In Revenue Procedure 2026-17 (the Revenue Procedure), the IRS has issued guidance allowing taxpayers to withdraw elections to be an electing real property trade or business, electing farming business or an excepted regulated utility trade or business, for purposes of the IRC Section 163(j) business-interest-deduction limitation. The Revenue Procedure also allows taxpayers that withdraw one of those elections to make a late election not to deduct the additional first-year depreciation under IRC Section 168(k) for certain property.

Background

IRC Section 163(j), as amended by the Tax Cuts and Jobs Act (TCJA), limits the business interest expense that may be deducted in a tax year to the sum of (i) the taxpayer's business interest income, as defined in IRC Section 163(j)(6), (ii) 30% of the taxpayer's adjusted taxable income (ATI), as defined in IRC Section 163(j)(8), and (iii) the taxpayer's floor plan financing interest, as defined in IRC Section 163(j)(9). For tax years beginning before January 1, 2022, a taxpayer's ATI was based on earnings before interest, taxes, depreciation and amortization (EBITDA). Thereafter, for tax years beginning January 1, 2022, a taxpayer's ATI is reduced by any deduction allowable for depreciation, depletion or amortization (i.e., the IRC Section 163(j) limitation is generally based on earnings before interest and taxes (EBIT)).

IRC Section 163(j)(5) defines business interest as "any interest expense properly allocable to a trade or business (other than investment interest within the meaning of [IRC Section] 163(d))." IRC Section 163(j)(7) excludes from the term "trade or business" an electing real property trade or business, an electing farming business and an excepted regulated utility trade or business. Accordingly, interest that is allocable to one of those trades or businesses is not allocable to a trade or business under IRC Section 163(j) and is, therefore, not business interest that is subject to the IRC Section 163(j)(1) limitation. Under IRC Section168(g)(1)(F) and (G) (as amended by the TCJA), an electing real property trade or business and electing farming business must use the alternative depreciation system under IRC Section 168(g) for certain types of property and cannot claim the additional first-year depreciation deduction under IRC Section 168(k) for those types of property. Under Treas. Reg. Section 1.163(j)-1(b)(15)(ii)(A), an excepted regulated utility trade or business cannot claim the additional first-year depreciation deduction under IRC Section 168(k) for any property that is primarily used in the excepted regulated utility trade or business.

The One Big Beautiful Bill Act (OBBBA) amended IRC Section 163(j)(8)(A)(v) to permanently allow taxpayers to compute ATI without regard to any deduction allowable for depreciation, amortization, or depletion (i.e., based on EBITDA) for tax years beginning after December 31, 2024. The OBBBA also amended IRC Section 163(j)(8)(A) to exclude from the ATI of a US shareholder any controlled foreign corporation (CFC) income inclusions under IRC Sections 78, 951(a) and 951A. Additionally, the corresponding deductions allowed under IRC Sections 245A(a) (by reason of IRC Section 964(e)(4)) and 250(a)(1)(B) (by reason of such CFC income inclusions) are excluded from ATI.

The OBBBA also allowed taxpayers to claim the 100% additional first-year depreciation deduction for certain property acquired after January 19, 2025, and for any specified plant that is planted or grafted after January 19, 2025. In addition, the OBBBA (under IRC Section 168(n)) provides a 100% depreciation deduction for certain nonresidential real property defined as qualified production property. To qualify as qualified production property, the property cannot be subject to depreciation under the alternative depreciation system under IRC Section 168(g). (For more on bonus depreciations, see Tax Alerts 2025-1432, 2026-0250 and 2026-0577.)

Revenue Procedure 2026-17

Withdrawal of IRC Section 163(j)(7) elections

The Revenue Procedure allows taxpayers that elected to be treated as an electing real property trade or business, electing farming business, or excepted regulated utility trade or business for a tax year beginning in 2022, 2023 or 2024 to withdraw the election. To withdraw the election, the taxpayer must write "FILED PURSUANT TO REV. PROC. 2026-17" at the top of the amended federal income tax return, amended Form 1065 or administrative adjustment request (AAR), for the tax year for which the election was originally made.

The taxpayer also must attach a statement that is titled "Revenue Procedure 2026-17 Section 163(j)(7) Election Withdrawal," includes the taxpayer's information and clearly states that the taxpayer is withdrawing the election. Taxpayers that receive an amended Schedule K-1 resulting from an amended federal income tax return or amended Form 1065 should file an amended federal income tax return, amended Form 1065 or AAR, and write "FILED PURSUANT TO REV. PROC. 2026-17" at the top. They also should attach a statement noting that they are filing as a result of an amended Schedule K-1 received from an electing taxpayer that filed an amended Federal income tax return or an amended Form 1065 in accordance with Revenue Procedure 2026-17.

Taxpayers must submit the withdrawal on or before the earlier of (i) October 15, 2026, or (ii) the expiration of the applicable period of limitations on assessment for the tax year for which the amended return is filed. If the taxpayer is a Bipartisan Budget Act (BBA) partnership filing an AAR, the Revenue Procedure requires the taxpayer to file the AAR on or before the earlier of (i) October 15, 2026, or (ii) the last day of the IRC Section 6227(c) period during which the partnership may file an AAR for the tax year for which the election was made.

For the withdrawal to be effective, the amended filing must reflect all resulting adjustments to taxable income due to the withdrawn IRC Section 163(j)(7) election, including collateral adjustments (e.g., modifications to any adjustments under IRC Section 481). The Revenue Procedure also requires taxpayers to file amended federal income tax returns, amended Forms 1065 or AARs for any affected succeeding tax years to reflect the adjustments to taxable income and any related collateral adjustments as a result of the withdrawn IRC Section 163(j)(7) election. A taxpayer that properly withdraws an election is treated as if the election had never been made for that tax year and all affected succeeding tax years.

Late election not to claim additional first-year depreciation

A taxpayer withdrawing an IRC Section 163(j)(7) election may make a late election under IRC Section 168(k)(7) not to deduct additional first-year depreciation on the same amended federal income tax return, amended Form 1065 or AAR. The late IRC Section 168(k)(7) election is made in the manner provided in Treas. Reg. Section 1.168(k)- 2(f)(1)(iii)(B). For taxpayers that are both withdrawing an IRC Section 163(j)(7) election and making a late election under IRC Section 168(k)(7) on the same return, the attached statement must be titled "Revenue Procedure 2026-17 Section 163(j)(7) Election Withdrawal and Late Section 168(k)(7) Election." The due date for the late election under IRC Section 168(k)(7) is the same as the due date for the withdrawal election.

For any succeeding tax years affected by the late election, taxpayers must file amended federal income tax returns, amended Forms 1065 or AARs to reflect any collateral adjustments to the taxable income or tax liability.

Relief from the CFC-group-election waiting period

Under the 60-month limitation rule, Treas. Reg. Section 1.163(j)-7(e)(5)(ii) allows designated US persons to revoke a CFC group election for any specified period beginning at least 60 months after the last day of the specified period for which the election was made and, once revoked, make a new CFC group election for any specified period beginning at least 60 months after the CFC group election was revoked.

The Revenue Procedure grants relief from the 60-month limitation rule in Treas. Reg. Section 1.163(j)-7(e)(5)(ii) by allowing taxpayers that are designated US persons to revoke or make a CFC group election, regardless of that rule, for the first specified period beginning after December 31, 2024. Once the election is revoked or made, however, the 60-month limitation applies to subsequent specified periods, meaning a taxpayer that makes or revokes an election for a specified period ending on December 31, 2025, cannot make or revoke a new CFC group election for any specified period beginning before December 31, 2030.

Amended return option for BBA partnerships

The Revenue Procedure allows a BBA partnership to withdraw an election or make a late election for additional first-year depreciation by filing an amended Form 1065 and furnishing amended Schedules K-1 instead of filing an AAR. This option is only available to BBA partnerships that filed Forms 1065 and furnished Schedules K-1 for tax years beginning in 2022, 2023 or 2024. BBA partnerships must follow the guidance in Section 4 of the Revenue Procedure when filing the amended Forms 1065.

Implications

The ability to withdraw the election to be excepted from IRC Section 163(j) is welcome relief for taxpayers. Certain taxpayers might not have otherwise made the election had they known that they could compute ATI for tax years beginning in 2025 and later without regard to any deduction allowable for depreciation, amortization or depletion. Accordingly, the ability to withdraw the election given the changes made to IRC Section 163(j) on the computation of ATI provides relief to those taxpayers. Similarly, taxpayers that elected to be an excepted trade or business may want to consider withdrawing those elections if they expect to acquire or produce property for which additional first-year depreciation under IRC Section 168(k) or 168(n) is unavailable due to the election. Withdrawing the election would allow them to avail themselves of these deductions.