SECTION 6. AFSI ADJUSTMENT FOR

QUALIFIED PRODUCTION COSTS UNDER SECTION 181

.01 Purpose . In response to comments received on the CAMT Proposed Regulations, 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 6 to allow a CAMT entity owner to adjust AFSI for qualified production costs under § 181. 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 is determined without regard to the AFSI adjustment provided in this section 6.

.02 Definitions . For purposes of this section 6:

(1) CAMT entity owner . The term CAMT entity owner means the CAMT entity that is the owner of a qualified production, as defined in section 6.02(4) of this notice, determined consistent with the rules provided in § 1.181-1(a)(2).

(2) Deductible qualified production costs . The term deductible qualified pro- duction costs means the qualified production costs, as defined in section 6.02(8) of this notice, that are allowed as a deduction in computing taxable income.

(3) Production costs . In the case of a qualified film or television production, as defined in § 1.181-3(a), the term produc- tion costs has the same meaning as provided in § 1.181-1(a)(3). In the case of a qualified live theatrical production, as defined in § 181(e), and a qualified sound recording, as defined in § 181(f), the term production costs means the costs attribut

able to a qualified live theatrical production and qualified sound recordings determined consistent with the rules provided in § 1.181-1(a)(3).

(4) Qualified production . The term qualified production means a qualified film or television production (as defined in § 1.181-3(a)), a qualified live theatrical production (as defined in § 181(e)), or a qualified sound recording production (as defined in § 181(f)).

(5) Qualified production book COGS depreciation . The term qualified produc- tion book COGS 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 qualified production costs—

(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 asset corresponding to the qualified production costs occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the asset corresponding to the qualified production costs occurs for AFS purposes; or

(c) Impairment loss reversal. (6) Qualified production book expense . The term qualified production book expense means any of the following items, other than qualified production book COGS depreciation, that are taken into account in FSI with respect to qualified production costs—

(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 asset corresponding to the qualified production costs occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the asset corresponding to the qualified production costs occurs for AFS purposes; or

(c) Impairment loss reversal. (7) Qualified production book inven- toriable expense . The term qualified production book inventoriable expense 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 AFS of a CAMT entity owner with respect to qualified production costs—

(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 asset corresponding to the qualified production costs occurs for AFS purposes, or

(ii) In the taxable year in which the complete disposition of the asset corresponding to the qualified production costs occurs for AFS purposes; or

(c) Impairment loss reversal. (8) Qualified production costs . The term qualified production costs means the production costs of any qualified production allowed as a deduction under § 181(a).

(9) Qualified production tax COGS . The term qualified production tax COGS means:

(a) The qualified production costs capitalized to inventory under § 263A and recovered as part of cost of goods sold in computing gross income; and

(b) Qualified production costs 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.

(10) Tax qualified production costs section 481(a) adjustment . The term tax qualified production costs 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 6.02(11) of this notice) that impacts the timing of taking into account qualified production costs in computing taxable income (for example, a change in method of accounting involving a change from deducting qualified production costs to capitalizing such costs under § 263A or another capitalization provision, or vice versa).

(11) Tax qualified production costs cap- italization method change . The term tax qualified production costs capitalization method change means a change in method

March 9, 2026 648 Bulletin No. 2026–11

of accounting for regular tax purposes involving a change from capitalizing and depreciating qualified production costs to deducting such costs (or vice versa). This term also includes a change in the treatment of qualified production costs due to a recapture event described in § 1.181-4(a) (1) and (2).

(12) Tax qualified production costs capitalization method change AFSI adjustment .

(a) In general . The term tax qualified production costs capitalization method change AFSI adjustment means an adjustment to AFSI that is required under section 6.03(1)(f) of this notice if a CAMT entity owner makes a tax qualified production costs capitalization method change and previously made an adjustment to AFSI under section 6 of this notice in a preceding taxable year. The tax qualified production costs capitalization method change AFSI adjustment is computed separately for each tax qualified production costs 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 6.03 of this notice with respect to the cost(s) subject to the tax qualified production costs capitalization method change that were made with respect to the preceding taxable years beginning with the first taxable year for which the CAMT entity owner makes an adjustment to AFSI under section 6 of this notice, and beginning before the tax year of change; and

(ii) The cumulative amount of adjustments to AFSI under section 6.03 of this notice with respect to the cost(s) subject to the tax qualified production costs 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 owner makes an adjustment to AFSI under section 6 of this notice, and beginning before the tax year of change, if the new method of accounting, or treatment, 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 qualified production costs capitaliza

tion method change AFSI adjustment is adjusted, as necessary, to prevent the duplication of any adjustment to AFSI due to the tax qualified production costs capitalization method change also constituting a tax capitalization method change (as described in proposed § 1.56A-15(b)(10)).

.03 AFSI adjustment for qualified pro- duction costs .

(1) In general . The AFSI of a CAMT entity owner for a taxable year may be adjusted as follows—

(a) Reduced by qualified production tax COGS, but only to the extent of the amount recovered—

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

(ii) 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;

(b) Reduced by the amount of deductible qualified production costs, but only to the extent allowed as a deduction in computing taxable income for the taxable year; and

(c) Adjusted to disregard qualified production book COGS depreciation and qualified production book expense with respect to any qualified production costs paid or incurred in any taxable year, including taxable years ending on or before December 31, 2019.

(d) Reduced by any tax qualified production costs section 481(a) adjustment 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;

(e) Increased by any tax qualified production costs section 481(a) adjustment 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

(f) Increased or decreased, as appropriate, by any tax qualified production costs capitalization method change AFSI adjustment in accordance with section 6.05 of this notice. .04 Determining qualified production tax COGS adjustment and qualified pro- duction book COGS depreciation adjust- ment .

(1) In general . Except as provided in section 6.04(2) of this notice, a CAMT entity owner is required to—

(a) Apply the method(s) of accounting the CAMT entity owner uses for AFS purposes to determine the qualified production book COGS depreciation adjustment under section 6.03(1)(c) of this notice; and

(b) Apply the method(s) of accounting under § 263A that the CAMT entity owner uses for regular tax purposes (and, in the case of inventory property, the method(s) of accounting that the CAMT entity owner uses to identify and value inventories under §§ 471 and 472) to determine the qualified production tax COGS adjustment under section 6.03(1)(a) of this notice.

(2) Reasonable method . A CAMT entity owner is permitted to use any reasonable method to determine qualified production book inventoriable expense in ending inventory for AFS purposes for purposes of determining the qualified production book COGS depreciation adjustment under section 6.03(1)(c) of this notice, or to determine the qualified production costs included in ending inventory for regular tax purposes for purposes of determining the qualified production tax COGS adjustment under section 6.03(1) (a) of this notice, or both, provided that such reasonable method is consistent with and reflects the method(s) of accounting the CAMT entity owner uses for AFS purposes or regular tax purposes, as applicable. 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 owner makes the AFSI adjustment provided in section 6.03 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 qualified production costs under § 181”,

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

(c) If a CAMT entity owner uses a reasonable method under section 6.04(2) of this notice, it must: include a statement whether the CAMT entity owner is using such reasonable method to determine (i) qualified production book inventoriable

Bulletin No. 2026–11 649 March 9, 2026

expense in ending inventory for AFS purposes for purposes of determining the qualified production book COGS depreciation adjustment under section 6.03(1)(c) of Notice 2026-7 for the taxable year, or (ii) qualified production costs in ending inventory for regular tax purposes for purposes of determining the qualified production tax COGS adjustment under section 6.03(1)(a) of Notice 2026-7 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 owner uses for AFS purposes or regular tax purposes, as applicable.

.05 Adjustment period for tax qualified production costs capitalization method change AFSI adjustment . The adjustment period for a tax qualified production costs 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).

.06 Consistency requirement . If a CAMT entity owner relies on section 6 of this notice and makes the adjustment to AFSI provided in section 6.03 of this notice for a taxable year, it must continue to make the adjustment provided in section 6.03 of this notice for all subsequent taxable years until all AFS assets corresponding to any qualified production costs are disposed of for AFS purposes or such time as prescribed by the Treasury Department and the IRS in regulations or guidance published in the Internal Revenue Bulletin.

.07 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 adjustments provided in section 6.03 of this notice.