IRS allows withdrawal of §163(j) real estate and farming elections

IRS Rev. Proc. 2026-17

Taxpayers may reverse prior §163(j) elections and adjust depreciation and interest positions for 2022 through 2024. Amended returns must be filed by October 15, 2026, or earlier if required.

Holding

The IRS permits taxpayers to withdraw certain §163(j) elections, make related depreciation elections, revise CFC group elections, and file amended partnership returns for 2022 through 2024 under specified procedures.

Why It Matters

• This transition relief responds to changes in the 2025 legislation that modified interest limitation calculations.

• Elections previously considered permanent may now be reversed for certain years.

• Taxpayers can re-optimize interest deductions and depreciation, directly impacting taxable income.

• Relief is available only through amended filings, with a strict deadline and required coordination among partners and entities.

Key Facts

• Applies to elections made for tax years 2022, 2023, and 2024.

• Covers:

  • Electing real property trades or businesses

  • Electing farming businesses

  • Excepted regulated utility trades or businesses

• Permits withdrawal of these elections and related adjustments.

• Allows amended Form 1065 and Schedule K-1 filings for partnerships.

• The deadline is generally October 15, 2026, or earlier if the statute of limitations expires.

Statutory or Regulatory Framework

• §163(j) limits business interest deductions to:

  • Interest income

  • 30 percent of adjusted taxable income (ATI)

  • Floor plan financing interest

• Certain trades or businesses can elect out of §163(j), but must:

  • Use slower depreciation methods

  • Forgo bonus depreciation under §168(k)

• The 2025 law restored depreciation addbacks in ATI, which may make prior elections less advantageous.

IRS Position

• Taxpayers may withdraw prior §163(j)(7) elections.

• A withdrawal is treated as if the election was never made.

• Taxpayers may also:

  • Make a late election out of bonus depreciation under §168(k)(7)

  • Recompute depreciation and taxable income

• CFC group elections may be changed without the standard 60-month restriction for the first period after 2024.

• Eligible partnerships may file amended returns rather than administrative adjustment requests.

Key Mechanics

• Submit an amended return, Form 1065, or an administrative adjustment request.

• Include a statement referencing Rev. Proc. 2026-17.

• Incorporate all related adjustments, including changes to depreciation.

• Amend subsequent years if they are affected.

• Partnerships must provide revised Schedule K-1s.

The Takeaway

This is a rare opportunity for correction. Taxpayers who previously made unfavorable §163(j) elections may now reconsider, but must act promptly and coordinate amended filings across entities and years.

List of Citations

• Rev. Proc. 2026-17

  • Provides procedures for withdrawing §163(j) elections and filing amended returns

• §163(j)

  • Governs the limitation on business interest deductions

• §168(k)

  • Governs bonus depreciation and related elections

• Bipartisan Budget Act (BBA) partnership rules

  • Controls amendment procedures for partnerships