How to Reverse Your 163(j) Election: Claiming Your Lost Bonus Depreciation
Let’s be completely honest—navigating the U.S. tax code often feels like trying to read a foreign language backward, doesn’t it? If you’re a real estate investor, a farmer, or run a regulated utility, you’ve probably spent countless hours agonizing over whether or not to make the § 163(j)(7) election. A few years ago, opting out of the business interest expense limitation seemed like a brilliant move. It freed you from the tight 30% adjusted taxable income (ATI) cap, but it came with a heavy cost: giving up your lucrative bonus depreciation and being forced into the slower Alternative Depreciation System (ADS).
Well, I have some fantastic news for you! The tax landscape just experienced a massive earthquake with the passage of the One, Big, Beautiful Bill Act (OBBBA) in July 2025. Because of the incredible changes brought by the OBBBA, the IRS has just released Revenue Procedure 2026-17 (effective March 18, 2026). This procedure is essentially a golden “undo” button. It allows you to retroactively withdraw those irrevocable elections for the 2022, 2023, and 2024 tax years. Let’s dive deep into exactly what this means, why you should care, and how you can put real money back into your pocket! 😊
What’s the Big Deal with Rev. Proc. 2026-17? 🤔
To truly appreciate how game-changing this new revenue procedure is, we need to take a quick trip down memory lane. Back in 2017, the Tax Cuts and Jobs Act (TCJA) introduced a strict limit on how much business interest you could deduct. Generally, it was capped at 30% of your business’s Adjusted Taxable Income (ATI). However, the IRS threw a lifeline to certain industries—specifically, real property trades, farming businesses, and regulated utilities. You could make a § 163(j)(7) election to completely ignore this interest limitation.
But there was a catch, and it was a big one. If you made this election, it was irrevocable. Furthermore, you were penalized by being forced to use the Alternative Depreciation System (ADS) for certain property. This meant saying goodbye to the incredibly popular 100% additional first-year depreciation (bonus depreciation) under § 168(k).
The CARES Act of 2020 temporarily bumped the ATI limit to 50% for 2019 and 2020 to help businesses during the pandemic, and the IRS previously offered a similar withdrawal option back then (Rev. Proc. 2020-22). But that window closed, leaving many businesses stuck with their elections for 2022 and beyond.
Enter the One, Big, Beautiful Bill Act (OBBBA) of 2025. This massive piece of legislation completely flipped the script. First, it restored your ability to add back depreciation, amortization, and depletion when calculating your ATI for taxable years beginning after December 31, 2024. Second—and this is the real kicker—it made 100% bonus depreciation permanent for property acquired after January 19, 2025! Suddenly, being stuck in ADS because of an old 163(j) election looks like a terrible financial trap. The IRS recognized this unfairness, hence the birth of Rev. Proc. 2026-17, allowing you to withdraw that old election and get back on the bonus depreciation train.
Who Can Withdraw Their § 163(j)(7) Election? 🙋♂️
Not everyone gets to hit the undo button. The IRS has established specific criteria for who falls under the scope of this new guidance. You are eligible to withdraw your election if you meet the following conditions:
- You made an election to be an electing real property trade or business.
- You made an election to be an electing farming business.
- You made an election to be an excepted regulated utility trade or business.
- You made this election on your timely filed original Federal income tax return (including extensions) for a taxable year beginning in 2022, 2023, or 2024.
If you successfully withdraw the election using this procedure, the IRS will treat you exactly as if the election had never been made in the first place. It completely erases it from your tax history! But remember, withdrawing this election means you will now be subject to the standard § 163(j) business interest limitations for those past years, so you need to crunch the numbers to ensure it’s actually beneficial for you.
How to Withdraw the Election (Step-by-Step) 📝
Alright, you’ve done the math and decided that withdrawing the election is the right move for your business. How do you actually do it? It requires some paperwork, but the process is straightforward if you follow the rules carefully.
You need to file an amended Federal income tax return, an amended Form 1065 (for partnerships), or an Administrative Adjustment Request (AAR) for the taxable year you initially made the election. Here is what you must include:
| Requirement | Action Needed |
|---|---|
| Top Margin Note | You must clearly write “FILED PURSUANT TO REV. PROC. 2026-17” at the top of the amended return or AAR. |
| Attachment Title | Attach a statement titled: “Revenue Procedure 2026-17 Section 163(j)(7) Election Withdrawal”. |
| Taxpayer Details | Include your name, address, and taxpayer identification number (TIN) on the statement. |
| Declaration | Explicitly state that you are withdrawing the election under § 163(j)(7)(B), (C), or 1.163(j)-1(b)(15)(iii) pursuant to this procedure. |
You don’t have forever to do this. Your amended return must be filed on or before the earlier of October 15, 2026, or the end of the applicable period of limitations on assessment for the taxable year. Don’t procrastinate on this! Furthermore, if you are currently under IRS examination, you must provide a copy of this amended return to the coordinating revenue agent immediately upon filing.
It’s crucial to understand that withdrawing the election causes a domino effect on your tax returns. You must make all relevant adjustments to your taxable income. This means adjusting your depreciation allowed (since you are no longer forced into ADS) and updating your property basis. If these changes affect subsequent tax years (which they almost certainly will due to depreciation changes), you must also file amended returns for all those affected succeeding taxable years!
The Late § 168(k)(7) Election Bonus 🎁
Now, let’s talk about the incredible flexibility the IRS is offering here. When you withdraw your 163(j) election, you are suddenly eligible for bonus depreciation on property placed in service during those years. However, what if you don’t want to claim bonus depreciation for a specific class of property? Maybe it creates a massive net operating loss that you can’t efficiently use, or it conflicts with your overall tax strategy.
Rev. Proc. 2026-17 has you covered! It allows you to make a late § 168(k)(7) election out of bonus depreciation. You can do this on the exact same amended return where you withdraw your 163(j) election. You just need to tweak your attachment title to say: “Revenue Procedure 2026-17 Section 163(j)(7) Election Withdrawal and Late Section 168(k)(7) Election”.
🔢 Quick Bonus Depreciation Savings Estimator
Use this simple tool to estimate how much tax you could save by withdrawing your election and claiming 100% permanent bonus depreciation under the OBBBA rules.
Special Rules for BBA Partnerships 🤝
Partnerships subject to the centralized partnership audit regime (BBA partnerships) usually have a notoriously difficult time fixing past returns. Normally, they are strictly prohibited from amending their returns and issuing new Schedules K-1 after the due date, forcing them to file complex Administrative Adjustment Requests (AARs) instead.
Fortunately, Section 7 of Rev. Proc. 2026-17 exercises the IRS's authority to grant a highly beneficial exception! If you are an eligible BBA partnership that filed for the 2022, 2023, or 2024 tax years, you have the option to bypass the agonizing AAR process. Instead, you can simply file an amended Form 1065 (with the "Amended Return" box checked) and issue corrected Schedules K-1 directly to your partners.
If an eligible BBA partnership chooses to file an amended Form 1065 under this procedure, they must still adhere to the October 15, 2026 deadline. Additionally, if the partnership is currently under audit, they must notify their revenue agent in writing *before* or at the same time they file the amended return.
A Quick Note on CFC Group Elections 🌍
For the international tax folks reading this, the procedure didn't forget about you. Section 6 addresses Controlled Foreign Corporation (CFC) group elections. Usually, under § 1.163(j)-7(e)(5)(ii), there is a strict "60-month limitation"—meaning once you make or revoke a CFC group election, you are locked in for 5 years.
Because of the massive changes brought by the OBBBA, Rev. Proc. 2026-17 provides a one-time waiver of this 60-month rule. A designated U.S. person can revoke or make a CFC group election for the first specified period beginning after December 31, 2024, without having to wait out the 60 months. However, be careful: once you make this new choice, the 60-month lock-in period resumes immediately for any subsequent periods.
Conclusion: Key Summary 📝
The interplay between the Tax Cuts and Jobs Act, the CARES Act, and now the One, Big, Beautiful Bill Act of 2025 has created a whirlwind of strategic tax planning opportunities. Rev. Proc. 2026-17 is a massive gift from the IRS, allowing real estate, farming, and utility businesses to undo past restrictions and fully leverage the new, permanent 100% bonus depreciation rules.
Rev. Proc. 2026-17 Quick Cheatsheet
Remember, while hitting the "undo" button on your 163(j) election might open the door to massive bonus depreciation, it simultaneously limits your interest deductions for those years. It is a mathematical balancing act. You need your tax professional to run the numbers both ways to see which scenario yields the highest net cash flow for your specific situation.
What are your thoughts on these new IRS changes? Are you planning to amend your returns, or does the math not work out for you? Let me know in the comments below! If you found this breakdown helpful, please share it with your fellow business owners! 😊
