Rev Proc 2026-17: The IRS Offers Flexibility with Certain Elections

On Wednesday, March 18, the IRS released Revenue Procedure 2026-17. The guidance provides relief to companies that made a Real Property Trade or Business election under §163(j)(7) of the code. It offers relief to companies that chose treatment as a Real Property Trade or Business, before the OBBBA changes.

Background

Under §163(j), taxpayers are limited in the amount of business interest they can deduct. They set this limitation at 30% of their adjusted taxable income (ATI). ATI was originally set to be tied to EBITDA.

However, as a budget move under the Tax Cuts and Jobs Act of 2017 (TCJA), this rule changed. For tax years starting after January 1, 2022, taxpayers used EBIT for this calculation. As a result, Depreciation and Amortization harmed the amount of interest they could deduct.

The calculation for ATI changed under the OBBBA back to the original EBITDA calculation. For tax years starting after December 31, 2024, the law restores the use of EBITDA in this calculation.

At the same time, the OBBBA brings back 100% bonus depreciation. The provision applies to assets purchased and placed in service after January 19, 2025. It also establishes a new deduction for manufacturing properties known as Qualified Production Property (QPP).

163(j)(7) Election

For real estate companies with significant interest expense, there is a way around the §163(j) restrictions. Under §163(j)(7), a company may elect Real Property Trade or Business status. The election removes the interest limitation. However, the RPTB election has its own restrictions.

Companies that make the RPTB election must use the Alternative Depreciation System (ADS). The requirement applies to 39-year real property, 27.5-year real property, and Qualified Improvement Property (QIP). Since ADS requires straight-line depreciation, companies cannot take bonus depreciation on QIP if they make the RPTB election.

With many elections, the RPTB election is irrevocable. Once a company makes the RPTB election, it cannot change it later.

As a result, companies that made an election in 2022, 2023, or 2024 may regret it. New changes affect the ATI calculation and increase the bonus. This is further complicated by businesses where QPP may apply under §168(n). §168(n) limits the use of QPP for companies required to utilize ADS.

Rev. Proc. 2026-17

This brings us to the recent relief provided by the IRS under Rev. Proc. 2026-17. The IRS recognized that companies may have made decisions regarding the RPTB election before the passage of the OBBBA. The election may no longer reflect the best interests of that business.

To address this, the IRS is allowing a limited time to amend 2022, 2023, and 2024 returns. During this window, taxpayers may revoke an election that is typically final. Taxpayers and their advisors should be aware that the relief comes with limitations.

The biggest restriction on this change is timing. The amended return must “be filed on or before the earlier of (i) October 15, 2026, or (ii) the end of the applicable period of limitations on assessment for the taxable year for which the amended return is being filed.”

Accordingly, taxpayers must decide soon how to proceed. Acting promptly is especially important for 2022 returns, where the statute of limitations may expire soon.

While this flexibility is good news for taxpayers, they must act quickly. If you have questions about the 163(j) election or other OBBBA changes, please contact your McGuire Sponsel representative.