Expanded Bonus Depreciation for Qualified Improvement Property Under OBBBA
The One Big Beautiful Bill Act (OBBBA) introduced significant updates to depreciation rules, most notably the permanent reinstatement of 100% bonus depreciation. A key beneficiary of this change is Qualified Improvement Property (QIP), which has remained a critical component of tax strategy since its introduction under the 2017 Tax Cuts and Jobs Act (TCJA).
By reinforcing QIP’s treatment, the OBBBA enhances its value as a powerful tax incentive for commercial property improvements, providing taxpayers with greater certainty and improved long-term planning opportunities.
In this article, we break down what QIP is, how recent legislative changes impact its treatment, common classification mistakes, and the key considerations taxpayers must understand to maximize depreciation benefits and tax savings.
What is a Qualified Improvement Property?
Qualified Improvement Property (QIP) refers to improvements made to the interior of a building after it has already been placed in service. In most cases, QIP applies to nonresidential (commercial) properties, such as offices, retail spaces, or hospitality assets.
However, there is an important exception—certain residential properties used as short-term rentals (e.g., Airbnb-type properties) may also qualify if they are treated as commercial property for tax purposes.
To be considered QIP, the improvements must be made by the taxpayer and must exclude specific structural changes.
Specifically, QIP does not include:
Expansions of the building’s overall structure
Installation of elevators or escalators
Changes to the building’s internal structural framework
Common examples of QIP include interior upgrades such as drywall installation, lighting improvements, plumbing work, drop ceilings, and other finish-related renovations. These improvements are widely seen in commercial spaces like retail stores, restaurants, hotels, and office buildings.
It’s important to note that QIP applies only to nonresidential properties. Residential Long-term rental properties, such as apartment buildings or assisted living facilities, do not qualify. Additionally, only improvements made after the building is placed in service are eligible and original construction components are excluded.
How the OBBBA Transformed QIP
Qualified Improvement Property (QIP) has a 15-year recovery period, which makes it eligible for bonus depreciation under IRC §168(k). Although Congress originally intended this treatment under the Tax Cuts and Jobs Act (TCJA), a drafting error prevented QIP from qualifying until the CARES Act formally corrected the law and designated QIP as 15-year property.
Before recent changes, bonus depreciation was scheduled to phase down, decreasing from 100% to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026 before being fully eliminated. This phase-down created a limited window for businesses to maximize first-year deductions, making the timing of capital improvements a critical planning factor.
The OBBBA restores 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025, effectively reversing the phase-down schedule established under the TCJA. Because Qualified Improvement Property (QIP) retains its 15-year recovery period, it continues to qualify for full expensing under IRC §168(k).
This change provides significantly greater long-term certainty for taxpayers planning capital improvements, although eligibility still depends on acquisition timing and other technical requirements.
Key Clarifications Under the OBBBA
In addition to making bonus depreciation permanent for Qualified Improvement Property (QIP), the OBBBA introduced several key clarifications that further define eligibility and application:
Leased improvements still qualify: Improvements made to leased commercial spaces remain eligible for QIP treatment, provided the lease is not between related parties. This expands opportunities for both landlords and tenants to leverage depreciation and maximize tax savings on buildouts.
Conversions are permitted: When a property is converted from residential to nonresidential use, subsequent interior improvements may qualify as QIP, even if the original structure did not meet QIP criteria. This creates additional planning opportunities for adaptive reuse projects.
Placed-in-service requirement remains: To qualify as QIP, improvements must be placed in service after the original building is placed in service. Interior work completed during initial construction does not qualify for accelerated depreciation under QIP rules.
Strategic Tax Planning with QIP
Given the complexities surrounding Qualified Improvement Property (QIP) and its tax treatment, a proactive and well-structured tax strategy is essential to fully capture available depreciation benefits and maximize tax savings. Here are the key considerations to include:
Work with a qualified CPA: Navigating QIP classifications, bonus depreciation, and compliance requirements can be complex. Partnering with a CPA experienced in real estate tax strategy and cost segregation ensures accurate treatment and alignment with current IRS regulations.
Maximize depreciation deductions: Leverage QIP’s 15-year recovery period to accelerate depreciation and reduce taxable income. In addition, evaluate opportunities under Section 179 to further enhance deductions and improve cash flow.
Plan around bonus depreciation changes: With bonus depreciation subject to legislative adjustments, timing is critical. Strategically plan QIP investments to capture maximum available benefits and consider alternative incentives, such as energy-efficient building deductions, to maintain tax efficiency.
Reassess lease agreements: For tenant improvements, review lease terms to ensure proper classification and reporting of QIP. This helps avoid misstatements and reduces the risk of issues during IRS reviews or financial audits.
Stay current with tax law updates: Tax regulations continue to evolve, impacting QIP eligibility and depreciation strategies. Regular consultations with your CPA and advisors will help you adapt your approach and maintain compliance while optimizing long-term tax outcomes.
Areas Prone to Misinterpretation
Several common missteps can result in Qualified Improvement Property (QIP) being misclassified or disqualified, ultimately limiting depreciation benefits and reducing potential tax savings:
Exterior improvements misidentified: Improvements such as roofing, HVAC units, and windows do not qualify as QIP. Only interior improvements to nonresidential property are eligible for accelerated depreciation.
Initial buildout incorrectly classified: Improvements placed in service at the same time as the original building do not qualify as QIP, even if they otherwise meet the criteria. QIP applies only to improvements made after the building is already in service.
Related-party lease issues: Improvements made to properties leased between related parties may be disqualified. It is critical to review lease structures to ensure compliance and preserve eligibility.
Example: A national retail chain leases a nonresidential building in early 2026 and subsequently installs new interior walls, lighting, electrical systems, and flooring. These improvements do not impact the building’s structural framework or involve elevators or escalators. With total costs of $600,000 placed in service in September 2026, the improvements qualify as QIP and are eligible for 100% bonus depreciation under the OBBBA, allowing a full deduction in the year placed in service.
If these same improvements had been completed during the building’s initial construction, rather than after occupancy, they would not qualify as QIP and would instead be depreciated under standard recovery periods.
Final Thoughts
The OBBBA brings much-needed clarity to Qualified Improvement Property (QIP), making 100% bonus depreciation a permanent benefit for eligible interior improvements. This allows taxpayers to immediately recover renovation costs and improve cash flow.
To fully capitalize on these benefits, accurate classification and strategic planning are essential. SegTax combines engineering-based cost segregation with tax expertise to help investors and property owners maximize depreciation, ensure compliance, and unlock the full value of QIP under the OBBBA.