New revenue procedure offers flexibility for business interest limitation elections

Background

Introduced by the Tax Cuts and Jobs Act of 2017 (TCJA), section 163(j) limits the amount of business interest a taxpayer may deduct to 30% of adjusted taxable income. Prior to 2022, adjusted taxable income was calculated on an EBITDA basis (i.e., earnings before interest, taxes, depreciation, and amortization) basis. However, a sunset provision included in TCJA changed the calculation of adjusted taxable income to an “EBIT” basis, excluding depreciation and amortization. The sunset provision's exclusion significantly reduced deductible business interest for entities with considerable depreciation deductions. This impact was further compounded by the extension of bonus depreciation under section 168(k), which accelerates depreciation deductions into the initial year a qualifying asset is placed in service. 

However, under section 163(j)(7), certain businesses were permitted to elect to be treated as an “electing real property trade or business,” an “electing farming business,” or an “excepted regulated utility trade or business” in order to avoid the business interest limitation entirely. By making one of these elections, taxpayers agreed to use the alternative depreciation system and forego any bonus depreciation available under section 168(k), resulting in smaller depreciation deductions over a longer period of time. Although restricted, opting out of the business interest expense limitation was often beneficial for taxpayers anticipating significant interest expenses over multiple years. 

Critically, though, an election under section 163(j)(7) is an irrevocable statutory election. While taxpayers may be able to revoke or obtain other relief with respect to regulatory elections under Treasury Regulations section 301.9100-3, such relief is not generally available with respect to statutory elections.

Separately, Treasury Regulation section 1.163(j)-7 provides rules for applying the section 163(j) limitation to controlled foreign corporations (CFCs). Under these rules, a “designated US person” may make a “CFC group election” to compute a single section 163(j) limitation for a specified group of CFCs. Once made, the CFC group election is subject to a 60-month limitation. It may not be revoked for at least 60 months, and once revoked, a new election may not be made for at least another 60 months.

OBBBA Statutory Changes

In 2025, OBBBA altered the financial calculus for taxpayers that had previously elected out of the business interest expense limitation. OBBBA permanently restored the adjusted taxable income calculation to an EBITDA basis, increasing the income base of the business interest deduction limit for taxpayers with capital-intensive businesses.

Additionally, OBBBA revised the bonus depreciation provisions under section 168(k) to permanently establish 100% bonus depreciation. Taxpayers that opted out of the business interest expense limitation under section 163(j) consequently forfeited eligibility for bonus depreciation, resulting in a substantial reduction in depreciation benefits for assets that would have otherwise qualified for 100% first-year depreciation. 

These OBBBA changes also directly affect the utility of the CFC group election under Treasury Regulation section 1.163(j)-7. Prior to the enactment of OBBBA, a designated US person making a CFC group election could effectively incorporate CFC tested income inclusions (such as GILTI) into its adjusted taxable income, thereby enabling US shareholders to utilize excess section 163(j) limitation capacity that would otherwise remain unavailable at the CFC level. However, OBBBA amended section 163(j) to explicitly exclude all CFC inclusions from adjusted taxable income, regardless of whether a CFC group election is in place. Consequently, the principal benefit of making a CFC group election – gaining access to CFC-level excess section 163(j) limitation – has been removed for taxable years beginning after December 31, 2024. 

Notably, OBBBA did not repeal (i) the CFC group election, (ii) the definition of a CFC group, or (iii) the concept of a designated US person under Treasury Regulation section 1.163(j)-7. Rather, Congress chose to remove the adjusted taxable income benefit that made the election valuable, effectively rendering existing CFC group elections largely ineffective for purposes of improving US-level interest deduction capacity. Therefore, designated US persons that have previously made or revoked a CFC group election may want to reevaluate their choice given the updated rules. However, unless they receive administrative relief, the 60-month restriction on making or revoking these elections under Treasury Regulation section 1.163(j)-7(e)(5)(ii) may prevent them from doing so. 

Overall, the modifications introduced by OBBBA significantly reduce the benefits of certain taxpayers’ elections under section 163(j)(7) compared to what they previously enjoyed. 

Rev. Proc. 2026-17

Ordinarily, taxpayers that miss or want to change an irrevocable regulatory election usually seek relief under Treasury Regulation section 301.9100, by requesting a private letter ruling, which can be an expensive and lengthy process. Changes to irrevocable statutory elections are less often permitted. Taxpayers affected by the changes in OBBBA will appreciate the availability of relief for these irrevocable statutory elections provided in Rev. Proc. 2026-17.

For taxpayers whose initial elections under section 163(j)(7) no longer yield the anticipated benefits – particularly those in capital-intensive industries such as real estate, farming, and regulated utilities, which originally elected out of the business interest limitation to preserve full interest deductibility – Rev. Proc. 2026-17 offers a one-time opportunity to withdraw a timely election under section 163(j)(7). This relief is expected to benefit taxpayers that: (i) claim substantial depreciation deductions, which under the renewed EBITDA-based calculation, would significantly increase their adjusted taxable income and therefore their deductible business interest; (ii) possess assets eligible for 100% bonus depreciation under the permanent provisions established by OBBBA; or (iii) meet both criteria. The relief applies to elections to be treated as an “electing real property trade or business,” “electing farming business,” or “excepted regulated utility trade or business” for taxable years beginning in 2022, 2023, or 2024.

To revoke an original election, the taxpayer must submit an amended return by October 15, 2026, covering all years during which the election was effective. Upon revocation, the taxpayer is regarded as if the election had never occurred, reverting to the status of a non-electing trade or business and becoming subject to the business interest limitation, as revised by OBBBA, for the applicable amended taxable years. 

Late Election to Opt-Out of Bonus Depreciation

After revoking the election to opt out of the business interest expense limitation, the taxpayer becomes eligible for 100% bonus depreciation for tax years during which the election was effective. Nonetheless, the availability of bonus depreciation may not always be advantageous; for instance, utilizing a substantial depreciation allowance could generate or increase a net operating loss that may not be fully utilized. In such cases, Rev. Proc. 2026-17 permits taxpayers to retroactively elect out of bonus depreciation under section 168(k)(7) on the same amended return in which the section 163(j)(7) election is withdrawn. The section 168(k)(7) election enables taxpayers to forgo bonus depreciation for any class of property, including depreciable property affected by the withdrawn section 163(j)(7) election. 

CAMT Considerations

Taxpayers considering whether to withdraw a section 163(j)(7) election should also be mindful of the potential implications under the corporate alternative minimum tax (CAMT) under section 55. The CAMT imposes a book minimum tax on certain large corporations with average adjusted financial statement income (AFSI) of more than $1 billion. Because bonus depreciation generates significant book-tax differences – accelerating depreciation deductions for tax purposes while the corresponding financial statement depreciation is recognized over a longer period – a taxpayer that withdraws its section 163(j)(7) election and claims bonus depreciation may experience an increase in AFSI, potentially giving rise to or increasing CAMT liability. 

Although the IRS has issued interim guidance in Notice 2026-7 providing certain AFSI adjustments – including adjustments for deductible repair expenses, section 197 amortization, and the amortization of domestic research and experimental expenditures under section 174 –taxpayers should carefully evaluate the net effect of election withdrawal on both their regular tax and CAMT positions.

CFC Group Election

Treasury Regulation section 1.163(j)-7 specifies that a single section 163(j) limitation may be computed for a “specified period” of a “CFC group” – that is, a specified group of controlled foreign corporations for which a CFC group election is in effect. The CFC group election is made or revoked by each “designated US person” with respect to the specified group by attaching an election statement to its timely filed federal income tax return or information return. However, under section 1.163(j)-7(e)(5)(ii), a CFC group election is subject to a 60-month limitation. Thus, once the election is made, it may not be revoked until at least 60 months have elapsed, and once revoked, a new election cannot be made for at least another 60 months.

Rev. Proc. 2026-17 provides relief from this 60-month limitation by allowing a designated US person to revoke or make a CFC group election for the first specified period of a specified group beginning after December 31, 2024, without regard to whether the 60-month period has elapsed. A taxpayer taking advantage of this relief must still comply with all other procedures specified in Treasury Regulation section 1.163(j)-7(e)(5). Importantly, the 60-month limitation continues to apply to subsequent specified periods, meaning that a CFC group election revoked or made under this provision cannot be changed again until at least 60 months have passed.

Special Considerations

• Taxpayers in Capital-Intensive Businesses. Taxpayers in capital-intensive industries that regularly acquire substantial depreciable property should evaluate whether withdrawing the election and claiming 100% bonus depreciation under section 168(k) would generate greater tax savings than the full interest deductibility they currently enjoy under the section 163(j)(7) election. Because OBBBA permanently established 100% bonus depreciation, taxpayers that previously forfeited bonus depreciation as a condition of their election are now foregoing a significant and permanent benefit.
• Taxpayers with Both Significant Depreciation and Interest Expense. Taxpayers that (i) have acquired or intend to acquire substantial assets eligible for 100% bonus depreciation pursuant to section 168(k), and (ii) incur significant business interest expense, may find that when these items are added back under the restored EBITDA-based calculation, their adjusted taxable income is sufficient to allow deduction of a considerable portion of their business interest expense, without necessitating an election under section 163(j)(7).
• Taxpayers for Which Bonus Depreciation Would Create Adverse Consequences. Conversely, taxpayers should consider whether claiming bonus depreciation after revoking a section 163(j)(7) election would generate or increase a net operating loss that cannot be fully utilized. In such cases, Rev. Proc. 2026-17 also permits a late election under section 168(k)(7) to opt out of bonus depreciation for specific classes of property on the same amended return on which the section 163(j)(7) election is withdrawn. This flexibility allows taxpayers to tailor their depreciation strategy on a class-by-class basis, preserving the availability of bonus depreciation for some asset classes and taking advantage of the increased EBITDA-basis section 163(j) limitation, while also mitigating the risk of creating unusable losses.
• Taxpayers with CAMT Exposure. Large corporate taxpayers should carefully model the implications of election withdrawal under the CAMT regime. As noted above, because bonus depreciation generates significant book-tax differences, a taxpayer that revokes its section 163(j)(7) election and claims bonus depreciation may experience an increase in AFSI, potentially giving rise to or increasing a CAMT liability. Although the IRS has issued interim guidance in Notice 2026-7 providing certain favorable AFSI adjustments – including adjustments for deductible repair expenses, section 197 amortization related to goodwill and certain other intangibles, and the amortization of domestic research and experimental expenditures under section 174 – these adjustments may not fully offset the AFSI increase attributable to accelerated depreciation. Taxpayers should therefore carefully evaluate the net effect of election withdrawal on both their regular tax and CAMT positions before making a withdrawal decision.
• Taxpayers under Examination. Taxpayers currently under examination must provide copies of all amended returns to the examining revenue agent contemporaneously with filing, and should anticipate that such returns may receive heightened scrutiny. Accordingly, taxpayers filing amended returns to revoke a section 163(j)(7) election should ensure that the amended returns are thoroughly documented and that the underlying analysis supporting the withdrawal – including the comparative benefit analysis and all collateral adjustments – is well-supported and contemporaneously prepared. The effect of the withdrawal election on ongoing examinations should also be considered.

Conclusion

By permanently reinstating the EBITDA-based calculation of adjusted taxable income, making 100% bonus depreciation a permanent feature, and explicitly excluding CFC inclusions from adjusted taxable income by statute, OBBBA has significantly reshaped the cost-benefit analysis associated with elections available under section 163(j)(7). Rev. Proc. 2026-17 offers timely relief to taxpayers whose previous elections have been impaired as a result of the amendments introduced by OBBBA. The administrative relief provides taxpayers a one-time opportunity to: (i) withdraw a previously irrevocable section 163(j)(7) election for taxable years beginning in 2022, 2023, or 2024 by submitting amended returns by October 15, 2026; (ii) retroactively elect out of bonus depreciation under section 168(k)(7) on the same amended return; and (iii) revoke or make a CFC group election for the initial specified period commencing after December 31, 2024, irrespective of the 60-month limitation.

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