global Tax IRS Provides Guidance on Business Interest Limitations Elections May 18, 2026 Attention businesses…the IRS released new guidance allowing businesses to revisit and potentially reverse prior interest limitation elections. Here’s what you should know. Quick Takeaways The IRS now allows taxpayers to withdraw prior Section 163(j)(7) elections (e.g., real estate, farming, and utilities) made in 2022,2023 or 2024. Businesses can reassess past decisions in light of the return to an EBITDA-based limitation under the OBBBA. Taxpayers who withdraw those elections may also be permitted to make a late election to opt out of bonus depreciation under Section 168(k)(7). Certain capitalized interest will now be subject to the limitation beginning in 2026, expanding what counts toward the cap. Why It MattersThis guidance gives businesses a rare opportunity to revisit prior tax elections that may no longer be optimal under the updated rules. With the shift back to an EBITDA-based calculation, many taxpayers may now benefit from reassessing prior elections that impacted the application of the Section 163(j) limitation. Businesses that act now may be able to increase current deductions, improve cash flow, and better align their tax strategy with the new law. What is the business interest limitation?Prior to the TCJA, deductions for business interest were typically fully deductible. The TCJA introduced a limitation, capping the deduction at 30% of a business’ adjusted taxable income (ATI) with any excess carried forward indefinitely. From 2018 through 2021, ATI was calculated on an EBITDA basis (adding back depreciation, amortization, and depletion). Beginning in 2022, those add-backs were removed, shifting ATI to an EBIT-based calculation and reducing allowable interest deductions for many businesses.What changed under the OBBBA?The One Big Beautiful Bill Act (OBBBA) restored the EBITDA-based calculation of ATI, increasing the limitation threshold and allowing for larger interest deductions.However, beginning in 2026, certain capitalized interest is now treated as business interest subject to the limitation. Specifically, interest capitalized under Sections 263(g) and 263A(f) retains its character as business interest and must be included in the Section 163(j) calculation.What’s new as of March 2026?Effective March 18, 2026, businesses may now withdraw certain Section 163(j)(7) elections, such as those for real property trades or businesses, farming businesses and regulated utilities, provided the election was made on a timely filed original return for a taxable year beginning in 2022, 2023, or 2024This is particularly relevant in light of the OBBBA’s return to an EBITDA-based calculation for adjusted taxable income, which may make those prior elections less beneficial than they once were.In addition, under the updated guidance, taxpayers who choose to withdraw a Section 163(j)(7) election are permitted to make a late election under Section 168(k)(7) to opt out of bonus depreciation for affected property classes, providing an opportunity to better align depreciation and interest deduction strategies under the updated rules.The guidance also provides temporary relief for multinational groups by allowing taxpayers to make or revoke a controlled foreign corporation (CFC) group election without being subject to the usual 60-month limitation for the first applicable period beginning after December 31, 2024.Important:Keep in mind that revisiting prior elections, coordinating with depreciation strategies, and modeling the impact of capitalized interest will be key to fully capturing the benefit while avoiding unintended consequences. Taxpayers should evaluate eligibility, timing and consequences under all applicable rules before acting.
