IRS Provides Procedure for Withdrawing Business Interest Limitation Elections

(Parker Tax Publishing April 2026)

The IRS provided a procedure for withdrawing an election under Code Sec. 163(j)(7)(B) to be an electing real property trade or business, and for withdrawing an election under Code Sec. 163(j)(7)(C) to be an electing farming business, for purposes of the business interest deduction limitation under Code Sec. 163(j). The procedure allows certain taxpayers to withdraw such an election for the tax year in which the election was made, and also allows a taxpayer that withdraws one of these elections to make a late election under Code Sec. 168(k)(7) not to deduct the additional first-year depreciation for certain property. Rev. Proc. 2026-17.

Background

Code Sec. 163(j) limits the amount of business interest that a taxpayer can deduct for a tax year to the sum of (1) the taxpayer's business interest income, (2) 30 percent of the taxpayer's adjusted taxable income (ATI), and (3) the taxpayer's floor plan financing interest expense. Before being amended by the One Big Beautiful Bill Act (OBBBA) (Pub. L. 119-21), Code Sec. 163(j)(8) defined ATI as the taxable income of the taxpayer computed without regard to certain items, including any deduction allowable for depreciation, amortization, or depletion for tax years beginning before January 1, 2022.

Code Sec. 163(j)(7)(A)(ii) through (iv) provides that, for purposes of Code Sec. 163(j), the term "trade or business" does not include (1) an electing real property trade or business (as defined in Code Sec. 163(j)(7)(B)); (2) an electing farming business (as defined in Code Sec. 163(j)(7)(C)); or (3) a regulated utility trade or business (as defined in Reg. Sec. 1.163(j)-1(b)(15)(iii)). Thus, interest expense that is properly allocable to any such trade or business is not properly allocable to a trade or business under Code Sec. 163(j) and is not business interest that is subject to the business interest limitation. Under Code Sec. 168(g)(1)(F) and (G), an electing real property trade or business and electing farming business are required to use the alternative depreciation system under Code Sec. 168(g) for certain types of property under Code Sec. 163(j)(11) and cannot claim the additional first-year depreciation deduction under Code Sec. 168(k) for those types of property.

Code Sec. 168(k)(7) allows a taxpayer to elect not to deduct the additional first-year depreciation for any class of property that is qualified property placed in service during the tax year. Under Reg. Sec. 1.168(k)-2(f)(1)(iii), the Code Sec. 168(k)(7) election must be made by (1) the due date, including extensions, of the federal income tax return or Form 1065 for the tax year in which the qualified property is placed in service by the taxpayer, and (2) in the manner prescribed on Form 4562, Depreciation and Amortization (Including Information on Listed Property), and its instructions.

The OBBBA amended Code Sec. 163(j)(8) to restore a taxpayer's ability to add back depreciation, amortization, or depletion when calculating ATI for tax years beginning after December 31, 2024. The OBBBA also amended Code Sec. 168(k) to make the additional first-year depreciation deduction 100 percent and permanent. That amendment is generally effective for property acquired after January 19, 2025, and for any specified plant that is planted or grafted after January 19, 2025.

Rev. Proc. 2026-17

In Rev. Proc. 2026-17, the IRS provided transition guidance under Code Secs. 163(j) and 168(k) for taxpayers who previously elected to be treated as an electing real property trade or business, electing farming business, or excepted regulated utility trade or business, but who now wish to withdraw the election in light of the OBBBA amendments to Code Secs. 163(j)(8) and 168(k).

Under the procedure, a taxpayer may withdraw its Code Sec. 163(j)(7) election for a 2022, 2023, or 2024 tax year by filing an amended federal income tax return, amended Form 1065 U.S. Return of Partnership Income, or administrative adjustment request (AAR), for the tax year for which the election was initially made, and attaching the election withdrawal statement described in Section 4.01(2) of Rev. Proc. 2026-17. The due date for the amended return or amended Form 1065 is the earlier of (1) October 15, 2026; or (2) the end of the applicable period of limitations on assessment for the tax year for which the amended return is being filed. A partnership filing an amended Form 1065 must also furnish any corresponding Schedules K-1 by the applicable date in the previous sentence. In the case of a BBA partnership filing an AAR, the AAR must be filed on or before the earlier of (1) October 15, 2026, and (2) the last day of the Code Sec. 6227(c) period during which the partnership may file an AAR for the tax year for which the election was made.

A taxpayer that withdraws its Code Sec. 163(j)(7) election for a 2022, 2023, or 2024 tax year will be treated as if the election had never been made. If the taxpayer is a partnership, the capital accounts of the partnership will not be maintained in accordance with Reg. Sec. 1.704-1(b)(2)(iv) unless the effect of the withdrawal is reflected in the capital accounts of its partners.

A taxpayer may make a late Code Sec. 168(k)(7) election on the same amended return, amended Form 1065, or AAR filed to withdraw the taxpayer's Code Sec. 163(j)(7) as described above. The late Code Sec. 168(k)(7) election is made in the manner provided in Reg. Sec. 1.168(k)-2(f)(1)(iii)(B). The amended return, amended Form 1065, or AAR must be filed on or before the earlier of (1) October 15, 2026, or (2) the end of the applicable period of limitations on assessment for the tax year for which the amended return is being filed.

A taxpayer that is withdrawing an election under Code Sec. 163(j) or making a late Code Sec. 168(k)(7) election must write "FILED PURSUANT TO REV. PROC. 2026-17" at the top of the amended return, amended Form 1065, or AAR and attach a statement that:

(1) is titled "Revenue Procedure 2026-17 Section 163(j)(7) Election Withdrawal" or, for taxpayers that are both withdrawing a Code Sec. 163(j)(7) election and making a late election under Code Sec. 168(k)(7) on the same return, amended Form 1065, or AAR, is titled "Revenue Procedure 2026-17 Section 163(j)(7) Election Withdrawal and Late Section 168(k)(7) Election";

(2) includes the electing taxpayer's name, address, and taxpayer identification number; and

(3) includes a statement that, pursuant to Rev. Proc. 2026-17, the electing taxpayer is withdrawing its election under Code Secs. 163(j)(7)(B), 163(j)(7)(C), or Reg. Sec. 1.163(j)1(b)(15)(iii), as applicable and, if applicable, making a late election under Code Sec. 168(k)(7) on the same return, amended 1065, or AAR.

Option Provided to Eligible BBA Partnerships

Partnerships that are subject to the centralized audit rules under the Bipartisan Budget Act of 2015 (BBA) (Pub. L. 114-74), and that filed Forms 1065 and furnished Schedules K-1 for the partnership tax years beginning in 2022, 2023, or 2024 prior to the issuance of Rev. Proc. 2026-17 (eligible BBA partnerships), may implement the procedure by filing an amended partnership return and furnishing corresponding Schedules K-1 instead of filing an AAR. The amended Form 1065 may take into account tax changes provided by Rev. Proc. 2026-17 as well as any other tax attributes to which the partnership is entitled by law. Rev. Proc. 2026-17 allows eligible BBA partnerships the option to file an amended Form 1065 instead of an AAR; it does not prevent an eligible BBA partnership from filing an AAR to obtain the benefits of the procedure or any other tax benefits to which the partnership is entitled. An eligible BBA partnership that files an amended Form 1065 pursuant to Rev. Proc. 2026-17 remains subject to the centralized partnership audit procedures enacted by the BBA.

For a discussion of the business interest limitation, see Parker Tax ¶92,323. For a discussion of bonus depreciation elections, see Parker Tax ¶94,235.

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