IRS Provides Relief For Section 163(j) Elections

The Internal Revenue Service recently issued Revenue Procedure 2026-17, which provides important transition relief for taxpayers that previously made elections under Section 163(j)(7) to be treated as an electing real property trade or business or a farming business. These elections generally allow taxpayers to avoid the business interest expense limitation under Section 163(j), but at the cost of foregoing certain depreciation benefits, including bonus depreciation. The new guidance offers taxpayers an opportunity to revisit those elections in light of subsequent legislative changes reinstating 100% bonus depreciation for qualified property placed in service after January 19, 2025, allowing businesses to fully deduct the cost of eligible investments in the year they are acquired.

The revenue procedure permits eligible taxpayers to withdraw a prior Section 163(j)(7) election for taxable years beginning in 2022, 2023, or 2024. To do so, taxpayers must file an amended federal income tax return, amended Form 1065, or administrative adjustment request (AAR) for the year in which the election was made, along with a required statement identifying the withdrawal. The amended filing must generally be submitted by the earlier of October 15, 2026, or the applicable statute of limitations.

Importantly, the guidance provides that a taxpayer that properly withdraws the election is treated as if the Section 163(j)(7) election had never been made. As a result, the taxpayer must recompute taxable income for the affected year and any subsequent years, including making collateral adjustments such as changes to depreciation deductions and basis. This recomputation may allow taxpayers to benefit from more favorable depreciation rules, depending on their specific situation.

In conjunction with the election withdrawal relief, Revenue Procedure 2026-17 also allows certain taxpayers to make a late election under Section 168(k)(7) to elect out of bonus depreciation for classes of property affected by the withdrawn election. This considers the interaction between the Section 163(j) regime and depreciation rules and is intended to give taxpayers flexibility in optimizing their tax positions following recent changes.

The revenue procedure further provides administrative flexibility for partnerships subject to the centralized partnership audit regime, allowing eligible partnerships to file amended returns rather than AARs in certain cases. It also temporarily relaxes limitations on making or revoking controlled foreign corporation (CFC) group elections under the Section 163(j) regulations, including relief from the usual 60-month restriction for certain periods.

Revenue Procedure 2026-17 presents an opportunity for taxpayers, particularly in the real estate and farming sectors, to reassess prior elections and potentially unlock additional deductions. However, the relief requires careful analysis of amended return mechanics, depreciation consequences, and statute of limitations considerations. Taxpayers should evaluate their eligibility and act promptly to take advantage of the limited window provided by the guidance.

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