Withdrawing Elections Out of Section 163(j)

On March 18, the IRS issued Revenue Procedure 2026-17, giving taxpayers a limited chance to retroactively withdraw elections out of the business interest expense limitation under Section 163(j) for taxable years beginning in 2022, 2023, or 2024. This relief was prompted by the One Big Beautiful Bill Act (OBBBA) restoring the ability to add back depreciation, amortization, and depletion to the taxable income amount on which the interest limitation is based (that is, using earnings before interest, taxes, depreciation, and amortization (EBITDA) instead of earnings before interest and taxes (EBIT)) and restoring 100% bonus depreciation on a permanent basis. For taxpayers that elected out of the business interest expense limitation for tax years 2022 through 2024, the revenue procedure opens a potentially valuable but time-limited opportunity to reassess whether that election still produces the best tax result given the taxpayer’s facts and circumstances.

Background

Generally, Section 163(j) limits a taxpayer’s deduction for its net business interest expense to 30% of the taxpayer’s adjusted taxable income (ATI). The limitation does not apply to qualified small business taxpayers and certain regulated utility trades or businesses. Additionally, the Section 163(j) limitation does not apply to electing real property trades or businesses, electing farming businesses, and certain electing regulated utility trades or businesses. However, the tradeoff for making these elections is that the electing taxpayer is required to use the longer recovery periods under the alternative depreciation system (ADS) for certain property without the ability to claim bonus depreciation under Section 168(k) for such property, as summarized here. These elections generally are irrevocable once made.

On July 4, 2025, the OBBBA amended Section 163(j) to permanently restore depreciation, amortization, and depletion addbacks when computing ATI for tax years beginning after Dec. 31, 2024, thus bringing it back to an EBITDA-based limitation. The OBBBA also amended Section 168(k) to make 100% bonus depreciation permanent, generally effective for property acquired after Jan. 19, 2025.

Crowe observation

These beneficial statutory changes could result in a taxpayer that made such an election being better off had it never made the election, due to the requirement to use slower depreciation periods.

Opportunity to withdraw the Section 163(j) opt-out election

The following summarizes the relief provided in Revenue Procedure 2026-17 and requirements for taxpayers to withdraw a prior election out of Section 163(j):

• Scope and eligible years. Taxpayers may withdraw an election out of Section 163(j) only if the original election was made on a timely filed (including extensions) original return for a taxable year beginning in 2022, 2023, or 2024. The withdrawal is made by attaching an election withdrawal statement to an amended return or AAR, as applicable, for the taxable year for which the election was initially made. The amended return or AAR must be filed by the earlier of Oct. 15, 2026, or the applicable limitations deadline.
• Relevant and collateral adjustments. The amended return or AAR must include all relevant adjustments to taxable income, including collateral adjustments, arising from the withdrawn election. Taxpayers also must file amended returns or AARs, as applicable, for any affected succeeding taxable years by the applicable deadlines.
• Late election out of bonus depreciation. Eligible taxpayers withdrawing an election out of Section 163(j) also can make a late election under Section 168(k)(7) on the same amended return or AAR to opt out of bonus depreciation for a class of depreciable property affected by the withdrawal, subject to the revenue procedure’s scope conditions (including that the original placed-in-service-year return was timely filed on or before March 18, 2026).
• Eligible BBA partnership amended return option. In lieu of filing an AAR, partnerships subject to the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA) are allowed to instead file an amended Form 1065, “U.S. Return of Partnership Income,” and furnish an amended Schedule K-1, “Partner’s Share of Current Year Income, Deductions, Credits, and Other Items,” to withdraw a prior election out of Section 163(j). A taxpayer that receives an amended Schedule K-1 should file an amended federal income tax return, an amended Form 1065, or an AAR.

Crowe observation

This is the first time the IRS has exercised its discretion to allow BBA partnerships to file an amended Form 1065 since 2021. Notably, the IRS did not provide this relief in Revenue Procedure 2025-28, which implemented changes made by the OBBBA for research expenses.

Controlled foreign corporation (CFC) group election relief

Revenue Procedure 2026-17 also allows designated U.S. persons to revoke or make a CFC group election for the first specified period of a specified group beginning after Dec. 31, 2024, without regard to the 60-month limitation in Treasury Regulation Section 1.163(j)-7(e)(5)(ii). The 60-month limitation applies again for subsequent periods.

Looking ahead

Taxpayers that previously elected out of Section 163(j) should revisit the economics of those elections under the post-OBBBA regime. In particular, taxpayers should reevaluate expected Section 163(j) limitation exposure as ATI computation rules change for post-2024 years and the depreciation and bonus depreciation implications of leaving an election out of Section 163(j) in place.

Because Revenue Procedure 2026-17 relief is time-limited and must be implemented through amended filings, taxpayers should consult their tax adviser to model the impact of withdrawing an election out of Section 163(j) for both the year of withdrawal and all subsequent taxable years.