SECTION 2. BACKGROUND

.01 Section 163(j) prior to amendment by the OBBBA .

(1) On December 22, 2017, § 163(j) was amended by § 13301(a) of Public Law 115-97, 131 Stat. 2054 (Dec. 22, 2017), commonly known as the Tax Cuts and Jobs Act (TCJA). Section 163(j), as amended by § 13301(a) of the TCJA, provides rules limiting the amount of business interest that can be deducted for taxable years beginning after December 31, 2017, to the sum of: (a) the taxpayer’s business interest income for the taxable year; (b) 30 percent of the taxpayer’s adjusted taxable income (ATI) for the taxable year; and (c) the taxpayer’s floor plan financing interest expense for the taxable year.

(2) Under § 163(j)(8) as amended by § 13301(a) of the TCJA, ATI is the taxable income of the taxpayer computed without regard to certain items, including any deduction allowable for depreciation, amortization, or depletion for taxable years beginning before January 1, 2022.

(3) The § 163(j) limitation applies to taxpayers with business interest, as defined in § 163(j)(5), except for taxpayers, other than tax shelters under § 448(a)

(3), that meet the gross receipts test in § 448(c). Section 163(j)(5), as amended by § 13301 of the TCJA, defines the term “business interest” to mean any interest expense properly allocable to a trade or business (other than investment interest within the meaning of § 163(d)).

(4) Section 163(j)(7)(A)(ii) through (iv) provides that, for purposes of § 163(j), the term “trade or business” does not include an “electing real property trade or business” (as defined in § 163(j) (7)(B)), an “electing farming business” (as defined in § 163(j)(7)(C)), or a “regulated utility trade or business” (as defined in § 1.163(j)-1(b)(15)(iii)). Thus, interest expense that is properly allocable to any such trade or business is not properly allocable to a trade or business under § 163(j) and is not business interest that is subject to the limitation in § 163(j)(1). Section 163(j)(7)(B) and (C), as amended by § 13301 of the TCJA, provide that the elections to be an electing real property trade or business and an electing farming business are made in the time and manner prescribed by the Secretary of the Treasury or the Secretary’s delegate (Secretary) and, once made, are irrevocable.

(5) On March 27, 2020, § 163(j) was further amended by § 2306 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281 (March 27, 2020). Section 2306 of the CARES Act temporarily increased the ATI percentage in § 163(j) (1) from 30 percent to 50 percent for taxable years beginning in 2019 and 2020.

(6) On April 27, 2020, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) published Rev. Proc. 2020-22, 2020-18 I.R.B. 745. Rev. Proc. 2020-22 provides, among other procedures, the time and manner for withdrawing an election under § 163(j)(7) (B) to be an electing real property trade or business, or under § 163(j)(7)(C) to be an electing farming business, for taxable years beginning in 2018, 2019, or 2020.

(7) On April 27, 2020, the Treasury Department and the IRS published Rev. Proc. 2020-23, 2020-18 I.R.B. 749. Rev. Proc. 2020-23 provides that eligible partnerships meeting certain conditions may

1 Unless otherwise specified, all “§” references are to sections of the Internal Revenue Code (Code), the Income Tax Regulations (26 CFR Part 1), or the Procedure and Administration Regulations (26 CFR Part 301).

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file amended partnership returns for taxable years beginning in 2018 and 2019.

(8) On September 14, 2020, the Treasury Department and the IRS published final regulations (TD 9905) in the Fed- eral Register (85 FR 56686) adopting §§ 1.163(j)-1(b)(15)(iii) and 1.163(j)-9.

(a) Excepted regulated utility trade or business . Section 1.163(j)-1(b)(15)(iii) permits certain taxpayers to elect to be treated as an excepted regulated utility trade or business. Interest expense that is properly allocable to any such trade or business is not properly allocable to a trade or business under § 163(j) and is not business interest that is subject to the limitation in § 163(j)(1). Taxpayers eligible to elect to be treated as an excepted regulated utility trade or business are those that (i) are not an excepted regulated utility trade or business described in § 1.163(j)-1(b) (15)(i)(A) or (C), and (ii) provide electrical energy, water, sewage disposal services, gas or steam through a local distribution system, or transportation of gas or steam by pipeline, to the extent that the rates are established or approved by a regulatory body described in § 1.163(j)-1(b) (15)(i)(A)( 2 )( i ). Section 1.163(j)-1(b) (15)(iii) provides rules and procedures for making the election to be an excepted regulated utility trade or business. Section 1.163(j)-1(b)(15)(iii)(B)( 1 ) provides that an election under § 1.163(j)-1(b)(15) (iii) is made with respect to each eligible trade or business of the taxpayer, applies only to the trade or business for which the election is made, and applies to the taxable year in which the election is made and all subsequent taxable years. Section 1.163(j)-1(b)(15)(iii)(B)( 2 ) provides that an election under § 1.163(j)-1(b)(15)(iii) is irrevocable. Section 1.163(j)-1(b)(15) (ii)(A) provides that an excepted regulated utility trade or business cannot claim the additional first-year depreciation deduction under § 168(k) for any property that is primarily used in the excepted regulated utility trade or business.

(b) Electing real property trade or business and electing farming business . Section 1.163(j)-9(d)(1) provides that a taxpayer makes an election under § 163(j) (7)(B) or § 163(j)(7)(C) to be an electing real property trade or business or electing farming business by attaching an election statement with the information speci

fied in § 1.163(j)-9(d)(2) to the taxpayer’s timely filed original Federal income tax return, including extensions. Section 1.163(j)-9(c)(1) provides that an election under § 1.163(j)-9 is made with respect to each eligible trade or business of the taxpayer, applies only to such trade or business for which the election is made, and applies to the taxable year in which the election is made and to all subsequent taxable years.

(9) On January 19, 2021, the Treasury Department and the IRS published final regulations (TD 9943) in the Federal Register (86 FR 5496) that, in relevant part, provide rules for applying § 163(j) to foreign corporations and United States shareholders under § 1.163(j)-7. Under § 1.163(j)-7(c)(2), a single § 163(j) limitation is computed for a specified period (as defined in § 1.163(j)-7(k)(29)) of a CFC group (that is, a specified group, within the meaning of § 1.163(j)-7(d)(2) (i), for which a CFC group election is in effect). Rules for making and revoking a CFC group election are provided in § 1.163(j)-7(e). Pursuant to § 1.163(j)-7(e) (5)(iii)-(iv), each designated U.S. person with respect to a specified group makes or revokes a CFC group election by attaching an election statement to its timely filed relevant Federal income tax return or information return, taking into account extensions, if any. Section 1.163(j)-7(k)(12) provides that the designated U.S. person with respect to a specified group is either (i) the specified group parent (if the specified group parent is a qualified U.S. person within the meaning of § 1.163(j)-7(d) (2)(iv)), or (ii) each controlling domestic shareholder of the specified group parent (if the specified group parent is an applicable CFC). Under § 1.163(j)-7(e)(5)(ii), a CFC group election may be revoked with respect to any specified period beginning at least 60 months after the last day of the specified period for which the CFC group election was made, and, once a CFC group election has been revoked, a new election can be made with respect to any specified period beginning at least 60 months after the last day of the specified period for which the CFC group election was revoked (collectively, the 60-month limitation).

.02 Amendments to § 163(j)(8) made by the One, Big, Beautiful Bill Act . On

July 4, 2025, § 163(j)(8) was amended by §§ 70303 and 70342 of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA). Section 70303(a) of the OBBBA amended § 163(j)(8) by striking “in the case of taxable years beginning before January 1, 2022,” from § 163(j)(8)(A)(v), thereby restoring a taxpayer’s ability to add back depreciation, amortization, or depletion when calculating ATI for taxable years beginning after December 31, 2024. Section 70342 of the OBBBA amended § 163(j) (8)(A) to provide that ATI is computed without regard to amounts included in gross income under §§ 951(a), 951A(a), and 78 (and the portion of the deductions allowed under §§ 245A(a) (by reason of § 964(e)(4)) and 250(a)(1)(B) by reason of such inclusions). The amendment made by § 70342 of the OBBBA applies to taxable years beginning after December 31, 2025.

.03 The § 168(k) additional first-year depreciation deduction .

(1) Under § 168(g)(1)(F) and (G), as amended by § 13205(a) of the TCJA, an electing real property trade or business and electing farming business are required to use the alternative depreciation system under § 168(g) for certain types of property under § 163(j)(11) and cannot claim the additional first-year depreciation deduction under § 168(k) for those types of property.

(2) Section 168(k)(2)(D)(i) provides that the term “qualified property” (that is, property eligible for the additional firstyear depreciation deduction) does not include any property to which the alternative depreciation system under § 168(g) applies, determined (a) without regard to § 168(g)(7) (relating to the election to use the alternative depreciation system), and (b) after the application of § 280F(b) (relating to listed property with limited business use).

(3) Section 168(k)(7) allows a taxpayer to elect not to deduct the additional first-year depreciation for any class of property that is qualified property placed in service during the taxable year (§ 168(k)(7) election). The rules and procedures for making the § 168(k)(7) election are set forth in § 1.168(k)-2(f) (1). Section 1.168(k)-2(f)(1)(ii) defines

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“class of property” for purposes of the § 168(k)(7) election. Pursuant to § 1.168(k)-2(f)(1)(iii), the § 168(k)(7) election must be made (a) by the due date, including extensions, of the Federal income tax return or Form 1065 for the taxable year in which the qualified property is placed in service by the taxpayer, and (b) in the manner prescribed on Form 4562, Depreciation and Amor- tization (Including Information on Listed Property ), and its instructions.

(4) Section 70301 of the OBBBA amended § 168(k) to make the additional first-year depreciation deduction 100 percent and permanent. This amendment is generally effective for property acquired after January 19, 2025, and for any specified plant (as defined in § 168(k)(5)(B), as amended by § 70301 of the OBBBA) that is planted or grafted after January 19, 2025. .04 Provisions related to BBA partner- ships .

(1) Section 1101(a) of the Bipartisan Budget Act of 2015 (BBA), P.L. 114-74, Title XI (November 2, 2015), replaced subchapter C of chapter 63 of subtitle F of the Code effective for partnership taxable years beginning after December 31, 2017. Section 1101(c) of the BBA enacted a centralized partnership audit regime that, in general, determines, assesses, and collects tax at the partnership level. The centralized partnership audit procedures enacted by the BBA are found at §§ 6221 through 6241. The centralized partnership audit procedures apply to all partnerships required to file a return, unless the partnership is eligible to make, and in fact makes, a valid election under § 6221(b) not to have those procedures apply. Partnerships subject to the centralized partnership audit regime are referred to as “BBA partnerships.”

(2) Section 6031(a) requires every partnership, except certain foreign partnerships, to file a return for each taxable year stating the items of its gross income and the deductions allowable by subtitle A of the Code and such other information as required by forms and regulations, including information about the partners in the partnership. The form filed by partnerships is Form 1065, which includes Schedules K‑1. Schedules K-1 report each partner’s name, taxpayer identification number, and

distributive share of partnership-related items and other information related to the partner’s interest in the partnership. Section 6031(b) requires that a partnership required to file a return under § 6031(a) furnish a copy of the Schedule K-1 to each partner that includes such information as may be required to be shown by regulations. In general, § 6031(b) also prohibits BBA partnerships from amending the information required to be furnished to their partners after the due date of the return, unless specifically authorized by the Secretary.

(3) Section 6222(a) requires partners in a BBA partnership to treat partnership-related items, as defined in § 6241 and the corresponding regulations, consistently on the partner’s return with the treatment of such items by the BBA partnership on its return. The consistency requirement generally applies to all partners. Consistent treatment with the partnership generally requires that partners in a BBA partnership file their returns consistently with the information reported to them on Schedule K-1.

.05 Transition rules . This revenue procedure provides transition guidance under §§ 163(j) and 168(k) for taxpayers who previously elected to be treated as an electing real property trade or business, electing farming business, or excepted regulated utility trade or business, but who now wish to withdraw the election in light of the various amendments to §§ 163(j)(8) and 168(k) under the OBBBA. Section 4 of this revenue procedure allows certain taxpayers to withdraw a prior election to be an electing real property trade or business, an electing farming business, or an excepted regulated utility trade or business. Section 5 of this revenue procedure allows a taxpayer withdrawing an election under section 4 of this revenue procedure to make a late § 168(k)(7) election with respect to any class of property that includes depreciable property affected by the election withdrawn under section 4 of this revenue procedure. Section 6 of this revenue procedure allows taxpayers to revoke or make a CFC group election without regard to the 60-month limitation under § 1.163(j)-7(e)(5)(ii). Section 7 of this revenue procedure permits an eligible BBA partnership to file an amended

Form 1065 subject to the conditions set forth in that section