The IRS has released Revenue Procedure 2026-17, providing significant relief and new planning opportunities for taxpayers who previously made certain irrevocable elections under Section 163(j) of the Internal Revenue Code. This guidance is a direct response to the changes enacted by H.R. 1, the One Big Beautiful Bill Act (OBBBA), which restored the ability to add back depreciation, amortization and depletion in calculating adjusted taxable income (ATI) for the business interest deduction limitation, and made 100% bonus depreciation permanent for qualifying property.

Background: Section 163(j) and the OBBBA Changes

Section 163(j), as amended by the Tax Cuts and Jobs Act (TCJA), generally limits the deduction for business interest expense to 30% of ATI, plus business interest income and floor plan financing interest. For tax years beginning before 2022, ATI was calculated on an EBITDA basis (excluding depreciation and amortization). For 2022 and later, ATI was calculated on an EBIT basis (no add-back for depreciation/amortization), which made the limitation more restrictive.

To avoid the Section 163(j) limitation, certain businesses—specifically real property trades or businesses, farming businesses and regulated utilities—could elect to be excepted from the limitation. However, this came at a cost: electing businesses were required to use the alternative depreciation system (ADS) for certain property and were ineligible for bonus depreciation on those assets.

The OBBBA, enacted in 2025, reversed course by restoring the EBITDA add-back for ATI for tax years beginning after December 31, 2024, and made 100% bonus depreciation permanent for property acquired after January 19, 2025. This fundamentally changed the cost-benefit analysis for making or maintaining a Section 163(j)(7) election.

Key Provisions of Rev. Proc. 2026-17

Withdrawal of Section 163(j)(7) Elections

• Taxpayers that made an election to be treated as an electing real property trade or business, electing farming business or excepted regulated utility trade or business for tax years beginning in 2022, 2023 or 2024 may now withdraw that election.
• The withdrawal is made by filing an amended return (or, for partnerships, an amended Form 1065 or administrative adjustment request (AAR)) for the year the election was made, with a specific statement as outlined in the revenue procedure.
• The withdrawal must be filed by the earlier of October 15, 2026, or the expiration of the statute of limitations for the relevant tax year.
• If properly withdrawn, the taxpayer is treated as if the election had never been made, requiring recomputation of taxable income, interest deductions, depreciation and basis for the affected and subsequent years.

Late Election Out of Bonus Depreciation

• Taxpayers withdrawing a Section 163(j)(7) election may also make a late election under Section 168(k)(7) to opt out of bonus depreciation for any class of property affected by the withdrawal.
• This is intended to allow taxpayers to recalibrate their depreciation and interest deduction profiles in light of the new law.

Special Rules for Partnerships

• Partnerships subject to the Bipartisan Budget Act (BBA) centralized audit regime may file an amended Form 1065 (with amended Schedules K-1) instead of an AAR, provided certain requirements are met.
• The amended return must be clearly marked as filed pursuant to Rev. Proc. 2026-17 and must be filed by the same deadlines as above.

CFC Group Election Flexibility

• Multinational groups may revoke or make a controlled foreign corporation (CFC) group election for the first specified period beginning after December 31, 2024, without regard to the usual 60-month waiting period.

Example: When Withdrawing the Election May Be Beneficial

Consider a real estate business that made the Section 163(j)(7) election for its 2023 tax year to avoid the business interest limitation. As a result, the business was required to use the alternative depreciation system (ADS) for its residential rental property and was ineligible for bonus depreciation on those assets. At the time, this trade-off made sense because the business had significant interest expense and wanted to ensure full deductibility.

With the enactment of the OBBBA and the issuance of Rev. Proc. 2026-17, the landscape has shifted. For tax years beginning after December 31, 2024, the business can once again add back depreciation and amortization in calculating ATI, making it much more likely that its interest expense will be fully deductible even without the Section 163(j)(7) election. Additionally, 100% bonus depreciation is now permanently available for qualifying property.

By withdrawing its prior Section 163(j)(7) election under Rev. Proc. 2026-17, the business can:

• Switch from ADS back to the general depreciation system (GDS), allowing for shorter recovery periods.
• Claim 100% bonus depreciation on qualifying property placed in service after January 19, 2025.
• Potentially increase current and future depreciation deductions, reducing taxable income and improving cash flow.
• Still fully deduct its business interest expense due to the restored EBITDA add-back.

For example, if the business acquired a new apartment building in 2025, under the old rules (with the election in place), it would have to depreciate the building over 30 years (ADS) and would not be eligible for bonus depreciation. By withdrawing the election, it can depreciate the building over 27.5 years (GDS) and claim immediate bonus depreciation on qualifying components, resulting in a much larger deduction in the first year and lower taxable income.

This change is especially beneficial for businesses with significant new capital expenditures and interest expense, as it maximizes both interest and depreciation deductions under the new law.

Practical Implications and Action Steps

• Model the Impact: Taxpayers who made a Section 163(j)(7) election in 2022, 2023, or 2024 should model the impact of withdrawing the election under the new law. The ability to claim bonus depreciation and the restoration of the EBITDA add-back may provide significant tax benefits.
• Amend Returns Promptly: The window for action is limited. Amended returns or AARs must be filed by October 15, 2026, or the close of the statute of limitations, whichever is earlier.
• Coordinate with Partners: Partnerships should consider the impact on partners, especially if amended Schedules K-1 are issued. Upper-tier partnerships may also need to file amended returns.
• Review Depreciation Elections: Consider whether to make a late election out of bonus depreciation for affected property classes to optimize tax outcomes.
• Consult Advisors: The rules are complex, and the interplay between interest deduction limitations and depreciation methods can be significant. Consult with your tax advisor to determine the best course of action.

Conclusion

Rev. Proc. 2026-17 offers a rare opportunity to revisit and potentially unwind prior irrevocable elections in light of a dramatically changed tax landscape. Taxpayers should act quickly to assess their options and take advantage of this relief before the window closes.

For more information or assistance with these procedures, contact our team here.

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