Entity Setup
Structuring Entities to Minimize Tax Pitfalls: Lessons from Recent IRS Guidance
Recent IRS bulletins illuminate how entity formation and election rules can lead to unexpected tax liabilities—learn how to set up your entity to maximize benefits while avoiding costly errors.
By NomadicTax Research Team • 5-8 min read • April 16, 2026
## Understanding Entity Elections & Late Election Relief
One recent change in IRS guidance is the availability of **late elections under § 168(k)(7)**, and rules concerning withdrawing the § 163(j)(7) election. These pertain to bonus depreciation and interest deduction limits. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-15.pdf?utm_source=openai))
If you formed a partnership or multi-member entity, you may be eligible to amend prior returns to make elections retroactively—but only if certain rules are met. For example:
- The late § 168(k)(7) election must be included in an amended return or an application for adjustment. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-15.pdf?utm_source=openai))
- Withdrawal of § 163(j)(7) requires adjustments in depreciation and income reporting in both the current year and succeeding years. Failure to account for “collateral adjustments” can lead to IRS adjustments and penalties. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-15.pdf?utm_source=openai))
## Best Practices for Entity Setups
To avoid pitfalls and maximize tax efficiency when setting up entities:
- Choose entity type with long-term goals in mind (LLC, partnership, S corp): consider statutory limitations like interest deductions, depreciation schedules, entity classification elections.
- File necessary elections **on time** or qualify under safe harbor provisions—don’t assume automatically being “grandfathered in.”
- Document internal capital accounts and basis accurately—especially for partnerships with moving capital contributions or withdrawals.
- Use the late election relief when applicable—but only with well-maintained records and correct amendments.
## Practical Examples
**Example A: Partnership & Bonus Depreciation**
You formed a partnership in 2022 and missed making a § 168(k)(7) election, meaning you didn’t claim 100% bonus depreciation on qualified property. Under Rev. Proc. 2026-17 (referenced in Bulletin 2026-15), you may have the opportunity to file an amended return to make the election late—subject to proper filing deadlines and documentation. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-15.pdf?utm_source=openai))
**Example B: Interest Deduction Withdrawal (§ 163(j)(7))**
Say you elected to use the § 163(j)(7) interest limitation but find it disadvantageous later. You can withdraw the election, but when you do, you must also adjust collateral items—like depreciation schedules—in both that year and subsequent years. Failure to do so leads to mismatches and IRS corrections. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-15.pdf?utm_source=openai))
## Actionable Tips Before Setting Up or Reforming Entities
- Consult a CPA or attorney before entity formation; one wrong election can cost years of lost deductions.
- Keep a calendar of deadlines—not just filing dates but election and amendment deadlines.
- Maintain clean capitalization and accounting—IRS examines discrepancies closely.
- Monitor IRS bulletins—new relief provisions or changes can offer windows to optimize prior filings.
Structuring your entity smartly isn’t just about what savings you enjoy now—it’s how you position yourself to benefit from every election and relief available in the future.