IRS clarifies shift to permanent interest deduction limit

The Internal Revenue Service (IRS) recently issued guidance to help taxpayers adjust to a major shift in how business interest deductions are calculated. At the center of this change is Rev. Proc. 2026-17, which explains how taxpayers can respond now that a stricter limitation has been reversed and replaced with a more favorable, permanent rule.

For many taxpayers, especially those in real estate and other capital-intensive industries, this clarification is more than technical. It provides a path to revisit prior decisions and potentially improves tax outcomes.

What changed in the interest deduction rules?

Under the Tax Cuts and Jobs Act (TCJA), business interest deductions were limited to 30% of adjusted taxable income (ATI). Initially, ATI was calculated using a measure similar to earnings before interest, taxes, depreciation and amortization (EBITDA). However, beginning in 2022, depreciation and amortization were no longer added back. This reduced ATI and tightened the limitation, meaning many businesses could deduct less interest.

Congress later reversed that stricter approach through the One Big Beautiful Bill Act. The law restored the more favorable EBITDA-based calculation and made it permanent. This shift created a problem. Many taxpayers had already made elections based on the old, stricter rules. 

Why the IRS issued this clarification

The IRS released Rev. Proc. 2026-17 to address that exact issue. Taxpayers had made binding elections, particularly real property trade or business elections under §163(j), to avoid the tighter interest limits. Those elections came with trade-offs. In exchange for fully deducting interest, taxpayers gave up bonus depreciation under §168(k). 

At the time, that decision made sense. Bonus depreciation was phasing down and the interest limitation was becoming more restrictive. But now, both conditions have changed. The interest limitation is more favorable again and taxpayers may want the depreciation benefits back. The IRS recognized that taxpayers shouldn’t be locked into decisions made under outdated rules. The new guidance allows them to revisit those elections. 

What the new guidance allows

The revenue procedure gives taxpayers several important options:

• Withdraw prior elections: Taxpayers can revoke real property trade or business elections made for tax years 2022 through 2024. 
• Treat the election as if it never happened: Once withdrawn, the election is disregarded entirely for tax purposes.
• Make late depreciation elections: Taxpayers can also make late §168(k)(7) elections related to bonus depreciation.
• Relief for controlled foreign corporations (CFCs): The revenue procedure waives the 60-month limitation under Reg. §1.163(j)-7(e)(5)(ii) for certain CFC elections, giving additional flexibility for multinational taxpayers.

This flexibility is significant. It allows taxpayers to realign prior filings with the current law instead of being stuck with less favorable outcomes.

How taxpayers make the change

To take advantage of the relief, taxpayers must file amended returns, amended partnership returns or administrative adjustment requests (AARs). 

The IRS also requires:

• A reference to Rev. Proc. 2026-17 at the top of the filing
• Adjustments that fully reverse the prior election and its effects
• Additional amended filings for later years if earlier years are changed

Deadlines matter. Taxpayers generally must act by the earlier of Oct. 15 or the expiration of the statute of limitations.

Why this matters for everyday taxpayers

While this guidance may seem technical, the impact is practical. Businesses that rely on financing, such as real estate operations, often carry significant interest expenses. The ability to deduct more of that interest can directly affect taxable income and cash flow. At the same time, regaining access to bonus depreciation can accelerate deductions and improve near-term tax positions. In simple terms, the IRS is allowing taxpayers to “redo” prior choices made under less favorable rules. That creates an opportunity to optimize past returns based on today’s law.

Final takeaway

The IRS issued this clarification to ensure fairness and consistency after Congress changed the underlying rules. Taxpayers who acted in good faith under prior law now have a chance to adjust.

For many, this is not just a technical update. It is a window to revisit past decisions, recover missed tax benefits and better align with current law. Tax professionals should review affected clients carefully. The opportunity is time-sensitive and the potential benefits can be substantial.