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Understanding tax codes can feel like decoding a secret language. But when it comes to Qualified Improvement Property (QIP), knowing the rules can save your business thousands if not more in tax deductions. This guide breaks down QIP in everyday language so you can understand how it affects your commercial property investments and leverage available tax benefits like a pro.
Whether you’re a real estate investor, a business owner, or a tax professional, this guide to qualified improvement property will help you make sense of depreciation timelines, IRS regulations, and how to maximise your QIP tax deductions.
What Is Qualified Improvement Property (QIP)?
Qualified Improvement Property refers to any improvement made by the taxpayer to the interior portion of a commercial building that is nonresidential real property. To qualify, the improvement must be made after the building was originally placed in service.
Key criteria:
- • There must be interior improvements.
- Only applies to nonresidential buildings
- Improvements must be made after the building’s initial use.
QIP excludes:
- Enlargement of the building
- Elevators or escalators
- Internal structural framework
Think of it this way: if you upgrade the lighting, install new drywall, or renovate restrooms in your office space, those could qualify as QIP.
Why QIP Matters for Commercial Property Owners
Understanding and using QIP properly can lead to significant tax savings. Before 2017, many property improvements were depreciated over 39 years, which drastically slowed down the ROI.
With the Tax Cuts and Jobs Act (TCJA), QIP was given a faster depreciation schedule initially intended to be 15 years. This opened the door for using bonus depreciation, which we’ll get into later.
Using QIP rules smartly helps businesses
- Increase immediate cash flow
- Reduce tax liability
- Make more strategic improvement investments.
Qualified Improvement Property IRS Definition
The IRS defines qualified improvement property under Section 168 of the Internal Revenue Code. According to the IRS, QIP includes improvements to the interior of a nonresidential building as long as they’re made after the building is placed in service and don’t involve structural or external work.
The IRS keeps updating guidelines for QIP based on legislative changes. As of 2020, under the CARES Act, QIP was officially assigned a 15-year recovery period for depreciation purposes. This correction made QIP eligible for 100% bonus depreciation through 2022.
The History Behind QIP
Qualified Improvement Property was introduced in the PATH Act of 2015 as a way to simplify the categorisation of certain interior improvements. Initially, QIP wasn’t eligible for bonus depreciation due to a legislative oversight in the Tax Cuts and Jobs Act of 2017 (TCJA).
However, the CARES Act of 2020 retroactively corrected that oversight, confirming the qualified improvement property’s 15-year life, which made it eligible for bonus depreciation.
This correction:
- Applied retroactively to QIP placed in service after January 1, 2018
- Allowed businesses to amend past tax returns for additional deductions
Qualified Improvement Property 15-Year Life Explained
One of the biggest game-changers was officially assigning QIP a 15-year recovery period.
Why is this important?
Because only assets with a life of 20 years or less qualify for bonus depreciation. Assigning QIP a 15-year life means
- You can fully deduct QIP in the year it was placed in service (under bonus depreciation rules).
- You shorten the wait time to recover your investment.
- You improve ROI through immediate tax savings.
If you can’t or choose not to claim bonus depreciation, you can still depreciate QIP over 15 years using the MACRS system.
QIP Depreciation Rules: What You Need to Know
Now let’s break down the QIP depreciation rules:
Under the MACRS system:
- 15-year recovery period
- Straight-line method for depreciation
- Half-year convention typically applies.
If bonus depreciation is applied:
- You can deduct 100% of the QIP cost in the year it is placed in service (through 2022).
- After 2022, bonus depreciation phases down:
- 80% in 2023
- 60% in 2024
- 40% in 2025
- 20% in 2026
- 0% in 2027 unless laws change
Important tip: Even if you’ve already filed a return, you may be able to amend it or use Form 3115 (Change in Accounting Method) to claim missed depreciation.
How Bonus Depreciation for QIP Works
Here’s how bonus depreciation for QIP works in practice:
Let’s say you spend $100,000 on interior improvements in your retail store in 2023. Since QIP qualifies for 80% bonus depreciation in that year, you can deduct $80,000 immediately. The remaining $20,000 is depreciated over 15 years.
Benefits of bonus depreciation:
- Reduces your taxable income right away
- Improves cash flow
- Encourages reinvestment
Always consult a tax advisor to ensure your improvements meet QIP standards and that you’re taking full advantage of depreciation options.
Common Mistakes with QIP Tax Deductions
Despite its advantages, many taxpayers miss out on QIP deductions due to simple errors. Avoid these common pitfalls:
- Misclassifying improvements as QIP when they don’t qualify (e.g., adding an elevator)
- Forgetting to amend past returns for years after 2018
- Failing to track improvement dates and costs accurately
- Overlooking bonus depreciation eligibility
Keeping clear records and consulting with a CPA can prevent these mistakes and ensure you get the most out of your qualified improvement property tax deduction.
How to Claim a QIP Tax Deduction
To claim a QIP tax deduction, follow these steps:
- Identify qualifying improvements: Make sure they meet IRS criteria (interior, nonresidential, post-in-service).
- Categorise costs correctly: Use cost segregation studies if needed.
- Apply the correct depreciation method: MACRS or bonus depreciation.
- File the appropriate forms: Use Form 4562 for depreciation and Form 3115 if making a change in accounting method.
- Amend past returns (if applicable): for missed deductions from previous years after 2018.
Working with a tax professional helps streamline this process and ensures you don’t miss eligible write-offs.
Final Thoughts: Making the Most of Qualified Improvement Property
Qualified Improvement Property can be a goldmine of tax benefits for commercial property owners. Thanks to its 15-year life, it’s eligible for bonus depreciation, meaning you can deduct most of your investment upfront.
By understanding QIP depreciation rules, staying compliant with IRS definitions, and avoiding common filing mistakes, you can maximise your qualified improvement property tax deductions and enhance your business’s financial health.
Whether you’re planning renovations or reviewing past improvements, make QIP a part of your tax strategy today—and keep more money in your pocket.
Pro Tip: Tax laws can change frequently. Always double-check current depreciation percentages and eligibility when preparing returns.
If you’re serious about maximising tax efficiency on property improvements, don’t overlook the power of Qualified Improvement Property.
Conclusion
Qualified Improvement Property (QIP) offers a valuable opportunity for commercial property owners to accelerate tax deductions and improve cash flow through its 15-year depreciation life and eligibility for bonus depreciation. Understanding the specific IRS rules around QIP and properly classifying your property improvements can lead to significant tax savings.
By staying informed about QIP depreciation rules and avoiding common mistakes, you can maximise your qualified improvement property tax deduction and make smarter financial decisions for your business. Always consider consulting a tax professional to ensure you’re fully leveraging these benefits.
In the end, making the most of QIP means turning your building upgrades into immediate tax advantages—helping your business grow while saving money.
