TOPIC
Qualified Improvement Property
Last Updated October 11, 2022
Qualified improvement property is an improvement made by the taxpayer to an interior portion of a nonresidential building if the improvement is placed in service after the building was first placed in service. Examples include the installation or replacement of drywall, interior doors, lighting, flooring, ceilings, fire protection, and plumbing.
Any enlargement of the building, any elevator or escalator, and any internal structural framework do not meet the requirements of qualified improvement property. Qualified improvement property is depreciated using the straight-line depreciation method.
What is qualified improvement property?
As defined by §168(e)(6), qualified improvement property (QIP) must be:
- Made by the taxpayer
- Made to an interior portion of a nonresidential (commercial, retail, factory) building
- Made to a building that is already in service
Exclusions include:
- Building enlargements
- Elevators and escalators
- Internal structural framework
Download: Cost Recovery Chart
This chart provides an at-a-glance look at the tax treatment of depreciation for qualified improvement property from 2004 to now.
Does bonus depreciation apply to qualified improvement property?
Qualified improvement property is generally eligible for bonus depreciation, allowing taxpayers to deduct up to 100% of the cost of assets up front.
Bonus depreciation may be retroactively applied to qualified improvement property placed into service in the 2018 and 2019 taxable years and may create losses, which could result in tax refunds.
The tax treatment of depreciation for qualified improvement property impacts owners of commercial, retail, and factory real estate and leaseholders by lowering their cost of capital.
Although bonus depreciation doesn’t change the amount deductible for the cost of qualified improvement property, it accelerates depreciation of qualified improvement property. This defers payment of tax on earnings, thus lowering the pre-tax rate of return that an investment in qualified improvement property must earn to achieve the desired after-tax rate of return.
Learn more: State Conformity with Federal Bonus Depreciation Rules
Your guide for an easy, accurate way to comply with state depreciation across multiple states. Learn more about tax reform and the state depreciation changes.
Is qualified leasehold improvement property eligible for bonus depreciation in 2021?
For property placed in service after Dec. 31, 2017, the 2017 TCJA eliminated the 15-year MACRS property classification for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property, and replaced them with a single classification: qualified improvement property.
The 2020 CARES Act further clarified that businesses can claim 100% bonus depreciation on qualified improvement property placed in service after 2017 provided all other requirements are met.
Download: Cost Recovery Chart
This chart provides an at-a-glance look at the tax treatment of depreciation for qualified improvement property from 2004 to now.
What is the rate of bonus depreciation on QIP?
Qualified improvement property is generally eligible for bonus depreciation, allowing taxpayers to deduct up to 100% of the cost of assets up front.
Bonus depreciation rate:
- Qualified improvement property acquired after Sept. 27, 2017, and placed in service in 2018 through 2022 (2023 for long production property and specified aircraft) generally qualifies for 100% bonus depreciation.
- Qualified improvement property acquired after Sept. 27, 2017, and placed in service in 2023 (2024 for long production property and specified aircraft) generally qualifies for 80% bonus depreciation.
- Qualified improvement property acquired after Sept. 27, 2017, and placed in service in 2024 (2025 for long production property and specified aircraft) generally qualifies for 60% bonus depreciation.
- Qualified improvement property acquired after Sept. 27, 2017, and placed in service in 2025 (2026 for long production property and specified aircraft) generally qualifies for 40% bonus depreciation.
- Qualified improvement property acquired after Sept. 27, 2017, and placed in service in 2026 (2027 for long production property and specified aircraft) generally qualifies for 20% bonus depreciation.
In Brief: Detangling State Tax Conformity
Calculating state depreciation has long been a source of frustration and stress. To help navigate this tangled web of state conformity, here are three things taxpayers can start doing today.
How is qualified improvement property depreciated if it is ineligible for bonus depreciation or if the taxpayer elects out of bonus depreciation for qualified improvement property?
A real property trade or business or farming business that elects out of the §163(j) business interest deduction limit must instead use the ADS to depreciate qualified improvement property using the straight-line method over 20 years.
A taxpayer that elects out of bonus depreciation for qualified improvement property placed in service in a given year can depreciate qualified improvement property placed in service during that year using the straight-line method over 15 years (GDS), or 20 years (ADS).
Read more: Business Interest Expense
Learn how the Tax Cuts and Jobs Act of 2017 impacted limitations on business interest, as outlined in IRC §163(j), as well as how that interest is defined.
Key IRC Sections
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PORTFOLIO
Portfolio 531-3rd: Depreciation: MACRS and ACRS
A basic reference tool for determining the depreciation deduction under both the modified accelerated cost recovery system (MACRS) and the original accelerated cost recovery systems (ACRS) of §168.
PRACTICE TOOL
Cost Recovery of Building Improvements Placed in Service 2004–Present
An overview of depreciation and cost recovery based on the type of improvement and date placed in service.
PRACTICE TOOL
Tax Practice Series: Depreciation of Realty and Tangible Property
This section of our Tax Practice Series provides a detailed overview of the three systems of depreciation available for tangible property.