Temporary Relief for Real Estate Businesses That Previously Elected Out of Business Interest Expense Deduction Limits by Angie Adames, CPA
Posted on August 24, 2026
by
Angie Adames
When it comes to tax laws, do-overs are uncommon. However, when the IRS offers taxpayers an opportunity to reverse decisions and actions from prior years, they should take the time to consider their options. This is the case with the IRS’s recently issued Rev. Proc. 2026-17, which allows certain real estate businesses to withdraw previously irrevocable elections they made in tax years 2022, 2023 and 2024 in favor of more generous tax deductions under the One Big Beautiful Bill Act (OBBBA).
Background
For tax years beginning after Dec. 31, 2021, the deduction for business interest expense (BIE) was capped at 30 percent of a taxpayer’s adjusted taxable income (ATI), calculated using a methodology similar to earnings before deductions for interest and taxes (EBIT). Because the calculation excluded depreciation and amortization from the ATI calculation, capital-intensive companies were left with more modest ATI and reduced interest expense deductions. Any interest expense not allowed as a deduction in a tax year could be carried forward and treated as business interest paid or incurred in the following taxable year.
The law carved out an exception for real property and farming businesses, regulated utility businesses and certain other specifically identified taxpayers to irrevocably elect out of the regime and avoid limits on BIE deductions. But doing so came at the cost of forgoing valuable bonus depreciation deductions and using longer recovery periods to depreciate other business assets.
The OBBBA, enacted in 2025, permanently restores depreciation, amortization and depletion to the ATI calculation, potentially increasing the amount of BIE that taxpayers may deduct on their tax returns. It also permanently reinstates first-year bonus depreciation, which allows taxpayers to write off 100 percent of the costs they incur for new and used qualifying property in the year they place it in service.
Withdrawing Previously Irrevocable Elections
Rev. Proc. 2026-17 addresses the OBBBA’s changes to BIE deduction limitations under Internal Revenue Code Section 163(j). More specifically, the guidance provides transitional relief for qualifying businesses, including real estate developers, construction companies and leasing, brokerage, and management firms, to rescind previously irrevocable elections they made in tax years 2022 through 2024 and treat them as if they never occurred. This may require depreciation and related basis adjustments, resulting in changes to taxable income and tax liabilities for affected years. In turn, this may lead to more taxpayer-friendly adjustments to income, depreciation schedules and tax liabilities and potentially enable taxpayers to revisit bonus depreciation treatment of eligible assets. To unwind an excepted real property trade or business election for tax years 2022 through 2024, taxpayers must file amended federal income tax returns, or Administrative Adjustment Requests (AARs) for partnerships, and recalculate both depreciation deductions and taxable income to account for the withdrawn election. They must also file amended returns for the succeeding taxable years to reflect changes to their accounting methods and adjustments to income, tax liabilities, allowable depreciation deduction and other collateral changes.
The deadline for filing amended returns is the earlier of 1) October 15, 2026, or (2) the end of the applicable period of limitations on assessment for the taxable year for which the amended return is being filed. For refund claims, the filing deadline is generally three years from the date the original return was filed or two years from the time the tax was paid.
Deciding to withdraw a previous tax election requires business owners to plan carefully, modeling ATI, depreciation deductions and tax liabilities across all their business operations and considering how these changes could impact their future cash flow and global tax efficiency. In some cases, taxpayers may find that the benefits of unrestricted interest deductions obtained in prior years outweigh the potential advantages of restoring bonus depreciation.
About the Author: Angie Adames, CPA, is a principal of Tax Compliance and Consulting with Baker Tilly x Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held entities. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
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