Key insights
- Recent law changes may make prior elections out of the Section 163(j) business interest expense limitation unfavorable.
- IRS Rev. Proc. 2026-17 provides a narrow window for taxpayers who elected out of the Section 163(j) limitation in 2022 – 2024 to undo that decision.
- Revoking the election can lower taxes in some years and raise them in others, making multi-year modeling essential.
Unlock potential tax benefits with a fresh review.
Tax law changes may have you rethinking a past Section 163(j) election out of the business interest limitation. Recent IRS guidance offers a limited chance to unwind that decision for certain taxpayers — and potentially reclaim depreciation benefits previously off the table.
IRS Revenue Procedure 2026-17 creates a narrow window for businesses that elected out in 2022 – 2024 to withdraw that election. Because the impact can lower taxes in some years and increase it in others, the decision is best evaluated with multi-year modeling before filing amended returns or an administrative adjustment request.
Learn whether you may be eligible to withdraw the election, what the deadlines and filing steps look like, and how to evaluate whether the change is likely to help or hinder you over multiple years.
Interest deductions and the Section 163(j) election
Businesses can generally deduct interest paid or accrued during the taxable year. However, Section 163(j) limits the deduction to 30% of your adjusted taxable income (ATI) for the year. Any disallowed interest carries forward to future years.
Small businesses — including most businesses with average annual gross receipts of $32 million or less—are generally exempt from the limit. Real estate and farming businesses can avoid the limit by electing out.
However, the election comes with a tradeoff: the business must use longer depreciation lives under the alternative depreciation system for certain property and is prohibited from claiming bonus depreciation on those assets.
Once made, the election is irrevocable — at least under the original rules.
Why many businesses opted out in 2022
When the business interest limitation became effective in 2018, depreciation and amortization were added back when calculating ATI.
Beginning in 2022, depreciation and amortization were no longer added back, significantly tightening the limitation for asset intensive businesses. Bonus depreciation began phasing down in 2023 and was eventually expected to be phased out.
In response, many real estate and farming businesses elected out of Section 163(j) to preserve full interest deductibility, even though doing so meant giving up accelerated depreciation.
How OBBBA changed the equation
The One Big Beautiful Bill Act (OBBBA) reversed several of the developments that drove businesses to opt out. Most notably, it restored the addback of depreciation and amortization in computing ATI and permanently extended 100% bonus deprecation.
These changes reduce the benefits and increase the costs of electing out of the limitation. In hindsight, some taxpayers who elected out may have chosen to remain subject to the limitation.
Rev. Proc. 2026-17: A limited opportunity to revoke the election
IRS Revenue Procedure 2026-17 provides a limited opportunity for taxpayers who elected out of the business interest limit in 2022, 2023, or 2024 to withdraw their election.
To do so, you must either file an amended federal income tax return or submit an administrative adjustment request (AAR). The withdrawal effectively treats the election as though it was never made.
The withdrawal must be completed by the earlier of:
- The expiration of the statute of limitations on assessment for the year involved (generally three years from the original filing date), or
- October 15, 2026.
To withdraw the election, you must file amended returns for the year of withdrawal and any affected subsequent years. These filings must reflect application of the business interest limitation and appropriate depreciation methods for affected assets.
If assets become eligible for bonus depreciation as a result of the withdrawal and you prefer not to claim bonus depreciation, the revenue procedure allows you to elect out of bonus depreciation for the affected asset class.
IRS Revenue Procedure 2026-17 provides a limited opportunity for taxpayers who elected out of the business interest limit in 2022, 2023, or 2024 to withdraw their election.
Seeing the numbers in action
The numbers can shift quickly once depreciation and interest rules interact. The simplified example below shows how revoking a prior election can change taxable income — and why looking at just one year rarely tells the full story.
Example
Auburn Real Estate Partners LLC is a partnership engaged in a real estate business. During 2025, it has the following items of income and expense:
- Gross receipts: $1,000
- Operating expenses: ($200)
- Interest expense: ($300)
- Depreciation — with bonus: ($500)
- Depreciation — no bonus ($300)
Auburn elected out of the business interest limitation in 2022 and is now considering whether to revoke that election. Auburn’s 2025 tax results under each scenario are as follows:
| Retain Election | Revoke Election | |
|---|---|---|
| Pre-limit taxable income | $200 | $0 |
| Add back business interest | N/A | $300 |
| Add back depreciation, amortization, and depletion | N/A | $500 |
| Adjusted income | N/A | $800 |
| Limitation percentage | N/A | 30% |
| Business interest limitation | N/A | $240 |
| Taxable income after applying the limit | $200 | $60 |
| Federal tax rate | 30% | 30% |
| Federal tax | $60 | $18 |
For 2025, Auburn’s federal tax liability is $42 lower if it revokes its prior election out of the business interest limitation. However, the depreciation and amortization addback did not apply in 2022, 2023, or 2024. As a result, revoking the election could increase tax liability in those amended return years.
Accordingly, Auburn should evaluate the impact of revoking the election across multiple years — not just the current year — before deciding to withdraw the election.
What this could mean for your organization
- You may have more flexibility than you realized around depreciation and interest deductions
- A decision that made sense a few years ago may look different under current law
- The impact isn’t isolated to one tax year — it can ripple across past, current, and future filings
How CLA can help with business interest
Determining whether to withdraw a Section 163(j) election requires careful modeling and an understanding of how interest limitations interact with depreciation methods over multiple years.
CLA’s tax professionals can help you evaluate whether withdrawing a prior election makes sense by analyzing your historical and projected taxable income, interest expense, and depreciation profile. We can also assist with preparing amended returns or administrative adjustment requests.
If your business elected out of the Section 163(j) limitation in 2022, 2023, or 2024, now is the time to revisit that decision. A proactive review can help you take full advantage of current law while avoiding unintended tax consequences before key deadlines expire.
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