IRS Provides Section 163(j) Guidance on Withdrawing Real Property Trade or Business Elections

In light of changes made by the One Big Beautiful Bill Act (OBBBA), the IRS on March 18 released guidance (Revenue Procedure 2026-17) setting out procedures for real property trades or businesses, electing farming businesses, and excepted regulated utility trades or businesses to withdraw previous elections to be excepted trades or businesses under Section 163(j)(7) for purposes of the business interest limitation. 

The Tax Cuts and Jobs Act of 2017 (TCJA) limited the amount of business interest that can be deducted for tax years beginning after December 31, 2017, to the sum of: (a) the taxpayer’s business interest income for the tax year; (b) 30% of the taxpayer’s adjusted taxable income (ATI) for the tax year; and (c) the taxpayer’s floor plan financing interest expense for the tax year. Under Section 163(j) as amended by the TCJA, ATI was calculated excluding any deduction allowable for depreciation, amortization, or depletion “for taxable years beginning before January 1, 2022” (i.e., such amounts would not be excluded in subsequent years).

Following the TCJA amendments, an exclusion from the Section 163(j) limitation applied for an “electing real property trade or business,” among others. However, under Section 168(g), an electing real property trade or business could not claim the additional first-year depreciation deduction under Section 168(k) for certain types of property. Section 168(k)(7) allows a taxpayer to elect not to deduct the additional first-year depreciation for any class of property that is qualified property placed in service during the tax year.

The OBBBA restored the Section 163(j) ATI add back for depreciation, amortization, and depletion for tax years beginning after December 31, 2024, and made 100% bonus depreciation permanent (generally for property acquired after January 19, 2025), changing the trade-off calculus that originally drove many Section 163(j)(7) elections.

For taxpayers withdrawing a Section 163(j)(7) election, the new guidance also permits such taxpayers to make a late election under Section 168(k)(7) not to deduct bonus depreciation.

To withdraw the elections under the guidance, eligible partnerships may file amended partnership returns for tax years beginning in 2022, 2023, and 2024 using a Form 1065, U.S. Return of Partnership Income, and issue an amended Schedule K-1 to each of their partners. Partnerships under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA partnerships) may file an administrative adjustment request (AAR) or, if certain requirements are met, opt to file an amended Form 1065 instead. 

Withdrawing Real Property Trade or Business Elections

For taxpayers who previously elected to be treated as an electing real property trade or business, the new revenue procedure sets out transition guidance under Sections 163(j) and 168(k) to withdraw the election for tax years 2022, 2023, or 2024 in light of the OBBBA amendments to Section 163(j) and 168(k). It further allows such taxpayers to make a late Section 168(k)(7) election with respect to any class of property that includes depreciable property affected by the withdrawal of the real property trade or business election. 

Under the guidance, affected taxpayers may withdraw their Section163(j)(7) election for a 2022, 2023, or 2024 tax year by filing an amended Form 1065 or AAR, as applicable, for the tax year for which the election was initially made and attaching an election withdrawal statement as described in the revenue procedure. Taxpayers receiving an amended Schedule K-1 as a result should follow similar procedures to amend their returns. 

The amended Form 1065 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 tax year for which the amended return is being filed. A partnership filing an amended Form 1065 must also furnish any corresponding Schedules K-1 by the same date. In the case of a BBA partnership filing an AAR, the applicable AAR must be filed on or before the earlier of October 15, 2026, and the last day of the Section 6227(c) period during which the partnership may file an AAR for the tax year for which the election was made.

In-scope taxpayers may make a late Section 168(k)(7) election on the same amended Form 1065 or AAR, including a statement as described in the revenue procedure. 

The guidance also includes an option for eligible BBA partnerships to file an amended Form 1065 instead of filing an AAR.