Section 59(k)(1): Applicable Corporation Status, AFSI Test, and Triggers

A corporation has applicable corporation status under Section 59(k)(1) of the Internal Revenue Code when its average annual adjusted financial statement income (AFSI) over a three-year period exceeds $1 billion for at least one tax year ending after December 31, 2021. That designation is what pulls a corporation into the Corporate Alternative Minimum Tax (CAMT) enacted by the Inflation Reduction Act of 2022. The statute layers three refinements onto the basic income test: outright exclusions for certain entity types, a two-part test for U.S. members of foreign-parented multinational groups, and aggregation rules that combine related entities. A narrow exception allows a corporation to shed the status, but only if Treasury agrees.

The Three-Year, $1 Billion AFSI Test

Section 59(k)(1)(A) makes a corporation “applicable” for a given tax year if it met the AFSI test for one or more prior tax years ending after December 31, 2021.¹ The test itself: average annual AFSI for the three-taxable-year period ending with the tested year must exceed $1 billion. If the corporation hasn’t existed for three full years, the average is taken over its actual period of existence.

Two words in the statute do real work. The starting figure is AFSI, not taxable income, so the calculation begins with net income from the corporation’s audited financial statements or SEC filings rather than the numbers on its tax return. And the threshold is “exceeds” $1 billion, not equals it. A corporation averaging exactly $1 billion falls just outside the definition.

Once a corporation clears the threshold in any tested year, the designation sticks. A company that averaged $1.2 billion for 2022 through 2024 and then dropped to $400 million in 2025 is still an applicable corporation in 2026, because it already met the test for a prior year.¹ Getting out requires the exception discussed below.

Entities That Cannot Be Applicable Corporations

Three entity types are carved out of the definition entirely, regardless of income. S corporations, regulated investment companies (RICs), and real estate investment trusts (REITs) cannot be applicable corporations under § 59(k)(1)(A).¹ Each of these entities already operates under a pass-through or distribution-based regime, and a book-income minimum tax would conflict with those structures.

The exclusion is absolute at the entity level. A REIT with $5 billion in average annual AFSI still falls outside the CAMT. But the shield doesn’t pass upward: a C corporation parent that owns a REIT subsidiary is tested on its own AFSI, evaluated independently of the subsidiary’s carve-out.

Foreign-Parented Multinational Groups: A Two-Part Test

A U.S. corporation belonging to a foreign-parented multinational group is measured differently. Section 59(k)(1)(B)(ii) applies a two-pronged test, and both prongs must be met. A foreign-parented multinational group generally exists when at least one domestic corporation and one foreign corporation appear on the same financial statement and the common parent is a foreign corporation.²

Global prong. The entire group’s average annual AFSI for the three-year period must exceed $1 billion, counting income from every entity on the group’s consolidated financial statement across all countries.
Domestic prong. The U.S. member’s own average annual AFSI for the same three-year period must be $100 million or more, calculated without the rest of the group’s income.¹

Fail either prong and the U.S. member stays outside the CAMT. A domestic subsidiary with $80 million in average AFSI is not an applicable corporation even if its foreign parent group earns $20 billion globally. A domestic subsidiary with $200 million in average AFSI is not caught if the global group averages only $900 million. The structure targets domestic operations that are both substantial on their own and part of a genuinely massive international enterprise.

When a foreign corporation conducts business directly in the United States rather than through a subsidiary, its U.S. trade or business is treated as a separate domestic corporation wholly owned by the foreign corporation for purposes of this test.²

Aggregation of Related Entities

Section 59(k)(1)(D) blocks the obvious workaround: splitting a large business into smaller legal entities to keep each below $1 billion. All AFSI of persons treated as a single employer with the tested corporation under § 52(a) or § 52(b) is treated as AFSI of that corporation.¹

Section 52(a) borrows the controlled-group definition from § 1563(a) but substitutes “more than 50 percent” for the usual “at least 80 percent” ownership threshold.³ This is where many tax teams get tripped up. The 80% threshold familiar from consolidated return rules doesn’t apply. For CAMT aggregation, a parent that owns more than 50% of a subsidiary’s voting stock or value must combine that subsidiary’s income into its own AFSI for the applicable-corporation test. The lower threshold sweeps in significantly more corporate relationships than the standard controlled-group rules.

Section 52(b) extends similar aggregation to trades or businesses under common control that are not organized as corporations, including partnerships and sole proprietorships connected to the group. The combined effect: a conglomerate cannot scatter $200 million across six subsidiaries and claim none of them individually hits $1 billion. Every dollar earned inside the group is pooled.

Losing Applicable Corporation Status

Section 59(k)(1)(C) provides the only path out. Two conditions must be met at the same time:

A qualifying event. The corporation either undergoes a change in ownership or has a consecutive string of tax years (a number the Secretary of the Treasury sets based on the taxpayer’s facts and circumstances) in which it no longer meets the AFSI test.
A Treasury determination. The Secretary must affirmatively decide that it is no longer appropriate to treat the corporation as applicable.¹

Neither condition alone is enough. A change in ownership does not by itself terminate the status; it only opens the door for the Secretary to grant relief. And the relief is revocable. If the corporation meets the AFSI test again for any tax year beginning after the first year the Secretary’s determination applies, it snaps back into applicable-corporation status automatically.

In practice, the exception matters most after genuine corporate breakups or acquisitions where the surviving entity bears little resemblance to the one that originally crossed the $1 billion line. For most large corporations, the designation is effectively permanent.

Simplified Safe Harbor Thresholds

The AFSI calculation is involved, and the IRS has issued simplified methods that let a corporation determine it is not an applicable corporation without running the full computation. If AFSI falls below the safe-harbor amount, the corporation can treat itself as not applicable.

IRS Notice 2025-27 established an interim simplified method with these thresholds:⁴

General test. The $1 billion threshold is reduced to $800 million.
Foreign-parented group domestic prong. The $100 million threshold is reduced to $80 million.

Proposed regulations would lower these safe-harbor amounts further, to $500 million and $50 million respectively.⁴ Those proposed thresholds are not yet final. The interim thresholds apply for tax years ending on or before the date final regulations are published. As of early 2026, no final CAMT regulations have been issued; Treasury has indicated it intends to publish proposed regulations incorporating interim guidance from notices before finalizing any rules.⁵

The logic is straightforward: a corporation well below the $1 billion line gains nothing from running the full AFSI calculation, which requires extensive book-to-tax adjustments. The safe harbor spares those companies the compliance work.

What the Status Actually Triggers

Applicable corporation status is a gateway, not the tax itself. The CAMT is imposed under § 55 as the excess of a corporation’s tentative minimum tax over its regular tax liability plus any base erosion and anti-abuse tax under § 59A.⁶ The tentative minimum tax for an applicable corporation is 15% of AFSI, reduced by the corporate AMT foreign tax credit. For any corporation that is not applicable, the tentative minimum tax is zero, meaning the CAMT has no effect on it at all. That is why the § 59(k)(1) definition is the pivot point: it decides whether a corporation is subject to the 15% floor in the first place, and everything else in the CAMT framework flows from that answer.

1
Office of the Law Revision Counsel. 26 USC 59 – Other Definitions and Special Rules
2
Office of the Law Revision Counsel. 26 US Code 59 – Other Definitions and Special Rules
3
Office of the Law Revision Counsel. 26 USC 52 – Special Rules
4
Internal Revenue Service. Notice 2025-27 – Waiver of Certain Additions to Tax Under Section 6655
5
Internal Revenue Service. Notice 2026-07 – Additional Interim Guidance Regarding the Application of the CAMT
6
Office of the Law Revision Counsel. 26 USC 55 – Alternative Minimum Tax Imposed