Qualified Improvement Property (QIP) refers to certain interior improvements made to non-residential (commercial) buildings after the building has been placed in service, and it works by giving those improvements a favorable 15-year recovery period instead of the standard 39 years. Thanks to legislative corrections, this shorter life, combined with eligibility for Bonus Depreciation (while percentages still apply), makes QIP a prime candidate for Cost Segregation.
By identifying QIP items separately during a Cost Segregation study, you can unlock accelerated deductions, enhancing immediate tax savings and overall cash flow. Even as Bonus Depreciation phases out, QIP still offers a significantly shorter life compared to the building shell. For large and complex improvements, an engineering-based Cost Segregation study is recommended to ensure every component is properly classified. For simpler upgrades, your CPA may be able to handle the classification with standard documentation.
QIP: Key Facts and Benefits
- Definition: QIP refers to certain interior improvements to non-residential (commercial) buildings that occur after the building is placed in service.
- Key Benefit: QIP generally enjoys a 15-year recovery period instead of the standard 39 years.
- Bonus Eligibility: QIP is eligible for Bonus Depreciation (while those percentages still apply).
- Cost Segregation Link: Identifying QIP separately allows you to accelerate depreciation and maximize the benefits.
- Study Requirement: For large and complex improvements, an engineering-based Cost Segregation study is necessary for precise classification and maximum benefit.
- Goal: Carefully analyzing QIP through Cost Segregation helps unlock accelerated deductions, improving cash flow and tax efficiency.
What Qualifies as Qualified Improvement Property
QIP property is broadly defined as any improvement made by the taxpayer to the interior of an existing nonresidential (commercial) building after the building was initially placed in service.
Crucially, the law specifically excludes three types of expenditures:
- Enlargement of the building (expanding its footprint).
- Installation of elevators or escalators.
- Modifications to the internal structural framework of the building.
Examples of expenditures that do qualify as QIP include installing new interior walls, lighting, flooring, drop ceilings, and interior plumbing or electrical wiring in a retail space, office, or factory. It only applies to nonresidential property, so improvements to apartment buildings do not qualify as QIP.
The QIP Depreciation Advantage
The real power of QIP lies in its short recovery period, which makes it eligible for accelerated depreciation.
- Shorter Life: While the building structure itself is depreciated over a lengthy 39 years, QIP is statutorily assigned a 15-year recovery period. This shorter leasehold improvements depreciation life means a faster write-off, freeing up capital sooner.
- Bonus Depreciation Eligibility: Because QIP has a 15-year life (which is 20 years or less), it qualifies for Bonus Depreciation. For assets placed in service after January 19, 2025, and under current law, this allows for a 100% deduction of the cost of the improvement in the year it is placed in service. For many commercial taxpayers, this means a major portion of a renovation can be instantly expensed.
Cost Segregation and QIP
QIP is most effectively leveraged through a Cost Segregation study, especially for major renovations. A Cost Segregation study is an engineering-based analysis that correctly identifies and reclassifies property components. It separates QIP (15-year property) from other, shorter-lived personal property (5- or 7-year life) and the 39-year building structure, ensuring all eligible costs are assigned the correct, accelerated recovery period.
For businesses making significant improvements to leasehold property, correctly classifying these expenses as QIP property is essential for maximizing first-year tax deductions and boosting cash flow.
