regulates insurance companies or the Financial Industry Regulatory Authority, or a comparable foreign self-regulatory organization.

If none of the above financial statements exist, the AFS can be an unaudited external statement. An unaudited external statement is a financial statement, other than a tax return or a financial statement described above, that is unaudited (or audited but not certified within the meaning of Proposed Regulations section 1.56A-2(d)), prepared for an external non-tax purpose, using (i) GAAP; (ii) IFRS; or (iii) any other accepted accounting standards that are issued by an accounting standards board charged with developing accounting standards for one or more jurisdictions. If an unaudited external statement also does not exist, the AFS for a CAMT entity that is not a controlled foreign corporation (CFC) can be a federal income tax return or information return filed with the IRS, or, for a CAMT entity that is a CFC, Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations (or any successor form).

Consolidated AFS and separate AFS. If a CAMT entity’s financial results are reported on an AFS other than a tax return with one or more other CAMT entities (consolidated AFS), the consolidated AFS with the highest priority under Proposed Regulations sections 1.56A-2(c)(1) through (5) is generally the AFS of the CAMT entity. However, if a CAMT entity’s financial results are reported on a consolidated AFS and separately reported on an AFS that is of equal or higher priority to the consolidated AFS (separate AFS), the CAMT entity’s AFS is the separate AFS except as provided below. See Proposed Regulations section 1.56A-2(g)(1).

A member of a tax consolidated group must prioritize a consolidated AFS that includes other members of its tax consolidated group over a separate AFS pursuant to special rules. See Proposed Regulations sections 1.56A-1(c)(2)(i) and 1.56A-2(g)(2)(i) through (iv) for additional details regarding this exception.

If a CAMT entity is a member of a foreign-parented multinational group (FPMG) whose common parent prepares a consolidated AFS (FPMG consolidated AFS) that includes the CAMT entity, the corporation must use the FPMG consolidated AFS regardless of whether the corporation’s financial results also are reported on a separate AFS. See Proposed Regulations section 1.56A-2(g)(2)(v).

Filed with the SEC or an agency of a foreign government that is equivalent to the SEC;
A financial statement that is used for credit purposes; reporting to shareholders, partners, or other proprietors, or to beneficiaries; or any other substantial nontax purpose; or
A financial statement filed with the federal government, any federal agency, a foreign government, or agency of a foreign government, other than the SEC, the IRS, or an agency that is equivalent to the SEC or the IRS.

An “other statement” is a financial statement, other than a tax return or a financial statement described above, filed with the federal government or any federal agency, a state

Foreign-parented multinational group (FPMG). To determine the FPMG and its members, see section 59(k). Also, see Proposed Regulations section 1.59-3.

FPMG means, for any tax year, two or more entities, if:

At least one entity is a domestic corporation and another is a foreign corporation,
Those entities are included in the same applicable financial statement for that year, and
Either the common parent of those entities is a foreign corporation or the entities are treated as having a common parent that is a foreign corporation.

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For this purpose, if a foreign corporation is engaged in a trade or business within the United States, that trade or business is treated as a separate domestic corporation that is wholly owned by the foreign corporation.