Understanding Qualified Improvement Property (QIP)
Commercial real estate is typically depreciated over 39 years under standard IRS guidelines, but certain improvements—known as qualified improvement property (QIP)—may qualify for accelerated depreciation or immediate expensing. While maximizing first-year deductions can provide a significant tax benefit, doing so isn’t always the most strategic move.
What Is QIP?
QIP includes improvements made to the interior of nonresidential buildings after the property is placed in service. However, some costs don’t qualify, including:
- Building expansions
- Elevators or escalators
- The building’s internal structural framework
QIP is depreciated over 15 years and may qualify for both bonus depreciation and Section 179 expensing—two valuable tax incentives designed to accelerate cost recovery.
Bonus Depreciation for QIP
The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, made substantial changes to bonus depreciation rules.
- 100% bonus depreciation now applies to assets (including QIP) acquired and placed in service after January 19, 2025.
- This 100% rate is now permanent under the OBBBA.
However, there’s a transition window to watch:
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For assets acquired between January 1–19, 2025, only 40% bonus depreciation applies.
If your goal is to maximize first-year deductions on QIP acquired during that period, claim the Section 179 deduction first (see below), then apply 40% bonus depreciation on any remaining basis.
Who May Not Qualify for Bonus Depreciation
Some businesses are excluded, such as:
- Real estate businesses that elect to deduct 100% of business interest expense
- Dealerships with floor-plan financing and average annual gross receipts over $31 million for the prior three years
Section 179 Expensing and QIP
Section 179 expensing allows immediate deduction of qualifying property—such as QIP—up to annual limits. The OBBBA increased these limits significantly beginning in 2025:
- Maximum deduction: $2.5 million (up from $1.25 million)
- Phase-out threshold: $4 million (up from $3.13 million)
Both figures will adjust annually for inflation.
Unlike bonus depreciation, Section 179 deductions cannot create a net loss—they can only reduce taxable income to zero. However, they do offer broader flexibility:
QIP under Section 179 also includes HVAC systems, nonresidential roofs, fire protection and alarm systems, and security systems installed after the building is placed in service.
When Spreading Out QIP Depreciation May Be Wiser
Although accelerated deductions can create valuable short-term savings, there are cases where spreading depreciation over 15 years is more strategic:
1. Avoiding the Excess Business Loss Rule
Bonus depreciation can trigger the excess business loss limitation for noncorporate taxpayers. For 2025, that limit is $313,000 (or $626,000 for joint filers).
Losses exceeding these thresholds must be carried forward, delaying some of the tax benefit.
2. Reducing Depreciation Recapture Risk
Large first-year deductions may result in higher-taxed recapture income when QIP is sold.
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Bonus depreciation and Section 179 deductions are recaptured as ordinary income (up to 37%).
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Straight-line depreciation is recaptured at 25%, potentially reducing tax liability on sale.
3. Preserving Future-Year Deductions
If tax rates rise or your business earns higher income in future years, deferring depreciation could provide more valuable long-term deductions.
While the OBBBA made current rates “permanent,” Congress can still change them in the future.
Determining the Right Depreciation Strategy
Every situation is unique. The decision between 100% bonus depreciation, Section 179 expensing, or standard 15-year depreciation depends on:
- Current and projected taxable income
- Cash flow needs
- Anticipated property holding period
- Potential sale timing and recapture exposure
A thoughtful depreciation strategy ensures your real estate investments deliver optimal tax efficiency—both now and in the future.
Contact Us
Deciding how to handle qualified improvement property depreciation can have lasting tax implications. Our team at Landmark CPAs can help you analyze your options and determine the most beneficial approach for your business. Contact us today to discuss your QIP depreciation strategy and ensure you’re maximizing available tax benefits while protecting your long-term interests.
Originally posted June 2023. Updated October 2025.