SECTION 5. AFSI ADJUSTMENT

FOR DOMESTIC RESEARCH AMORTIZATION

.01 Purpose . In response to comments received, the Treasury Department and the IRS anticipate that forthcoming proposed regulations will include proposed regulations issued under § 56A(c)(15) and (e) consistent with the guidance in this section 5, which provides an adjustment to AFSI for certain domestic research amortization for taxable years beginning after December 31, 2024. In addition, the Treasury Department and the IRS anticipate that the forthcoming proposed regulations will propose modifications to proposed § 1.59-2 to provide that, 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 5.03 of this notice.

.02 Definitions . For purposes of this section 5:

(1) Book research or software devel- opment amortization . The term book research or software development amor- tization means amortization taken into account in determining FSI for a taxable year beginning after December 31, 2024, with respect to:

(a) Amounts incurred for AFS purposes in a taxable year beginning after December 31, 2021, and before January 1, 2025;

(b) That are attributable to domestic research or experimental expenditures (as defined in section 5.02(2) of this notice); and

(c) That are taken into account as TCJA domestic § 174 amortization for regular tax purposes.

(2) Domestic research or experimen- tal expenditures . The term domestic research or experimental expenditures has the meaning provided in § 174A(b). In addition, the term domestic research or experimental expenditures also includes any amount paid or incurred in connection with the development of any software that is treated as a research or experimental expenditure under § 174A(d)(3) if such amount is not an expenditure that is attributable to foreign research (within the meaning of § 41(d)(4)(F)).

(3) TCJA domestic § 174 amortization . The term TCJA domestic § 174 amorti-

zation means amortization taken under TCJA § 174(a)(2)(B) in a taxable year beginning after December 31, 2024, with respect to domestic research or experimental expenditures that were paid or incurred for regular tax purposes and capitalized under TCJA § 174 in a taxable year beginning after December 31, 2021, and before January 1, 2025. TCJA domestic § 174 amortization also includes amortization taken under § 70302(f)(2)(A) of the OBBBA with respect to domestic research or experimental expenditures that were paid or incurred for regular tax purposes and capitalized under TCJA § 174 in a taxable year beginning after December 31, 2021, and before January 1, 2025. (4) TCJA § 174 . The term TCJA § 174 means § 174, as in effect after amendment by § 13206(a) of the TCJA, and prior to amendment by § 70302(b)(1) of the OBBBA.

(5) Tax research capitalization method change . The term tax research capital- ization method change means a change in method of accounting for regular tax purposes involving a change from capitalizing and amortizing a cost as a domestic research or experimental expenditure under TCJA § 174 to capitalizing or deducting the cost under another section of the Code (or vice versa), or a change in the treatment of costs that were capitalized and amortized as domestic research or experimental expenditures under TCJA § 174 (such as a change from amortizing such costs over a recovery period inconsistent with TCJA § 174(a)(2)(B) to amortizing such costs over a recovery period consistent with TCJA § 174(a)(2)(B)).

(6) Tax research capitalization method change AFSI adjustment . The term tax research capitalization method change AFSI adjustment means an adjustment to AFSI that is required under section 5.03(3) of this notice if a CAMT entity makes a tax research capitalization method change for a taxable year beginning after December 31, 2025, and previously made an adjustment to AFSI under section 5 of this notice in a preceding taxable year. The tax research capitalization method change AFSI adjustment is computed separately for each tax research capitalization method change and equals the difference between the following amounts computed as of the beginning of the tax year of change—

(a) The cumulative amount of adjustments to AFSI under section 5.03 of this notice with respect to the cost(s) subject to the tax research 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 5 of this notice, and beginning before the tax year of change; and

(b) The cumulative amount of adjustments to AFSI under section 5.03 of this notice with respect to the cost(s) subject to the tax research 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 5 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.

.03 AFSI adjustment for domestic research amortization . For taxable years beginning after December 31, 2024, the AFSI of a CAMT entity for a taxable year may be adjusted as follows:

(1) Reduced by TCJA domestic § 174 amortization, but only to the extent of the amount taken into account in computing taxable income for the taxable year;

(2) Adjusted to disregard book research or software development amortization; and

(3) Increased or decreased, as appropriate, by any tax research capitalization method change AFSI adjustment in accordance with section 5.04 of this notice.

.04 Adjustment period for tax research capitalization method change AFSI adjustment . The adjustment period for a tax research capitalization method change AFSI adjustment is determined 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).

.05 Consistency requirement . If a CAMT entity relies on section 5 of this notice and makes the AFSI adjustment provided in section 5 of this notice for a taxable year, it must continue to make the adjustment provided in section 5 of this notice for all relevant subsequent taxable years or until such time as prescribed by

Bulletin No. 2026–11 647 March 9, 2026

the Treasury Department and the IRS in regulations or guidance published in the Internal Revenue Bulletin.

.06 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 5.03 of this notice.