On March 18, the IRS issued Revenue Procedure 2026-17. This guidance allows taxpayers to withdraw certain elections that were previously treated as irrevocable.
The relief applies to taxpayers who elected to be:
- A real property trade or business
- An electing farming business
- An excepted regulated utility trade or business
Eligible taxpayers may amend their 2022, 2023, and 2024 tax returns to revoke these elections.
One Big Beautiful Bill Act’s Impact
The One Big Beautiful Bill Act (OBBBA) made two key changes:
- It restored 100% bonus depreciation
- It allows depreciation and amortization to be added back when calculating adjusted taxable income (ATI) for purposes of §163(j) limitations
In the past, many real estate businesses elected out of §163(j). This allowed them to deduct all business interest. In return, they had to use the Alternative Depreciation System (ADS) for all Real Property, which does not allow bonus depreciation. This particularly affected real estate companies, especially those who were making improvements to their properties that qualified as Qualified Improvement Property.
This created a trade-off:
- Full interest deduction
- Slower depreciation with no bonus
Prior to the OBBBA, bonus depreciation was phasing down, which made it more beneficial for taxpayers to make the election to deduct interest rather than utilize bonus depreciation.
With the new law, the math on the trade-off has changed. 100% Bonus depreciation is back, and the ATI calculation is more favorable. For some taxpayers, it may now be better to revoke the election and claim faster depreciation instead of preserving full interest deductions.
Taxpayers will need to rethink their position as it could be more advantageous to utilize bonus depreciation rather than deduct all their business interest for those who made the election.
How to Implement Relief
The IRS now allows taxpayers to withdraw these elections for a limited time. To do this, taxpayers must:
- File amended returns for 2022, 2023, and 2024
- File by October 15, 2026, or before the statute of limitations expires for the election year
Taxpayers should review prior filings to see if bonus depreciation would now provide a better result.
Who Should Review
The §163(j) rules affected many industries. The following taxpayers should take a close look if they previously made the 163(j) election:
- Commercial real estate owners and lessors
- Residential real estate investors
- Manufacturers with upcoming investments that may qualify Qualified Production Property
- Retail property owners and investors
- Hospitality businesses, including hotels and casinos
- Auto and equipment dealers
Final Thoughts
Taxpayers should review their prior elections and model the impact of these changes as soon as possible. The window to amend returns is limited, and the potential benefits can be significant. If you have questions or would like help evaluating your options, please contact Align for guidance tailored to your situation.
