New Guidance Offers Flexibility to Revisit Prior Real Property and CFC Elections

The passage of the One Big Beautiful Bill Act (OBBBA) reshaped how taxpayers evaluate interest expense limitations under Section 163(j), and the IRS is now offering a path to revisit prior decisions. Revenue Procedure 2026-17 provides eligible taxpayers with an opportunity to withdraw certain elections that may no longer be beneficial under the current rules.

This guidance is particularly relevant for taxpayers who previously elected to be treated as a real property trade or business or made a controlled foreign corporation (CFC) group election.

With the restoration of more favorable adjusted taxable income (ATI) calculations and other changes introduced by recent legislation, taxpayers may be able to enhance interest deductions, revisit depreciation methods and realign their tax positions.

Section 163(j) Interest Limitation and Election Landscape

Real property trade or business elections

Section 163(j) limits interest expense deductions to generally 30% of adjusted taxable income (ATI), subject to certain exceptions and thresholds. Since its amendment on December 22, 2017, the calculation of ATI has evolved, directly impacting the extent to which taxpayers can deduct interest expense.

ATI was calculated as follows prior to January 1, 2022:

• Taxable income, plus
• Interest expense, plus
• Depreciation and amortization, less
• Interest income

From January 1, 2022, through December 31, 2024, depreciation and amortization were no longer added back when determining ATI. This change reduced ATI for many taxpayers, and in turn, limited the amount of interest expense they were allowed to deduct under Section 163(j).

As a result of these limitations, Section 163(j) allowed certain taxpayers, including real property trades or businesses, farming businesses and excepted regulated utility trades or businesses to elect out of the provisions of Section 163(j). The cost of making this election was that qualifying taxpayers had to use the alternative depreciation system (ADS) instead of the modified accelerated cost recovery system (MACRS) depreciation for real property assets and qualified improvement property (QIP).

If qualifying taxpayers made this election, it was irrevocable, making the decision particularly consequential.

Controlled foreign corporation (CFC) group elections

Section 163(j) is generally applied on a CFC-by-CFC basis unless a CFC group election is made. A CFC group election provides for an aggregation approach, in which the limitation components are calculated in aggregate for members of the “CFC group.”

For CFCs subject to a Section 163(j) limitation on a stand-alone basis, a taxpayer could evaluate whether making a CFC group election would result in a higher limitation and increased interest deductions for purposes of certain CFC calculations.

Additionally, under the 2020 proposed regulations, certain U.S. shareholders of CFCs were permitted to increase their ATI for U.S.-level Section 163(j) purposes. This increase was tied to the excess ATI generated by the CFC Group, providing an additional potential benefit for taxpayers that made the election.

Impact of the One Big Beautiful Bill Act

OBBBA permanently revised Section 163(j) to restore the pre-2022 ATI calculations such that depreciation and amortization expenses are added back when determining ATI. As a result, taxpayers may now see increased ATI, and in turn, a higher limitation on deductible interest expense. This change could prompt some taxpayers to reassess their prior elections to remain exempt from Section 163(j).

OBBBA also eliminated CFC inclusions (and the related Section 78 gross-up) from the definition of ATI, removing one of the key benefits previously associated with CFC group elections.

Together, these changes may shift the cost-benefit analysis for both real property trade or business elections and CFC group elections, creating an opportunity for taxpayers to revisit prior decisions.

Opportunities to Revisit Prior Elections

Withdrawing a prior Section 163(j) election

Revenue Procedure 2026-17 allows taxpayers to withdraw certain prior elections for real property trades or businesses and similar elections described in Section 163(j)(7) if the following conditions are met:

1. The initial election was made during tax years 2022, 2023 or 2024.
2. The taxpayer amends all tax returns impacted by the original election.
3. The amended returns are filed by the earlier of the applicable statute of limitations or October 15, 2026.

The amended return must clearly state that it is “Filed Pursuant to Rev. Proc. 2026-17.”

Taxpayers must attach a withdrawal statement and may need to adjust depreciation deductions and basis to reflect revocation of the election.

If the taxpayer is under examination, copies of the amended returns must be provided to the assigned revenue agent.

Revisiting bonus depreciation elections

Taxpayers generally must elect out of bonus depreciation under Section 168(k)(7) on a timely filed return. A Section 163(j)(7) real property trade or business election requires the use of ADS for nonresidential and residential real property and qualified improvement property (QIP), which renders QIP ineligible for bonus depreciation.

If a taxpayer later revokes a Section 163(j)(7) real property trade or business election, bonus depreciation may be applied to the affected property.

In such cases, the taxpayer must include a statement with the amended return indicating the election is pursuant to Rev. Proc. 2026-17.

Flexibility for CFC group elections

Revenue Procedure 2026-17 provides that a taxpayer that is designated as a U.S. person may revoke or make a CFC group election without the 60-month limitation, provided the election or revocation applies to the first specified period after December 31, 2024. ​

The first specified period begins after December 31, 2024. Any revocation or new election must follow the procedures outlined in Treasury Regulation Section 1.163(j)-7(e)(5), except for the 60-month limitation. ​

The 60-month limitation will apply to subsequent periods. ​For example, if a taxpayer revokes or makes an election for a period ending December 31, 2025, the taxpayer is generally restricted from making or revoking another election for periods beginning before December 31, 2030. ​

Amended Return Procedures for Partnerships

Revenue Procedure 2026-17 allows partnerships to file amended tax returns even if they are considered Bipartisan Budget Act (BBA) partnerships.

Partnerships can file an amended Form 1065 with the “Amended Return” box checked and must provide amended Schedules K-1 to its partners. In addition, the amended return must clearly indicate that the return is “Filed Pursuant to Rev. Proc. 2026-17.”

If partnerships choose to file amended Forms 1065, the partners must file amended returns as well. The amended returns must reflect changes to all collateral items impacted by the withdrawal of the election, such as the amount of depreciation expense that may be subject to capitalization under other provisions of the Internal Revenue Code.

Alternatively, BBA partnerships may file an administrative adjustment request (AAR) under Section 6227. ​

Planning Considerations Before You Act

Real property trade or business elections

On the surface, withdrawing a Section 163(j) real property trade or business election may appear beneficial under the revised rules. However, taxpayers and their owners should carefully evaluate the potential downstream implications before taking action.

Considerations include:

• Does the taxpayer expect to make significant capital improvements in future years?
• What is the impact of amending prior-year tax returns, including the potential for additional tax, penalties or interest?
• Is it more beneficial to amend the partnership return or file an AAR?
• Should the taxpayer elect out of bonus depreciation or revisit prior depreciation positions?
• Are there material impacts from collateral issues in the amended returns resulting from the revocation of the election?

CFC group elections

As a result of the OBBBA removing one benefit of the CFC group election — namely the ability to increase ATI for certain CFC inclusions — and the reinstatement of depreciation and amortization addbacks to ATI, taxpayers may want to reassess whether an existing CFC group election continues to provide value.

Revenue Procedure 2026-17 offers a limited opportunity to revoke an existing election without being subject to the 60-month limitation rule. This allows taxpayers to realign their international interest limitation strategy with the revised statutory framework.

Key Takeaways

Revenue Procedure 2026-17 provides a timely opportunity for taxpayers to revisit prior Section 163(j) elections in light of recent legislative changes. While the potential benefits can be significant, the decision to withdraw or modify an election requires careful analysis of eligibility, timing and broader tax implications. Taxpayers should act promptly to evaluate their position ahead of applicable deadlines.

Weaver’s tax professionals can help assess the impact of these changes and guide you through the process of revisiting prior elections. Contact us to discuss how these developments may affect your organization.

©2026

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The Tax Navigator – Section 163(j) Real Property Election Relief Under Rev. Proc. 2026‑17