This article is co-authored by Paul Ellis and Bob Yates who both lead our dedicated Real Estate Tax Consulting Group.

The One Big Beautiful Bill Act (OBBBA) brought major enhancements to depreciation law, including the permanent restoration of 100% bonus depreciation. One of the most significant beneficiaries of this change is Qualified Improvement Property (QIP), which has remained a key focus since its introduction in the 2017 Tax Cuts and Jobs Act (TCJA). The OBBBA reinforces QIP’s status as a valuable incentive for commercial property improvements, offering taxpayers greater clarity and long-term planning advantages.

Learn more about what qualifies as QIP, how the OBBBA changed its treatment, common mistakes to avoid and what taxpayers need to consider to fully leverage this benefit.

What is Qualified Improvement Property?

QIP refers to certain improvements made to the interior of a nonresidential building after the building has been placed in service. These improvements must be made by the taxpayer, and importantly, cannot include:

• Enlargements to the overall building structure.
• Installation of elevators or escalators.
• Modifications to the internal structural framework.

Examples of qualifying QIP include the installation or replacement of drywall, lighting systems, interior plumbing, drop ceilings and other finish work inside commercial buildings. These types of renovations are common in the retail, restaurant, hospitality and office industries—making QIP a highly relevant asset category for a broad range of taxpayers.

QIP applies only to nonresidential real property, meaning residential rental buildings such as apartment complexes or assisted living facilities are not eligible. Additionally, improvements must occur after the building was originally placed in service—initial construction components do not qualify.

How the OBBBA Transformed QIP

Under the TCJA, QIP was assigned a 15-year recovery period and made eligible for bonus depreciation through 2026. However, beginning in 2023, bonus depreciation began phasing down from 100% to 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026 before fully expiring. This limited window created timing pressure for businesses trying to capture maximum depreciation benefits.

The OBBBA permanently eliminated that phase-down schedule. As of Jan. 20, 2025, all QIP placed in service qualifies for 100% bonus depreciation—with no scheduled expiration. This change offers long-term certainty for taxpayers planning multi-year renovation strategies.

Notably, the 15-year recovery period remains in place, which is a critical factor because bonus depreciation under IRC §168(k) is only allowed for property with a recovery period of 20 years or less. By retaining the 15-year life and reinforcing bonus eligibility, the OBBBA solidifies QIP as one of the most favorable asset types for accelerated depreciation.

Key Clarifications Under the OBBBA

In addition to making bonus depreciation permanent for QIP, OBBBA clarified several other important features:

• Leased improvements still count: Improvements made to leased spaces qualify, provided the lease is not between related parties. This benefits both landlords and tenants investing in commercial buildouts.
• Conversions are allowed: If a property is converted from residential to commercial use, future improvements may qualify as QIP—even though the original building did not.
• Placed-in-service test still applies: QIP must be placed in service after the original building was placed in service. Interior work completed during initial construction does not qualify as QIP.

Planning Strategies for Maximizing QIP Benefit

To take full advantage of QIP under the OBBBA, careful planning and documentation are key. Property owners and tenants should work with their CPAs and cost segregation specialists to identify and track QIP-eligible assets separately from other construction or renovation costs. Cost segregation studies can be especially useful in distinguishing QIP from non-qualifying structural elements.

Timing is also important. Improvements should be clearly tracked to ensure they are placed in service after the original building. If QIP is bundled with other assets, proper allocations should be made to preserve eligibility for bonus depreciation.

Areas Prone to Misinterpretation

Several common errors can lead to QIP being misclassified or disqualified, such as:

• Exterior improvements mistaken: Roofing, HVAC units on the exterior and windows do not qualify as QIP. Only interior improvements count.
• Initial buildout misclassified: If improvements are placed in service at the same time as the original building, they are not considered QIP—even if they otherwise meet the criteria.
• Related-party lease improvements: Improvements made to property leased between related parties may be disqualified. Taxpayers should review lease arrangements carefully.

Example: A national retail chain leases a nonresidential building in early 2026. After moving in, it installs new interior walls, lighting, electrical wiring and flooring—none of which affect the building's structure or include escalators or elevators. The improvements cost $600,000 and are placed in service in September 2026. Under the OBBBA, this $600,000 qualifies as QIP and can be fully deducted using 100% bonus depreciation in the year placed in service.

If the chain had made these improvements during the original construction of the building (rather than after occupancy), the costs would not have qualified as QIP.

Final Thoughts

The OBBBA brings much-needed certainty to QIP, making 100% bonus depreciation a permanent fixture of the tax code for qualifying interior improvements. This change enhances the value of reinvesting in nonresidential properties and allows taxpayers to recover renovation costs immediately.

With proper classification, clear documentation and strategic planning, QIP offers one of the most powerful and accessible tax incentives for commercial property enhancements. Businesses investing in leasehold improvements, tenant buildouts or ongoing interior upgrades should ensure they fully understand and leverage the opportunities now cemented under the OBBBA.