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Maximize or Defer QIP Deductions? What Businesses Should Know

Introduction

When it comes to commercial real estate, depreciation typically spans 39 years. However, certain interior improvements—known as Qualified Improvement Property (QIP)—can be depreciated faster or even fully deducted in the first year. While this accelerated depreciation sounds appealing, it may not always be the optimal tax strategy.

🧱 What Is Qualified Improvement Property (QIP)?

QIP refers to improvements made to the interior of a nonresidential building after the building itself was placed in service. However, it excludes:

  • Building expansions
  • Elevators and escalators
  • Internal structural framework

QIP is eligible for:

  • A 15-year depreciation period
  • Bonus depreciation
  • Section 179 expensing

💸 100% Bonus Depreciation Under the OBBBA

The One Big Beautiful Bill Act (OBBBA), signed in July 2025, permanently reinstates 100% bonus depreciation for assets acquired and placed in service after January 19, 2025.

⚠️ Important Timing Caveat

Assets acquired between January 1–19, 2025, only qualify for 40% bonus depreciation. In such cases:

  1. Claim Section 179 expensing first
  2. Apply 40% bonus depreciation if Section 179 is maxed out

🚫 Bonus Depreciation Limitations

Some businesses may not qualify for bonus depreciation, including:

  • Real estate firms deducting 100% of business interest expense
  • Dealerships with floor-plan financing and gross receipts over $31 million

🧾 Section 179 Expensing: An Alternative Path

Section 179 allows immediate deduction of eligible asset costs, including QIP. Under the OBBBA:

  • Maximum deduction: $2.5 million (up from $1.25 million)
  • Phase-out threshold: $4 million (up from $3.13 million)
  • Adjusted annually for inflation after 2025

🔒 Restrictions

  • Can only offset net income (not create a loss)
  • Cannot reduce taxable income below zero

✅ Bonus Overlap

Section 179 also covers:

  • HVAC systems
  • Nonresidential roofs
  • Fire protection and alarm systems
  • Security systems

📉 Why Spread Out QIP Depreciation?

While immediate deductions are tempting, spreading depreciation over 15 years may be smarter in some cases.

1. Excess Business Loss Rule

Claiming large first-year deductions could trigger this rule, limiting how much loss can offset other income. For 2025, the cap is:

  • $313,000 for individuals
  • $626,000 for joint filers

Excess losses carry forward as net operating losses.

2. Depreciation Recapture Risk

Selling QIP after claiming large deductions may result in:

  • Recapture taxed at up to 37% ordinary income rate
  • Additional 3.8% Net Investment Income Tax (NIIT)

In contrast, straight-line depreciation gains are taxed at 25% + NIIT.

3. Future Tax Rate Considerations

If your income or tax rates rise in future years, deferred depreciation could be more valuable. Despite OBBBA’s “permanent” rates, Congress could still enact increases.

🧠 Final Thoughts: What’s Best for Your Business?

Choosing between immediate QIP deductions and long-term depreciation depends on:

  • Your current and projected income
  • Eligibility for bonus or Section 179
  • Potential sale of the property
  • Risk of triggering excess loss rules

Consult a tax advisor to model your options and make the most strategic decision.