The 2025 tax act lets companies deduct domestic software and AI build costs at once. ASU 2025-06 changes when the same costs are capitalized on the books. For a company in CAMT range, the gap between the two is now a cash-tax line, and it belongs to the controller as much as to tax.
Three clocks on one cost
A dollar spent building internal software or an AI capability now runs on three clocks. For regular tax, domestic software development is research and experimental spending, and section 174A lets it be deducted in the year it is paid or incurred, for tax years beginning after December 31, 2024. Foreign development stays on 15-year amortization.
On the books, ASC 350-40 as amended by ASU 2025-06 capitalizes internal-use software once management has authorized and committed funding and completion is probable, then amortizes it over its useful life. The standard is effective for annual periods beginning after December 15, 2027, with early adoption permitted.
For the corporate alternative minimum tax, the starting point is adjusted financial statement income, which follows the books. So the same build cost is deducted at once for regular tax, spread over several years on the books, and spread over the same years for CAMT.
Rules: OBBBA — §174A, ASU 2025-06, IRC §55 (CAMT); Notices 2025-46, 2025-49, 2026-7
Where CAMT bites, and where it does not
CAMT applies to corporations whose average adjusted financial statement income over three years exceeds $1 billion, at 15% of that income, and is owed only to the extent it exceeds regular tax. Anything that lowers regular tax without lowering book income moves a company toward paying CAMT.
Bonus depreciation on qualified property is largely neutral here: the CAMT rules replace book depreciation on tax-depreciable property with tax depreciation, so 100% expensing of servers, data-center equipment and other qualifying hardware reduces both measures. Section 174A expensing has no such adjustment. A software or AI build deducted at once for regular tax still reaches CAMT income only as the books amortize it, which widens the gap between the two taxes in the build years.
That makes the mix of an AI program matter. Purchased compute and hardware ride bonus depreciation in both measures. Internally developed software and model work ride 174A for regular tax only.
Rules: OBBBA (P.L. 119-21) — §168(k), OBBBA — §174A, IRC §55 (CAMT); Notices 2025-46, 2025-49, 2026-7
Why ASU 2025-06 is now a tax decision
Removing the project-stage model means agile and iterative builds, which often never had a clean application-development stage, can be capitalized once the funding and probability tests are met. More cost capitalized, or capitalized earlier, lowers book expense now and raises it later as amortization.
For a company paying regular tax only, that is a presentation question. For a company near its CAMT crossover, it moves CAMT income, and the adoption date and transition method shift which years carry the higher amortization. The policy choice and the tax forecast should be made together, before the 2028 build plan is locked.
Rules: ASU 2025-06, IRC §55 (CAMT); Notices 2025-46, 2025-49, 2026-7
What lands in the tax provision
The tax act was enacted on July 4, 2025, so its effects were recognized in the period that includes that date. Companies that had built deferred tax assets for capitalized research costs under the pre-2025 rules saw those assets reverse as the catch-up deductions became available, and new book-capitalized software that is expensed for tax now creates a deferred tax liability.
CAMT itself is a period cost. Under the FASB staff's guidance an entity may elect whether to consider CAMT when it assesses whether deferred tax assets will be realized, and should apply that policy consistently. ASU 2023-09's expanded rate reconciliation and taxes-paid disclosures will show these movements to investors, so the narrative should be agreed before the numbers are published.
Rules: OBBBA — ASC 740 enactment accounting, ASU 2023-09
Illustrative arithmetic, year one
Round inputs, not a forecast for any company: a $100.0M domestic software and AI build, 80% capitalized on the books and amortized straight line over 3 years, the rest expensed.
- Regular-tax deduction (174A)
- $100.0M
- Book charge, which CAMT income follows
- $46.7M
- Deduction regular tax gets and CAMT does not
- $53.3M
- That gap at the 15% CAMT rate
- $8.0M
The last line is the most CAMT this gap alone can add in year one. Whether any CAMT is owed depends on the whole company: average adjusted financial statement income above $1 billion, and CAMT above regular tax. In later years the books keep amortizing while the tax deduction is spent, so the gap reverses.
What to do this quarter
- Build one cost map for the software and AI portfolio that labels every cost line three ways: book treatment under ASC 350-40 as amended, regular-tax treatment (domestic 174A expensing, foreign 15-year amortization, or bonus-eligible hardware), and CAMT treatment.
- Run the CAMT crossover alongside the regular-tax forecast every quarter, with the build schedule as an input, not an afterthought.
- Choose the 174A catch-up election (one year or two) against the CAMT forecast, not against regular tax alone.
- Decide the ASU 2025-06 adoption date and transition method with the tax director in the room, and test the effect on CAMT income for each year it touches.
- Agree the deferred tax mapping for capitalized software and the CAMT policy election with the auditors, and draft the rate-reconciliation narrative early.
This is Koko's reading of published rules, reviewed on the date shown. It is not accounting or tax advice. CAMT guidance is still interim (see the CAMT row above), and every position here should be confirmed with your tax advisers and auditors.