Understanding Qualified Improvement Property (QIP) and Its Impact on Your Tax Strategy

Qualified Improvement Property (QIP) has become a significant aspect of tax planning for businesses, especially in the context of nonresidential buildings. The category was created by the Tax Cuts and Jobs Act (TCJA) of 2017, which consolidated three older ones into it but omitted the 15-year recovery period Congress intended — the drafting error known as the retail glitch, fixed retroactively by §2307 of the CARES Act in 2020. QIP plays a vital role in determining how businesses can benefit from accelerated depreciation and other tax incentives.

What is Qualified Improvement Property (QIP)?

Qualified Improvement Property refers to any improvement made to the interior of a nonresidential building after the building has been placed in service. These improvements can include renovations, enhancements, or other modifications, provided they do not involve the expansion of the building, the installation of elevators or escalators, or changes to the internal structural framework. The designation of QIP is crucial because it allows businesses to take advantage of certain tax benefits, particularly related to depreciation.

One word in the definition does a lot of work and gets missed. §2307(a)(1)(B) of the CARES Act amended §168(e)(6) so that the improvement must be “made by the taxpayer.” Interior work that a previous owner carried out, and that you acquired along with the building, is not your QIP. It sits in the building’s basis on the 39-year schedule. Only what you build after you own it qualifies.

Before the TCJA, there were separate categories for different types of property improvements, such as Qualified Leasehold Improvement Property (QLIP), Qualified Restaurant Property (QRP), and Qualified Retail Improvement Property (QRIP). The TCJA simplified this by consolidating these categories into a single classification: Qualified Improvement Property. That left one definition to test against instead of three, and one recovery period to get right.

For businesses leasing nonresidential property, understanding the implications of QIP is particularly important. QIP carries no lease or single-tenant condition — that requirement belonged to the qualified leasehold improvement property rules the TCJA replaced. An owner-occupied building qualifies on the same terms as a leased one. Where there is a lease, both lessors and lessees must be aware of how QIP affects their financial statements and tax obligations.

The Benefits of Bonus Depreciation for QIP

One of the most significant tax benefits associated with QIP is the availability of bonus depreciation. Bonus depreciation allows businesses to deduct a large percentage of the cost of qualifying assets in the year they are placed in service, rather than spreading the deduction over several years. This can provide substantial tax savings and improve cash flow, making it an attractive option for businesses looking to reduce their taxable income.

Bonus depreciation changed in July 2025, and the change was large. The One Big Beautiful Bill Act (OBBBA) restored 100% bonus depreciation permanently for qualified property acquired after January 19, 2025 and placed in service after that date. The TCJA phase-down that was scheduled to zero out bonus depreciation by 2027 no longer applies to those assets.

The acquisition date is what controls, so both rules are still in play depending on when you signed:

• Acquired after January 19, 2025: 100% bonus depreciation, permanent. No scheduled phase-down.
• Acquired before January 20, 2025: the legacy TCJA schedule still governs — 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, zero in 2027 — based on the year the asset is placed in service.

For a QIP project, that makes the contract and acquisition timeline a real planning variable, not paperwork. Section 179 expanded under OBBBA as well. The 2025 Form 4562 instructions put the maximum deduction at $2,500,000, reduced dollar for dollar once section 179 property placed in service in the year exceeds $4,000,000, both indexed for inflation. Section 179 lets you deduct the full cost in the year of purchase and, unlike bonus, lets you choose how much to claim. That control matters on a project that outruns what bonus covers, and on an asset acquired before January 20, 2025 that is still stuck on the old phase-down.

Depreciation Methods for QIP

The depreciation method for QIP differs depending on whether you're applying tax accounting or generally accepted accounting principles (GAAP). For tax purposes, QIP is typically depreciated using the straight-line method over a 15-year recovery period. This is a shorter period compared to the 39-year recovery period used for other types of nonresidential real property. The shorter recovery period for QIP provides businesses with an accelerated depreciation schedule, allowing them to recover the cost of their improvements more quickly.

Depreciating QIP over the wrong recovery period is an impermissible method of accounting, which is a different problem from an IRS reclassification and has a different remedy. Rev. Proc. 2020-25 is the guidance that cleaned up the retail-glitch years: it lets affected taxpayers file an amended return, an administrative adjustment request under §6227, or a Form 3115 to change their QIP depreciation for property placed in service after December 31, 2017 in a 2018, 2019 or 2020 taxable year. That window is specific to those years. A wrong period discovered on a more recent return is handled under the ordinary method-change rules, so check which applies before filing anything.

Where the alternative depreciation system does apply, whether by election or because §163(j)(7) requires it, §168(g)(3)(B) gives QIP a 20-year straight-line recovery period. The 39-year figure people reach for is the nonresidential real property default, and it stopped applying to QIP when the CARES Act added clause (vii) to §168(e)(3)(E).

For GAAP accounting, the amortization of QIP follows the guidelines of ASC 842. If the improvements meet or exceed the entity’s capitalization threshold, the asset would be capitalized and amortized over the lesser of the useful life of the improvement or the remaining term of the lease. This means that businesses must carefully assess their lease terms and the expected useful life of their improvements to ensure accurate financial reporting.

Reassessing Lease Terms Due to QIP

The addition of significant leasehold improvements can have implications for the term of a lease, particularly when renewal options or termination clauses come into play. Under GAAP, if the exercise of a renewal option becomes reasonably certain—often due to the increased value provided by leasehold improvements—the term of the lease must be reassessed. This reassessment can affect the amortization schedule for the QIP, potentially extending the period over which the improvement is depreciated.

Factors such as penalties for early termination or optional bargain buyouts can also influence the reassessment of lease terms. For example, if a leasehold improvement significantly enhances the value of the property, the lessee may be more likely to renew the lease rather than incur penalties or lose the benefit of their investment. This could lead to a longer amortization period and impact the financial statements of both the lessor and lessee.

Strategic Tax Planning with QIP

Given the complexities of QIP and its associated tax treatments, businesses must engage in strategic tax planning to fully realize the benefits. Here are some key steps to consider:

1. Get the classification right before the invoice is paid: The split between qualifying interior work, excluded elevator or structural work, and land improvements is easiest to defend when the contractor breaks it out on the original invoice. Reconstructing it two years later from a single line item is how a 15-year position turns into a 39-year one.
2. Maximize deductions: Take advantage of the 15-year recovery period for QIP to accelerate depreciation and reduce your taxable income. Additionally, consider other deductions available under Section 179 to further enhance your tax savings.
3. Watch the acquisition date, not just the in-service date: Property acquired after January 19, 2025 gets 100% bonus depreciation permanently. Property acquired before that date is still on the old phase-down. On a multi-phase QIP project, when you signed can be worth more than when you finished.
4. Reassess lease agreements: If you've made significant improvements to a leased property, review your lease terms to determine whether a reassessment is necessary. This can help you accurately report your QIP on financial statements and avoid potential issues with the IRS or your auditors.
5. Stay informed about tax law changes: Tax laws are constantly evolving, and staying up-to-date is crucial for effective tax planning. Check the acquisition-date and phase-down rules against the current Form 4562 instructions each year before you model a project.

Four Things to Check Before Your Next Renovation

Is the building nonresidential, and will you own it when the work is done? Is the work interior, and does it steer clear of enlargement, elevators, escalators and the internal structural framework? What is your acquisition date relative to January 19, 2025, since that is what sets your bonus rate rather than the date you cut the ribbon? And does the invoice separate the qualifying work from the rest, in writing, before anyone pays it?

If you have already placed QIP in service on the wrong recovery period, that is worth looking at now rather than at filing. Our tax team can work out whether an amended return, an AAR or a Form 3115 is the right route for the year in question.