This article was written by Ashley Sullivan, CCSP, Partner MSC, President, American Society of Cost Segregation Professionals.
On March 18, 2026, the Internal Revenue Service issued Revenue Procedure 2026‑17, providing transition guidance under Internal Revenue Code §§ 163(j) and 168(k). The revenue procedure gives certain taxpayers a chance to revisit prior elections made under the business interest limitation rules. For taxpayers that elected to be excepted from §163(j) in 2022–2024, the IRS now provides a process to withdraw those elections retroactively, with related depreciation and procedural relief, in light of statutory amendments enacted by the One Big Beautiful Bill Act (OBBBA). The guidance applies to specific taxable years and outlines procedural requirements, deadlines, and related adjustments.
Overview of Revenue Procedure 2026-17
Revenue Procedure 2026‑17 establishes administrative procedures allowing eligible taxpayers to withdraw certain §163(j)(7) elections that were made on a timely filed original return for taxable years beginning in 2022, 2023, or 2024. The procedure also provides related relief concerning depreciation elections under §168(k), controlled foreign corporation (CFC) group elections, and amended partnership filings under the centralized partnership audit regime.
Eligible Elections That May Be Withdrawn
The revenue procedure permits the withdrawal of the following elections, if properly made for an eligible taxable year:
- An election to be treated as an electing real property trade or business under §163(j)(7)(B);
- An election to be treated as an electing farming business under §163(j)(7)(C); and
- An election to be treated as an excepted regulated utility trade or business under the §163(j) regulations.
If a withdrawal is validly made, it is retroactive, and the taxpayer is treated as though the election had never been made for the year at issue.
Procedures for Withdrawing an Election
To withdraw an eligible election, a taxpayer must file the appropriate amended return, amended Form 1065, or administrative adjustment request (AAR), as applicable. The filing must include a required legend stating, “FILED PURSUANT TO REV. PROC. 2026‑17” and a statement identifying the specific election being withdrawn.
Filing Deadlines
Importantly, to use this relief, the taxpayer must file by the earlier of October 15, 2026, or the applicable statute of limitations date. For partnerships subject to the centralized partnership audit regime filing an AAR, the deadline is the earlier of October 15, 2026, or the end of the period described in §6227(c).
Required Tax and Depreciation Adjustments
A taxpayer withdrawing a §163(j)(7) election must reflect all consequences of the retroactive withdrawal. Withdrawing the election is not merely procedural, and the taxpayer must recompute all related tax consequences, including depreciation, basis, and other collateral items affected by the change. The revenue procedure requires that depreciation be recomputed under §168, with corresponding basis adjustments, and that any affected succeeding taxable years also be amended as necessary. Any required accounting method adjustments must be taken into account in accordance with applicable rules.
Cost Segregation Considerations
Revenue Procedure 2026‑17 creates an opportunity for taxpayers to reassess prior §163(j)(7) elections that may no longer reflect the best interests of the business under the current depreciation landscape. For taxpayers that previously completed a cost segregation study in connection with an electing real property trade or business or electing farming business election, a retroactive withdrawal may reopen depreciation outcomes that were previously limited by ADS treatment. For example, qualified improvement property (QIP) that was depreciated over a 20‑year ADS life and excluded from bonus depreciation as a result of the election may, following a withdrawal, become eligible for accelerated recovery under §168, potentially resulting in significant additional deductions through amended filings. Taxpayers with prior cost segregation reports should consider whether those studies can be leveraged in connection with this relief to realign depreciation outcomes with current business objectives.
Late Election Out of Bonus Depreciation Under §168(k)(7)
Revenue Procedure 2026‑17 permits a taxpayer that withdraws a §163(j)(7) election to make a late election under §168(k)(7) to elect out of additional first‑year depreciation (bonus depreciation) for classes of property affected by the withdrawal. This late election must be made on the same amended return, amended Form 1065, or AAR and is subject to the same filing deadlines.
Additional Relief Provisions
The revenue procedure also includes two additional relief provisions:
- CFC Group Election Relief: A designated U.S. person may revoke or make a CFC group election without regard to the 60‑month limitation under the §163(j) regulations for the first specified period of a specified group beginning after December 31, 2024. The 60‑month limitation applies again after that period.
- BBA Partnership Relief: Certain eligible partnerships subject to the centralized partnership audit regime for taxable years beginning in 2022 through 2024 may file an amended Form 1065 with amended Schedules K‑1 instead of an AAR, provided the conditions in the revenue procedure are satisfied.
Practical Considerations
Given the retroactive nature of the relief provided in Revenue Procedure 2026‑17 and the requirement to account for all resulting tax, depreciation, and collateral adjustments, taxpayers should carefully evaluate the parameters of the guidance as they apply to their specific facts and filing history. Coordination with a qualified tax professional is important to fully understand eligibility, procedural requirements, and the potential implications of withdrawing a prior election or making a related depreciation election, and to determine which available option, if any, is most appropriate under the revenue procedure.
Key Takeaway
Taxpayers that previously elected to be exempted from §163(j) for 2022–2024 should revisit those elections now. Rev. Proc. 2026-17 creates a limited window to unwind certain prior elections and make related adjustments, but the relief is subject to filing deadlines and requires taxpayers to account for all downstream tax consequences.
If you have any questions or are interested in learning more, don’t hesitate to reach out today!
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