Maximizing Depreciation of Qualified Improvement Property
Posted by Michē Needham on October 20, 2025
Commercial real estate typically depreciates over 39 years, but certain improvements, classified as Qualified Improvement Property (QIP), offer opportunities for accelerated deductions. With recent legislative changes under the One Big Beautiful Bill (OBBB), understanding how to optimize QIP depreciation is critical for tax planning.
What Is QIP?
QIP refers to improvements made to the interior portion of a nonresidential building after the building was placed in service. However, it excludes:
- Building enlargements
- Elevators or escalators
- Internal structural framework
QIP enjoys a 15-year recovery period and qualifies for bonus depreciation and Section 179 expense, making it a powerful tool for reducing taxable income.
100% Bonus Depreciation: A Game-Changer
Under the OBBB, 100% bonus depreciation is permanently reinstated for assets acquired and placed in service after January 19, 2025. This allows businesses to deduct the full cost of QIP immediately, improving cash flow.
Key timing considerations:
- Assets placed Jan. 1–Jan. 19, 2025 qualify for 40% bonus depreciation.
- After Jan. 19, 2025, the full 100% applies.
Real estate businesses electing full interest expense deductions and dealerships with floor-plan financing may be excluded if average annual gross receipts exceed $31 million.
Section 179 Expensing: Enhanced Limits
Section 179 offers another avenue for immediate deductions, now with higher thresholds:
- $2.5 million maximum deduction (up from $1.25 million),
- Phase-out begins at $4 million in asset acquisitions,
- Applies to QIP and additional items like HVAC systems, roofs, fire protection, and security systems.
Unlike bonus depreciation, Section 179 cannot create a net operating loss, it only offsets taxable income.
Should You Accelerate or Spread Out Deductions?
While first-year deductions are attractive, they’re not always optimal. Consider these factors:
- Excess Business Loss Rule: Large deductions may trigger limits for noncorporate taxpayers ($313,000 for singles; $626,000 for joint filers in 2025).
- Depreciation Recapture: Immediate deductions can lead to higher ordinary income tax rates (up to 37% plus 3.8% NIIT) upon sale.
- Future Tax Rates: Accelerating deductions now reduces future depreciation, which could be more valuable if tax rates rise.
Strategic Takeaways
- Timing matters: Plan acquisitions around January 19, 2025, to maximize bonus depreciation.
- Evaluate eligibility: Confirm whether your business qualifies for bonus depreciation or should rely on Section 179.
- Model scenarios: Compare immediate deductions versus spreading them over 15 years to optimize long-term tax outcomes.
Final Thoughts
OBBB changes create significant opportunities for businesses investing in nonresidential property improvements. However, the decision to accelerate or defer deductions requires careful analysis of your income projections, tax position, and future plans. Consult with a Lumsden McCormick tax advisor to tailor the strategy to your situation.
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Michē has more than 21 years of experience providing tax and advisory services to commercial businesses and individuals. She has extensive experience with pass-through taxation of partnerships and S corporations and individual taxation, specializing in the areas of real estate, energy, and professional services. Additionally, Michē is responsible for providing services such as business tax planning, individual tax planning, personal wealth, and succession planning.