Commercial real estate is typically depreciated over 39 years, but certain interior improvements qualify for accelerated depreciation or even full immediate expensing. These improvements, known as Qualified Improvement Property (QIP), can offer significant tax savings — but claiming the biggest first-year deduction isn’t always the best strategy.
What Counts as Qualified Improvement Property (QIP)?
QIP refers to improvements made to the interior of a nonresidential building after it’s been placed in service. However, it does not include:
- Expansions of the building,
- Elevators or escalators, or
- The building’s internal structural framework.
QIP carries a 15-year depreciation period and qualifies for both bonus depreciation and Section 179 expensing.
100% Bonus Depreciation Made Permanent
Under the One Big Beautiful Bill Act (OBBBA), signed in July 2025, bonus depreciation increases to 100% for eligible assets — including QIP — acquired and placed in service after January 19, 2025. This 100% rate is now permanent.
However, note that assets acquired between January 1 and January 19, 2025, and placed in service later in the year qualify for only 40% bonus depreciation.
If your goal is to maximize deductions on QIP during that brief window, consider claiming the Section 179 deduction first. Once that’s maximized, apply the 40% bonus depreciation.
Keep in mind, some businesses can’t use bonus depreciation — such as:
- Real estate businesses electing to fully deduct business interest expense, or
- Dealerships with floor-plan financing and average annual receipts exceeding $31 million over the previous three years.
Section 179 Expensing: An Alternative Path
Similar to bonus depreciation, Section 179 expensing allows immediate deduction of the cost of qualified property — including QIP. The OBBBA significantly expanded the limits:
- Maximum deduction (2025): $2.5 million (up from $1.25 million)
- Phase-out threshold: Begins at $4 million (up from $3.13 million)
These limits will be indexed for inflation starting in 2026.
Section 179 has one key restriction — it can only offset net income, not create a loss.
An advantage of Section 179 over bonus depreciation is its broader eligibility. QIP for Section 179 purposes includes:
- HVAC systems
- Nonresidential building roofs
- Fire protection and alarm systems
- Security systems
as long as these are installed after the building was first placed in service.
Why You Might Want to Spread Out QIP Depreciation
Accelerating depreciation can deliver big upfront deductions — but there are strategic reasons to spread QIP depreciation over 15 years instead.
1. Avoid Triggering the Excess Business Loss Rule
Claiming 100% bonus depreciation can create a large paper loss, which may be limited by the excess business loss rule.
For 2025, noncorporate taxpayers can deduct only up to $313,000 ($626,000 for joint filers) of business losses against other income such as wages or investment income.
Any excess loss is carried forward as a net operating loss.
2. Minimize Depreciation Recapture at Sale
Large first-year deductions increase depreciation recapture when the property is sold. Recaptured amounts are taxed as ordinary income — up to 37%, plus potentially 3.8% NIIT.
By contrast, gains related to straight-line depreciation on long-term QIP are taxed at 25%, plus NIIT if applicable.
3. Preserve Future-Year Deductions
Accelerated depreciation reduces future deductions. If you expect to be in a higher tax bracket later, or if tax rates rise, deferring deductions could be more valuable over time.
Even though the OBBBA made current rates “permanent,” Congress can still change them.
Making the Right Choice for Your Business
Deciding whether to maximize QIP deductions or spread them out depends on multiple factors — your business structure, projected income, and future tax outlook.
A professional tax advisor can help evaluate which approach aligns best with your financial goals and compliance requirements.
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