New IRS guidance offers a limited opportunity to revisit elections made in prior years and seek to maximize tax benefits when it comes to bonus depreciation and the section 163(j) business interest limitation. If a taxpayer elected out of bonus depreciation or chose slower depreciation in exchange for freedom from the section 163(j) limitation, it may be rethinking that election as the One Big Beautiful Bill Act (OBBBA) enacted permanent 100% accelerated depreciation and restored the addback of depreciation, depletion and amortization into the section 163(j) adjusted taxable income (ATI) computation. Rev. Proc. 2026-17 offers a much-appreciated opportunity for taxpayers to make informed decisions regarding the continued use of these elections.
Potential election changes under the guidance
The most prominent relief allows certain taxpayers to withdraw prior elections made under section 163(j). Specifically, taxpayers who chose to be treated as an electing real property trade or business, an electing farming business or an excepted regulated utility trade or business for tax years beginning in 2022, 2023 or 2024 can now revoke those elections. These elections, which were previously irrevocable, allowed businesses to escape the section 163(j) business interest expense limitation but required them to use a less favorable depreciation system. The withdrawal, which must be made by filing an amended return or similar request by the earlier of Oct. 15, 2026, or the expiration of the statute of limitations for the election year, effectively treats the election as if it were never made.
Coupled with the withdrawal of a section 163(j) election, the revenue procedure permits taxpayers to make a late election under section 168(k)(7) to opt out of the additional first-year bonus depreciation. When a taxpayer withdraws an election, such as the electing real property trade or business election, the property previously subject to the slower alternative depreciation system (ADS) may become eligible for the bonus depreciation percentage allowable in the election year. This late election provides taxpayers with the flexibility to forgo this bonus depreciation on a class-by-class basis, allowing for more strategic tax planning in light of the change.
Finally, the guidance provides an opportunity for certain multinational businesses to adjust their international tax posture. Designated U.S. persons of a controlled foreign corporation (CFC) group can now make or revoke a CFC group election for the first specified period beginning after Dec. 31, 2024. This election treats the specified group as a single taxpayer for purposes of computing the section 163(j) business interest expense limitation. Making or revoking this election can be taken without regard to the standard 60-month waiting period that typically applies to such changes under Reg. section 1.163(j)-7(e)(5)(ii). However, the 60-month limitation will apply to any subsequent changes made after this one-time relief is utilized.
Selected industry impact
The new rules represent a significant opportunity for real estate and construction businesses to revisit and potentially revoke prior year elections to be treated as 'electing real property trade or businesses' under section 163(j)(7). This new revenue procedure was granted largely as relief for the real estate industry, which otherwise missed out on much of the tax benefits created by OBBBA. The ability to make a late revocation is a rare opportunity with enormous upside–businesses can now model out which action benefits them the most with the benefit of hindsight and potentially generate refunds or optimize tax planning in future years.
Many real estate businesses have elected to be exempt from the section 163(j) ‘cap’ on business interest deductions. The limitation disproportionately affects the real estate industry for several reasons. The upfront expense required to build or buy tends to require higher leverage early in a business’s life. Properties also typically take time to produce income. The result is that the interest cap will be calculated as a percentage of (ATI) in years that income is lowest and interest is highest. The election out of the limitation is therefore vital for many businesses, but the tradeoff is that affected real estate assets get slower ADS depreciation, including disqualification from bonus depreciation for qualified improvement property. The choice of whether to elect out of section 163(j) can be extremely difficult for tax planning for real estate businesses, as it has often meant less depreciation to offset income in future years.
The math has changed dramatically now that OBBBA restored 100% bonus depreciation and, crucially, reinstated the addback of depreciation, amortization and depletion in the calculation of ATI for tax years beginning after Dec. 31, 2024. For many taxpayers, the ATI cap on deductible interest is now much higher, as it is calculated without subtracting depreciation deductions. For real estate and construction businesses with substantial depreciation deductions, this change can significantly increase the amount of interest expense that is deductible under section 163(j) without the need for the excepted trade or business election. As a result, the benefit of being excepted from the limitation may now be outweighed by the opportunity to claim immediate and accelerated depreciation deductions on eligible property, including 100% bonus depreciation. Any businesses with large depreciation deductions should leap at the opportunity to revisit the election to match income and expense—most particularly, businesses with bonus-eligible qualified improvement property (QIP). Commercial lessors that renovate interior spaces between new leases and retailers that frequently update stores are most likely to benefit. There may also be opportunities to plan construction timelines to maximize the amount of QIP, and real estate businesses should discuss with their tax advisor how they may be able to further add to the benefits.
Implementation details
Withdrawal of excepted trade or business elections
The withdrawal procedures outlined in Rev. Proc. 2026-17 are available for taxpayers who previously elected to be excepted from the section 163(j) limitation as an electing real property trade or business, an electing farming business or an excepted regulated utility trade or business. To be eligible, the taxpayer must have made the election on a timely filed original federal income tax return for a taxable year beginning in 2022, 2023 or 2024. A taxpayer satisfying these requirements may withdraw the election for the year in which it was made, and upon doing so, will be treated for tax purposes as if the election had never been made.
To initiate a withdrawal, taxpayers must file an amended federal income tax return, amended Form 1065, or an administrative adjustment request (AAR) for the year of the original election. The filing must be clearly marked ‘FILED PURSUANT TO REV. PROC. 2026-17’ and include a statement confirming the withdrawal. The amended return must reflect all resulting adjustments, including changes to depreciation, property basis and any collateral adjustments under section 481(a). Amended returns for all affected subsequent years are also required. Finally, if a taxpayer is under examination for any of the eligible years, they must provide a copy of the amended filing to the coordinating revenue agent no later than the date the filing is submitted to the IRS.
Understanding the critical deadline
Amended returns must be filed by the earlier of Oct. 15, 2026, or the end of the applicable statute of limitations on assessment or refund for that tax year. This is a critical detail, as for many taxpayers, the deadline may be sooner than October 2026. For example, the three-year refund statute for a 2022 return filed on March 15, 2023, would generally expire on April 15, 2026. Taxpayers must immediately identify the relevant statute of limitations for each election year to avoid missing this limited window of opportunity.
Option for eligible BBA partnerships
In a significant simplification, Rev. Proc. 2026-17 provides an alternative to the typically required administrative adjustment request (AAR) process, allowing eligible BBA partnerships to file an amended Form 1065 and issue amended Schedules K-1 to implement these changes.
To take advantage of this option, an eligible BBA partnership must clearly indicate the filing is made pursuant to the revenue procedure and furnish amended Schedules K-1 to its partners reflecting the revised treatment of partnership items. In addition, a BBA partnership that receives an amended Schedule K-1 from another partnership that filed an amended Form 1065 pursuant to this revenue procedure may also file an amended Form 1065 to take those adjustments into account, provided it otherwise meets the eligibility requirements.
Controlled foreign corporation (CFC) group election relief
Under the section 163(j) regulations, a designated U.S. person may elect to apply the interest limitation on a CFC group basis, whereby a single section 163(j) limitation is computed for the specified period of a specified group. Once a CFC group election is made or revoked, the regulations generally impose a 60-month limitation before the taxpayer may make or revoke the election again.
Recognizing that the OBBBA’s changes to the ATI calculation may significantly affect international tax planning, Rev. Proc. 2026-17 provides targeted relief by allowing taxpayers to make or revoke a CFC group election without regard to the 60-month limitation for the first specified period of a specified group beginning after Dec. 31, 2024.
This relief enables taxpayers to reassess their CFC group election position in light of recent changes, including the restoration of earnings before interest, taxes, and amortization (EBITDA)-based ATI calculation for taxable years beginning after Dec. 31, 2024 and additional modifications to ATI for international inclusions.
Following a revocation or new election made pursuant to this revenue procedure, the 60-month limitation applies to subsequent specified periods. For example, if a CFC group election is revoked for a specified period ending Dec. 31, 2025, a new election generally cannot be made for any specified period beginning before Dec. 31, 2030.
