On March 18, 2026, the IRS issued Revenue Procedure 2026-17 (“the Rev. Proc.”), which allows taxpayers a rare opportunity to revoke certain previously “irrevocable” election under §163(j) business interest deductions introduced with the Tax Cuts and Jobs Act of 2017 (TCJA). The Rev. Proc. provides transition guidance under §163(j) and §168(k) for taxpayers who previously elected under §163(j)(7) to be treated as an electing real property trade or business (RPTOB), electing farming business, or excepted regulated utility trade or business but now wish to withdraw the election in response to the One Big Beautiful Bill Act (OBBBA).
Specifically, OBBBA permanently restored bonus depreciation under §168(k) and returned to the more favorable earnings before interest, tax, depreciation, depletion and amortization (EBITDA)-based calculation for adjusted taxable income (ATI) for purposes of calculating business interest expense limitations under §163(j)(8).
The Rev. Proc. offers certain taxpayers relief to withdraw or modify prior elections that have historically been treated as irrevocable. Below, we break down the details and what partnerships should carefully consider when deciding whether to proceed with filing amended returns rather than an Administrative Adjustment Request (AAR).
Real Property Trade or Business Election Relief
Section 163(j) generally limits the deductibility of interest expense. However, certain taxpayers engaged in a real property trade or business may elect out of this limitation under §163(j)(7), but such an election comes with mandatory use of the alternative depreciation system (ADS) for certain real property and eligibility for bonus depreciation under §168(k). Historically, this election has been irrevocable, requiring taxpayers to carefully consider the long-term tax implications at the time the election is made.
The TCJA phased down 100% first year bonus depreciation by a rate of 20% each year, beginning with tax years ending on or after Dec. 31, 2023, which significantly diminished the value of the depreciation adjustment. Further, TCJA limited business interest deductions under §163(j) to 30% of ATI based on earnings before interest and tax (EBIT) beginning in 2022. Many taxpayers in the real estate industry concluded that opting out of bonus depreciation with the §163(j)(7) RPTOB election resulted in more interest limitation relief with only a modest cost in lost accelerated depreciation.
OBBBA changed the premise of this conclusion by making 100% bonus depreciation permanent for eligible assets placed in service on after Jan. 19, 2025, and reverting to an EBITDA-based calculation for §163(j) purposes.
The Rev. Proc. allows certain taxpayers to withdraw previously made §163(j)(7) RPTOB elections for tax years beginning in 2022, 2023, or 2024, enabling them to move away from the mandatory use of ADS and utilize more favorable depreciation methods under §168. Withdrawal is treated as if the election had never been made, requiring corresponding adjustments to depreciation and interest limits via amended returns or AARs that are consistently applied across all affected tax years.
Withdrawal permits catching up on missed bonus depreciation deductions and utilization of accelerated depreciation methods while also allowing for late opt-out elections of bonus depreciation under §168(k)(7).
Taxpayers should carefully evaluate whether their original RPTOB election remains an optimal tax strategy and weigh that against current interest burden, taxable income projections, and value of accelerated depreciation.
To take advantage of this relief, taxpayers must file amended returns or AARs by Oct. 15, 2026.
A Quandary for Partnerships: Amend or Adjust?
For partnerships considering withdrawing historical RPTOB elections, the decision comes with options. The Rev. Proc. allows eligible partnerships, subject to the rules of Subchapter C of chapter 63 of the Code (BBA Partnerships) the option to file an amended Form 1065 rather than an AAR for partnership tax years that begin in 2022, 2023 or 2024, subject to certain conditions.
An “Eligible Partnership” is defined by reference to Rev. Proc. 2020-23, which provides the framework for partnership subject to the centralized partnership audit regime (i.e. BBA Partnership). Only those eligible partnerships may opt to amend rather than adjust.
Amended returns allow adjustments to flow through to partners in the reviewed year, reopening partner reporting for prior years, which can be administratively challenging. Amendments will require recalculation of capital accounts, partners may need to recalculate basis and loss limitations, and there may have been historic capital transactions that further complicate reporting. However, amendment generally produces a cleaner result by ensuring the benefit of any changes are directly allocated to the partners in the partnership for that tax year.
By contrast, AAR adjustments are allocated based on current ownership, not the ownership in place when the item was originally reported. This generally simplifies the results and reporting while reducing administrative burden but can create economic distortion between current and historical partners.
Partnerships should consider partner composition between the review year and the adjustment year, review partnership agreements for allocation provisions, and understand whether partners who benefited from the original election are the same partners impacted by the change.
Why This Matters for Your Business
Rev. Proc. 2026-17 provides taxpayers with a rare opportunity to revisit a historically binding tax election. The benefits of withdrawing from this election can be significant, but careful consideration should be given before proceeding with an amended return or AAR. Taxpayers should carefully weigh the magnitude of the benefit, impact on partners, administrative and future considerations before settling on a decision. Reach out to our team to chat about the best course of action for you.
READ MORE: Depreciation Expensing Changes in the One Big Beautiful Bill Act