SECTION 3. AFSI — Internal Revenue Bulletin 2026-11

CERTAIN TAX REPAIR DEDUCTIONS

.01 Purpose . In response to comments received on the CAMT Proposed Regulations and Notice 2025-49, this section 3 modifies the interim guidance provided in section 4 of Notice 2025-49 to allow a CAMT entity to adjust AFSI for certain tax repair deductions. The Treasury Department and the IRS anticipate that the forthcoming proposed regulations will include proposed regulations under § 56A(c)(15) and (e) consistent with the guidance provided in this section 3. In addition, the Treasury Department and the IRS anticipate that the forthcoming proposed regulations will propose a modification to proposed § 1.59-2(c) to provide that, for purposes of applying the average annual AFSI test in § 59(k) (1)(B) or proposed § 1.59-2(c), AFSI would be determined without regard to the AFSI adjustment provided in this section 3.

.02 Definitions . For purposes of this section 3:

(1) Book COGS repair depreciation . The term book COGS repair depreciation means any of the following items that are taken into account as part of cost of goods sold (or as part of the computation of gain or loss from the sale or exchange of property held for sale) in FSI with respect to an eligible repair asset—

(a) Depreciation expense; (b) Other recovery of AFS basis (including from an impairment loss) that occurs either:

(i) Prior to the taxable year in which the complete disposition of the eligible repair asset occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible repair asset occurs for AFS purposes; or

(c) Impairment loss reversal. (2) Book repair depreciation expense . The term book repair depreciation expense means any of the following items, other than book COGS repair depreciation, that are taken into account in FSI with respect to an eligible repair asset—

(a) Depreciation expense; (b) Other recovery of AFS basis (including from an impairment loss) that occurs either:

(i) Prior to the taxable year in which the complete disposition of the eligible repair asset occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible repair asset occurs for AFS purposes; or

(c) Impairment loss reversal. (3) Book repair inventoriable depreci- ation . The term book repair inventoriable depreciation means any of the following items that are included in inventoriable cost (or capitalized as part of the cost of non-inventory property held for sale) in the CAMT entity’s AFS with respect to an eligible repair asset—

(a) Depreciation expense; (b) Other recovery of AFS basis (including from an impairment loss) that occurs either:

(i) Prior to the taxable year in which the complete disposition of the eligible repair asset occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the eligible repair asset occurs for AFS purposes; or

(c) Impairment loss reversal. (4) Deductible tax repair . The term deductible tax repair means any amount paid or incurred for regular tax purposes for repairs and maintenance during a taxable year and allowed as a deduction in computing taxable income for such taxable year under § 1.162-4 with respect to an eligible repair asset, including amounts deductible under § 1.162-4 that are capitalized (other than under § 263) and subsequently recovered as a deduction in computing taxable income (even if the deduction is allowed under a provision of the Code other than § 162, for example under §§ 616 and 617).

(5) Eligible repair asset . The term eligible repair asset means any cost that

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meets the requirements in section 3.03 of this notice.

(6) Tax COGS repair deduction . The term tax COGS repair deduction means—

(a) Any amount deducted under § 1.162-4 with respect to an eligible repair asset that is capitalized to inventory under § 263A and is recovered as part of cost of goods sold in computing gross income; and

(b) Any amount deducted under § 1.162-4 with respect to an eligible repair asset that is capitalized under § 263A to the basis of property described in § 1221(a) (1) that is not inventory and is recovered as part of the computation of gain or loss from the sale or exchange of such property in computing taxable income.

(7) Tax repair section 481(a) adjust- ment . The term tax repair section 481(a) adjustment means an adjustment (or portion thereof) required under § 481(a) for a change in method of accounting (other than a change in method of accounting described in section 3.02(8) of this notice) that impacts the timing of taking into account a deductible tax repair with respect to an eligible repair asset in computing taxable income (for example, a change in method of accounting involving a change from deducting a deductible tax repair to capitalizing such deductible tax repair under § 263A or another capitalization provision, or vice versa).

(8) Tax repair capitalization method change . The term tax repair capitalization method change means a change in method of accounting for regular tax purposes involving a change from capitalizing and depreciating a deductible tax repair under § 263 to deducting the deductible tax repair under § 1.162-4 (or vice versa).

(9) Tax repair capitalization method change AFSI adjustment .

(a) In general . The term tax repair cap- italization method change AFSI adjust- ment means an adjustment to AFSI that is required under section 3.04(6) of this notice if a CAMT entity makes a tax repair capitalization method change and previously made an adjustment to AFSI under section 3 of this notice in a preceding taxable year. The tax repair capitalization method change AFSI adjustment is computed separately for each tax repair capitalization method change and equals the

difference between the following amounts computed as of the beginning of the tax year of change—

(i) The cumulative amount of adjustments to AFSI under section 3.04 of this notice with respect to the cost(s) subject to the tax repair capitalization method change that were made with respect to the preceding taxable years beginning with the first taxable year for which the CAMT entity makes an adjustment to AFSI under section 3 of this notice, and beginning before the tax year of change; and

(ii) The cumulative amount of adjustments to AFSI under section 3.04 of this notice with respect to the cost(s) subject to the tax repair capitalization method change that would have been made with respect to the preceding taxable years beginning with the first taxable year for which the CAMT entity makes an adjustment to AFSI under section 3 of this notice, and beginning before the tax year of change, if the new method of accounting for the cost(s) had been applied for regular tax purposes in those taxable years.

(b) Coordination with proposed § 1.56A-15 . The amount of the tax repair capitalization method change AFSI adjustment is adjusted, as necessary, to prevent the duplication of any adjustment to AFSI due to a tax repair capitalization method change also constituting a tax capitalization method change (as described in proposed § 1.56A-15(b)(10)) with respect to section 168 property.

.03 Eligible repair asset . (1) In general . For purposes of section 3 of this notice, an eligible repair asset means any cost that is—

(a) Attributable to repair or maintenance of section 168 property (as defined in proposed § 1.56A-15(c));

(b) Capitalized and subject to depreciation for AFS purposes;

(d) Not capitalized to section 168 property under § 263A or another capitalization provision for regular tax purposes.

(2) Placed in service in any taxable year . An eligible repair asset includes any eligible repair asset placed in service by the CAMT entity for AFS purposes in any taxable year, including taxable years ending on or before December 31, 2019.

.04 AFSI adjustment for eligible repair assets . The AFSI of a CAMT entity for a taxable year may be adjusted as follows:

(1) Reduced by the tax COGS repair deduction with respect to eligible repair assets, but only to the extent of the amount taken into account—

(a) As part of cost of goods sold in computing gross income for the taxable year; or

(b) As part of the computation of gain or loss from the sale or exchange of non-inventory property described in § 1221(a) (1) that is included in taxable income, or deducted in computing taxable income, respectively, for the taxable year;

(2) Reduced by deductible tax repairs with respect to eligible repair assets, but only to the extent of the amount taken as a deduction in computing taxable income for the taxable year;

(3) Adjusted to disregard book COGS repair depreciation and book repair depreciation expense with respect to eligible repair assets;

(4) Reduced by any tax repair section 481(a) adjustment with respect to eligible repair assets that is negative, but only to the extent of the amount of the adjustment that is taken into account in computing taxable income for the taxable year;

(5) Increased by any tax repair section 481(a) adjustment with respect to eligible repair assets that is positive, but only to the extent of the amount of the adjustment that is taken into account in computing taxable income for the taxable year; and

(6) Increased or decreased, as appropriate, by any tax repair capitalization method change AFSI adjustment in accordance with section 3.06 of this notice.

.05 Determining the book COGS repair depreciation and tax COGS repair deduc- tion adjustments .

(1) In general . Except as provided in section 3.05(2) of this notice, a CAMT entity is required to—

(a) Apply the method(s) of accounting the CAMT entity uses for AFS purposes to determine the book COGS repair depreciation adjustment under section 3.04(3) of this notice; and

(b) Apply the method(s) of accounting under § 263A that the CAMT entity uses for regular tax purposes (and, in the case of inventory property, the method(s) of accounting that the CAMT entity uses

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to identify and value inventories under §§ 471 and 472) to determine the tax COGS repair deduction adjustment under section 3.04(1) of this notice.

(2) Reasonable method . A CAMT entity is permitted to use any reasonable method to determine book repair inventoriable depreciation in ending inventory with respect to eligible repair assets for AFS purposes, or to determine deductible tax repairs included in ending inventory for regular tax purposes, or both, for purposes of determining the book COGS repair depreciation adjustment under section 3.04(3) of this notice or the tax COGS repair deduction adjustment under section 3.04(1) of this notice, provided that such reasonable method is consistent with and reflects the method(s) of accounting the CAMT entity uses for AFS purposes or regular tax purposes, respectively. A reasonable method would include a method similar to the simplifying methods provided in proposed § 1.56A-15(d)(3)(ii)(A) through (C).

(3) Reporting requirement . If a CAMT entity makes the AFSI adjustment provided in section 3.04 of this notice for a taxable year, it must attach a statement to its Federal income tax return for such taxable year. The statement—

(a) Must be titled “AFSI adjustment for tax repair deductions”,

(b) Must include the CAMT entity’s name, address, and taxpayer identification number, and

(c) If a CAMT entity uses a reasonable method under section 3.05(2) of this notice, it must: include a statement whether the CAMT entity is using such reasonable method to determine (i) book repair inventoriable depreciation in ending inventory with respect to eligible repair assets for purposes of determining the book COGS repair depreciation adjustment, or (ii) deductible tax repairs in ending inventory for purposes of determining the tax COGS repair deduction adjustment for the taxable year, or (iii) both; describe such reasonable method(s) used; and certify that such reasonable method(s) used are consistent with, and reflect, the method(s) of accounting the CAMT entity uses for AFS purposes or regular tax purposes, as applicable.

.06 Adjustment period for tax repair capitalization method change AFSI

adjustments . The adjustment period for a tax repair capitalization method change AFSI adjustment is determined in a manner consistent with the proposed rules provided in proposed § 1.56A-15(d)(4) (adjustment period for tax capitalization method change AFSI adjustments with respect to section 168 property).

.07 Consistency requirement . If a CAMT entity relies on section 3 of this notice and makes the AFSI adjustment provided in section 3 of this notice for a taxable year, it must continue to make the adjustment provided in section 3 of this notice for all subsequent taxable years or until such time as prescribed by the Treasury Department and the IRS in regulations or guidance published in the Internal Revenue Bulletin.

.08 Determining applicable corpo- ration status . For purposes of applying the average annual AFSI test in § 59(k) (1)(B) or proposed § 1.59-2(c), AFSI is determined without regard to the AFSI adjustment provided in section 3 of this notice.