For tax professionals advising clients on the business interest deduction limitation, Revenue Procedure 2026-17 offers crucial administrative relief. Following the sweeping legislative changes introduced by the One, Big, Beautiful Bill Act (OBBBA), this procedure permits eligible taxpayers to withdraw previously irrevocable IRC § 163(j)(7) and § 1.163(j)-1(b)(15)(iii) elections. By doing so, taxpayers can capitalize on newly restored adjusted taxable income (ATI) add-backs and permanent 100 percent bonus depreciation. Below is a detailed technical review of the reasons for the procedure’s issuance, the IRS’s analysis of the law, the specific requirements for obtaining relief, and the mechanical procedures required for implementation.

Background and the IRS’s Rationale for Issuance

The IRS states that this revenue procedure was issued to provide "transition guidance under §§ 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 various amendments to §§ 163(j)(8) and 168(k) under the OBBBA".

Enacted on July 4, 2025, the OBBBA fundamentally altered the calculus for taxpayers subject to the § 163(j) limitation. Section 70303(a) of the OBBBA struck the language from § 163(j)(8)(A)(v) that restricted depreciation, amortization, or depletion add-backs to taxable years beginning before January 1, 2022, "thereby restoring a taxpayer’s ability to add back depreciation, amortization, or depletion when calculating ATI for taxable years beginning after December 31, 2024". Furthermore, § 70301 of the OBBBA amended § 168(k) "to make the additional first-year depreciation deduction 100 percent and permanent," generally effective for property acquired after January 19, 2025. Because an election to opt out of the § 163(j) limitation previously required the use of the alternative depreciation system (ADS)—thereby forfeiting bonus depreciation—taxpayers are now seeking to unwind these elections to harness the dual benefits of enhanced ATI calculations and permanent 100 percent bonus depreciation.

Additionally, the procedure offers relief regarding controlled foreign corporation (CFC) group elections. It allows "a taxpayer to revoke or make a controlled foreign corporation (CFC) group election without regard to the 60-month limitation under § 1.163(j)-7(e)(5)(ii) for the first specified period of a specified group beginning after December 31, 2024". Finally, to ease administrative burdens, the procedure allows eligible Bipartisan Budget Act of 2015 (BBA) partnerships the option to file an amended Form 1065 instead of filing an administrative adjustment request (AAR).

IRS Analysis of the Underlying Tax Law

In formulating this relief, the IRS relies on the interplay between § 163(j) and § 168(k) as originally enacted by the Tax Cuts and Jobs Act (TCJA) and subsequently amended. Under the TCJA, § 163(j) limited the deduction for business interest to the sum of business interest income, 30 percent of ATI, and floor plan financing interest. Taxpayers were granted the option under § 163(j)(7)(B) and (C) to elect out of this limitation by qualifying as an "electing real property trade or business" or an "electing farming business". However, as the IRS analyzes, the statute explicitly provided that "the elections to be an electing real property trade or business and an electing farming business are made in the time and manner prescribed by the Secretary of the Treasury or the Secretary’s delegate (Secretary) and, once made, are irrevocable". Similar irrevocability rules bound elections for an excepted regulated utility trade or business under § 1.163(j)-1(b)(15)(iii).

The trade-off for these elections was harsh: "an electing real property trade or business and electing farming business are required to use the alternative depreciation system under § 168(g) for certain types of property under § 163(j)(11) and cannot claim the additional first-year depreciation deduction under § 168(k)". Because § 168(k)(2)(D)(i) excludes property to which ADS applies from being "qualified property," electing entities lost access to bonus depreciation.

For BBA partnerships, the IRS recognizes that § 6031(b) generally "prohibits BBA partnerships from amending the information required to be furnished to their partners after the due date of the return, unless specifically authorized by the Secretary". Through this revenue procedure, the IRS "exercises § 6031(b) authority to allow a BBA partnership to file an amended partnership return and issue amended Schedules K-1".

Eligibility and Requirements for Obtaining Relief

To qualify for relief under Revenue Procedure 2026-17, taxpayers must meet specific scoping requirements depending on the type of relief sought.

Withdrawal of § 163(j)(7) Elections

Section 4 applies to any taxpayer who made a qualifying election on its "timely filed (including extensions) original Federal income tax return or Form 1065 for a taxable year beginning in 2022 (2022 taxable year), 2023 (2023 taxable year), or 2024 (2024 taxable year) and now wants to withdraw the election".

Late § 168(k)(7) Elections

Taxpayers withdrawing a § 163(j)(7) election are also permitted to make a late election out of bonus depreciation for a specific class of property. Section 5 applies to a taxpayer who: (1) is withdrawing a § 163(j)(7) election under section 4; (2) placed depreciable property into service during the year of the prior election or a subsequent year; (3) "timely filed its Federal income tax return or Form 1065 for the placed-in-service year of such depreciable property on or before March 18, 2026"; and (4) "has not yet made, but wants to make, a late § 168(k)(7) election with respect to a class of depreciable property that includes property affected by the withdrawal of the § 163(j)(7) election".

CFC Group Elections

Section 6 provides that a "taxpayer that is a designated U.S. person may revoke or make a CFC group election without regard to the 60-month limitation of § 1.163(j)-7(e)(5)(ii) for the first specified period of a specified group beginning after December 31, 2024". The 60-month limitation will continue to apply to any subsequent specified periods following this action.

Mechanics of Applying the Procedure

The implementation of this revenue procedure requires strict adherence to specific filing deadlines, formal naming conventions, and collateral adjustments.

Filing Procedures and Deadlines

A taxpayer may withdraw its § 163(j)(7) election by filing an amended Federal income tax return, an amended Form 1065, or an AAR for the taxable year for which the election was initially made. Crucially, the return must "be filed on or before the earlier of (i) October 15, 2026, or (ii) the end of the applicable period of limitations on assessment for the taxable year for which the amended return is being filed". For claims of refund, practitioners must ensure the claim is filed within the § 6511 statute of limitations (generally three years from the time the return was filed or two years from the time the tax was paid) because neither § 6501 nor § 6511 were amended by the OBBBA.

Required Statements and Formatting

The taxpayer’s amended return must have “FILED PURSUANT TO REV. PROC. 2026-17” written at the top. Furthermore, the taxpayer must attach a statement titled “Revenue Procedure 2026-17 Section 163(j)(7) Election Withdrawal” (or "...and Late Section 168(k)(7) Election," if applicable). This statement must include the taxpayer’s name, address, taxpayer identification number, and a declaration that they are withdrawing the election pursuant to the revenue procedure. Affected taxpayers receiving an amended Schedule K-1 must file their own amended returns or AARs, applying the identical "FILED PURSUANT TO REV. PROC. 2026-17" header, and attach a statement noting they are filing due to receiving an amended K-1 from an electing entity.

Collateral Adjustments and Succeeding Years

When withdrawing an election, the taxpayer "will be treated as if the § 163(j)(7) election had never been made". Consequently, the amended return "must include the adjustments to taxable income due to the withdrawn § 163(j)(7) election and any collateral adjustments to taxable income or to tax liability, including modifications to any adjustments under § 481". A primary example is the adjustment to the amount of depreciation allowed or allowable under § 168. Additionally, "the basis of the property affected by the withdrawn election must be adjusted to take into account any change in the amount of such depreciation". The taxpayer must also file amended returns or AARs for any "affected succeeding taxable years" by the same accelerated due dates to reflect these ongoing collateral adjustments.

BBA Partnership Mechanics

Eligible BBA partnerships are granted the administrative convenience to "implement this revenue procedure by filing an amended partnership return and furnishing corresponding Schedules K-1 instead of filing an AAR". The partnership must file a Form 1065 "with the “Amended Return” box checked" and write the required Rev. Proc. 2026-17 header at the top of the form, while attaching a corresponding statement to each amended Schedule K-1 sent to partners. "The amended Form 1065 replaces any prior return (including any AAR filed by the partnership) for the taxable year for purposes of determining the partnership’s treatment of partnership-related items". If the BBA partnership has previously filed an AAR, it should "use the items as adjusted in the AAR, where applicable, in lieu of any reporting from the originally filed partnership return".

Taxpayers Under Examination

If a taxpayer or an eligible BBA partnership is currently under examination for a 2022, 2023, or 2024 taxable year, they "must provide a copy of any amended Federal income tax return, amended Form 1065, or AAR... to the revenue agent coordinating the taxpayer’s examination no later than the date the taxpayer files the amended return, amended Form 1065, or AAR". BBA partnerships must also send written notice to the examining agent prior to or contemporaneously with filing the amended Form 1065 under these rules.

Prepared with assistance from NotebookLM.