Qualified Improvement Property: 100% Bonus Depreciation on Leasehold Improvements

Qualified Improvement Property (QIP) is any improvement made to the interior portion of a nonresidential (commercial) building after the building is placed in service. QIP has a 15-year recovery period under MACRS and is eligible for 100% bonus depreciation (permanently restored by the OBBBA). This means the full cost of qualifying interior improvements can be deducted in the year the improvement is placed in service.

How does QIP benefit tenants and building owners?

What about the tenant vs. landlord question?

The party who pays for the improvement and has the economic benefit of the improvement claims the deduction. In most commercial leases:

• Tenant-funded improvements: The tenant pays for the buildout and deducts it as QIP. This is the most common scenario.
• Tenant improvement allowance (TIA): The landlord provides a cash allowance for the tenant to build out the space. If the tenant controls the buildout and the TIA is treated as a rent reduction, the tenant may still claim the deduction on the portion they fund above the TIA. The TIA itself may be taxable income to the tenant (reducing the net benefit).
• Landlord-funded improvements: If the landlord pays for and owns the improvements (they revert to the landlord at lease end), the landlord claims the deduction.

The lease agreement should clearly state who owns the improvements and who bears the economic benefit, as this determines who takes the depreciation deduction.

What is the difference between Section 179 and bonus depreciation?

Both allow accelerated cost recovery, but they work differently. Section 179 lets you deduct the full cost of qualifying assets in the year placed in service, up to an annual limit ($1,220,000 in 2024), but only against net business income (it cannot create a loss). Bonus depreciation (60% in 2024, phasing down 20% per year) applies to both new and used property with no dollar limit and can create a net operating loss. Section 179 requires an active election on the return. Bonus depreciation applies automatically unless you elect out. For most small businesses, Section 179 is preferred when income supports the deduction. Bonus depreciation is better when you want to generate or increase a loss for carryforward.

What is bonus depreciation and how has it changed recently?

Bonus depreciation allows you to deduct a large percentage of an asset’s cost in the first year, rather than spreading it over the full MACRS recovery period. Under the Tax Cuts and Jobs Act, bonus depreciation was 100% for assets placed in service from September 27, 2017 through December 31, 2022. It began phasing down by 20% per year: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027. Unlike Section 179, bonus depreciation can create or increase a net operating loss, which you can then carry forward to offset future income. Bonus depreciation applies to new and used property (the TCJA removed the new-only requirement), as long as you have not previously used the asset.

Related guides:

• Section 1031 Like-Kind Exchange for Small Business Real Estate

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.