Key Takeaways:
- IRS Notice 2025‑28 simplifies how partnerships and CAMT entity partners calculate AFSI and comply with reporting.
- The new top‑down election reduces complexity by aligning with financial statement income already reported.
- Partnerships must be ready to support both electing and non‑electing CAMT partners with different reporting needs.
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Since the enactment of the Corporate Alternative Minimum Tax (CAMT), partnerships and their CAMT entity partners have struggled with implementing its rules under Section 56A. In response, the IRS released Notice 2025‑28, providing interim guidance and signaling a significant shift toward flexibility.
This updated guidance:
- Introduces new elections to simplify the calculation of adjusted financial statement income (AFSI)
- Revises reporting obligations
- Addresses contributions and distributions
- Reduces compliance burdens on both partnerships and CAMT entity partners
For partnerships, these changes provide much-needed relief — but also introduce new strategic choices around elections, reporting coordination, and documentation.
CAMT and Partnerships: The Compliance Challenge
The CAMT applies a 15% minimum tax on AFSI for corporations with average annual AFSI over $1 billion. While the tax targets corporations, AFSI includes distributive shares of partnership income — creating complex compliance challenges for corporate investors.
The original proposed regulations (issued in 2024) outlined a bottom-up approach:
- Partnerships calculate AFSI
- Partners apply a four‑step method to determine their distributive share
- Adjustments under Section 56A are applied at the partner level
While technically sound, this model was widely viewed as administratively burdensome — especially when layered across multiple partnerships.
The Top-Down Election: A Simpler Path
Notice 2025-28 introduces a top‑down election, allowing a CAMT entity partner to bypass the four‑step bottom‑up method. Instead, the partner uses income already reflected in its financial statements to calculate AFSI from a partnership investment.
Under the top‑down election, AFSI equals:
- 80% of the income from the partner’s own financials
- Plus AFSI from sales or exchanges
- Plus specific enumerated adjustments
This streamlined formula reduces dependency on complex partnership reports. For many large CAMT entities, it also enhances alignment with existing financial systems and external reporting.
Notably:
- Any CAMT entity partner (except partnerships) may make the election
- The election can be made on a partnership‑by‑partnership basis
- The election applies beginning with the year it is made and continues unless revoked
Impacts on Partnership Reporting
If a CAMT partner makes the top‑down election, the partnership is no longer required to report modified financial statement income (FSI) to that partner. But if a CAMT partner does not make the election, the partnership must compute and provide modified FSI upon request.
This means partnerships may face dual obligations:
- Supporting electing partners with basic informational confirmations
- Supporting non‑electing partners with detailed modified FSI calculations
Partnerships need to track which partners have elected and implement clear procedures for managing requests.
Alternative Election: Limited Taxable-Income Method
In addition to the top‑down approach, the IRS is evaluating another simplified method — the limited taxable‑income election — which allows partners to use taxable income data instead of financial statement income in determining AFSI. This election is narrower in scope but may appeal to partners with limited data alignment between book and tax systems.
New Rules for Contributions and Distributions
Partnership contributions and distributions can distort AFSI calculations, particularly when property is transferred at a built‑in gain or loss. Notice 2025‑28 introduces two simplified methods to address these transactions:
Modified -20 Method
Applies principles from Prop. Reg. §1.56A‑20, with adjustments:
- Liability allocation rules (Sections 752, 707)
- Adjusted recovery periods
- Treatment of property with no assigned tax life
Full Subchapter K Method
Applies full Subchapter K principles (Sections 721, 731, 704(c), 734, 737) for AFSI adjustments, aligning CAMT with traditional partnership tax mechanics.
These options offer flexibility but require consistency. Partnerships adopting either method must apply it uniformly and maintain support for relevant adjustments.
What Partnerships Should Consider Now
As partnerships evaluate how to support CAMT entity partners, several questions arise:
1. Which CAMT Partners Will Elect Top‑Down?
Electing partners reduce your reporting obligations, but the partnership must be ready to support both electing and non‑electing investors.
2. How Will You Track Partner Elections?
Internal tracking systems should be updated to flag CAMT partners and election statuses. Timely notice from partners is essential.
3. Will You Offer AFSI Data to Non‑Electing Partners?
Partnerships should assess whether they have systems in place to calculate and report modified FSI if requested.
4. Which Contribution/Distribution Method Will You Adopt?
Weigh the complexity of modified -20 vs. full Subchapter K, and apply your choice consistently.
5. Will You Retroactively Apply the Guidance?
Taxpayers may apply the new rules for prior years if desired — but must do so consistently.
Navigating CAMT and Partnership Complexity
MGO supports partnerships and CAMT entity partners in analyzing election opportunities, calculating distributive share income, and developing sustainable reporting processes. We help determine whether the top‑down approach or alternative methods best fit your structure, and guide implementation to meet IRS expectations.
As CAMT guidance evolves, our team remains focused on simplifying compliance while preserving tax efficiency. Reach out to our team today to review your partnership’s CAMT reporting process and election strategies.