Should you undo your 163(j) election?
- Rev. Proc. 2026-17 gives real estate and farming businesses a new opportunity to withdraw a Section 163(j) real property trade or business or farming trade or business election made in tax years 2022-2024.
- Many businesses made these elections to avoid the business interest limitation, but the tradeoff was losing bonus depreciation on key assets (e.g., qualified incentive property and certain farming assets).
- Withdrawing the election could allow those businesses to take advantage of 100% bonus depreciation on those key assets without losing their business interest deduction in 2025 and beyond.
- To withdraw, taxpayers must file amended returns for the election year and all affected subsequent years (and pass-through entities must issue amended K-1s), recomputing interest and depreciation as if the election were never made.
The Tax Cuts and Jobs Act created Section 163(j), which limits the deduction of business interest expense to 30% of adjusted taxable income (ATI), commonly called “tax EBITDA.” Beginning in 2022, businesses were limited to “tax EBIT” and could no longer add back depreciation and amortization expense to ATI. Many businesses got hit by the limitation.
Why real estate and farming businesses elect out of Section 163(j)
Because real estate and farming businesses are often highly leveraged, their interest deductions may be significant. These businesses can opt out of the limitation by making a real property trade or business (RPTB) or farming trade or business (FTB) election.
Many did so in 2022-2024 to avoid losing their interest deductions. However, the election came with a high cost — electing businesses are ineligible to take bonus depreciation on certain assets (qualified incentive property [QIP] for real estate businesses and single-purpose agricultural buildings, land improvements and farm buildings for farming businesses).
How OBBB changes the Section 163(j) planning equation
The One Big Beautiful Bill Act (OBBB) turned back the clock and restored “tax EBITDA” for Section 163(j) and made permanent 100% bonus depreciation. In 2025 and beyond, businesses can deduct 100% bonus depreciation without that depreciation severely restricting their deductible interest expense.
Real estate and farming businesses that made RPTB or FTB elections in tax years 2022-2024 may now be experiencing buyer’s remorse. If they had been aware of OBBB’s favorable changes, they might not have decided to make the election.
Luckily, on March 18, 2026, the IRS released Rev. Proc. 2026-17, which allows real estate and farming businesses to withdraw RPTB or FTB elections made in tax years 2022-2024.
A business that wants to withdraw its election must file an amended tax return for the year the election was made and all subsequent years impacted. Withdrawing partnerships or S corporations must also issue amended K-1s to their owners, who would then need to amend their tax returns for the impacted years.
What changes after the Section 163(j) election withdrawal: impact on interest limit and depreciation
Once withdrawn, the business is treated as if the election were never made. This means taxable income, interest expense and depreciation deductions are recomputed on the amended returns. Because a business would no longer be exempt from the limitation in the impacted years, additional taxable income and tax due could result from the loss of interest deductions. To reduce the impact, businesses may either deduct bonus depreciation on QIP and the farming assets listed above or choose to opt out of bonus depreciation altogether in the impacted years (whichever results in the highest benefit).
Additional income for 2022-2024 might be a small price to pay to take advantage of 100% bonus depreciation and reduced exposure to the interest expense limitation in 2025 and beyond.
Withdrawing the election could be a valuable option for commercial lessors who make frequent tenant improvements, as well as capital-intensive farming, ranching and horticultural businesses.
Businesses must act fast to take advantage of this guidance. A cost-benefit analysis is needed to make a strategic decision, and all amended tax returns must be filed by October 15, 2026 (sooner for amended 2022 tax returns).
How Wipfli can help
Wipfli’s tax advisory team can help you evaluate a Section 163(j) election withdrawal by modeling the impact on interest deductions, depreciation (including QIP) and overall tax liability across all affected years. Our specialists can also guide you through the amended return and amended K-1 process to help you apply this guidance efficiently and consistently. Reach out to your team to run a cost-benefit analysis and develop an action plan ahead of the October 15, 2026, deadline.
