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Guidance on Interest and Depreciation Elections Under OBBBA

Guidance on Interest and Depreciation Elections Under OBBBA

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    Taxpayers May Withdraw Elections to Clear the Way for OBBBA Interest and Depreciation Benefits

    Taxpayers that previously made an election to be treated as a real property trade or business and to forgo bonus depreciation may now withdraw those elections under a new IRS revenue procedure. The elections would have been made for tax years beginning in 2022, 2023, or 2024. Reversing those elections will allow taxpayers to take advantage of the more beneficial treatment of business interest and bonus depreciation enacted in H.R. 1, the One Big Beautiful Bill Act (OBBBA). The IRS guidance also allows taxpayers that withdraw these elections to make a late election not to deduct bonus depreciation for certain property.

    Specifically, OBBBA allows depreciation and amortization to be added back to adjusted taxable income (“ATI”) after 2024 when determining the business interest deduction limitation, which can increase the amount of deductible interest. The 2025 legislation also restored and made permanent 100% bonus depreciation for eligible property acquired and placed in service after January 19, 2025. Taxpayers that made the earlier elections were not subject to the business interest limitation but were required to depreciate property more slowly under the Alternate Depreciation System and could not qualify for bonus depreciation. Furthermore, the earlier elections were irrevocable.

    How to Withdraw the Elections

    To withdraw these elections, a taxpayer must file an amended Federal income tax return for the taxable year of the election, 2022, 2023, or 2024. A taxpayer that receives an amended Schedule K-1 as a result of an amended Federal income tax return or amended Form 1065 filed under the revenue procedure should similarly file an amended Federal income tax return.

    If a taxpayer is a partnership subject to the BBA centralized partnership audit process, the partnership should file an Administrative Adjustment Request (AAR) and then issue amended Schedule K-1s to its partners. The amended individual returns, amended Form 1065s, or AARs must be filed by the earlier of: (1) October 15, 2026, or (2) by the end of the assessment period for the taxable year of the amended return (ie, generally 3 years). (Note that the AARs have a slightly different due date.)

    Example. Taxpayer, a C corporation, timely filed a Federal income tax return for its taxable year beginning January 1, 2022, and ending December 31, 2022, on March 1, 2023. The taxpayer’s due date for filing an amended return to withdraw the business interest election for the taxable year ending December 31, 2022 is April 15, 2026.

    Taxpayers also must file amended Federal income tax returns, amended Forms 1065, or AARs, as applicable, for any affected succeeding taxable years and make collateral adjustments for those years and to the basis of assets, as applicable.

    Taxpayers that made an election to be treated as a real property trade or business and to forgo bonus depreciation should now analyze whether it would be advantageous to withdraw those elections. The option to withdraw has a relatively short time window, so take steps now to evaluate these options.

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