Qualified Improvement Property (QIP): The Smart Way to Accelerate Depreciation on Commercial Renovations

In the world of commercial real estate, every renovation is more than just a facelift, it’s a financial decision that can directly impact your tax strategy and cash flow. Whether you’re upgrading lighting, redoing interiors, or replacing HVAC systems, those costs could qualify for significant tax benefits under the Qualified Improvement Property (QIP) classification.

Yet, many property owners and managers miss out on those benefits because they’re unaware of how QIP works or how recent tax law changes have shaped it. Understanding this classification can help you recover renovation costs faster and free up cash for future investments if handled correctly.

At ProcStat, we regularly work with property management firms, developers, and commercial owners who want to ensure that every improvement is classified and depreciated accurately. Here’s a comprehensive look at what QIP is, how it evolved, and how you can maximize its advantages for your business.

What Exactly Is Qualified Improvement Property?

Qualified Improvement Property (QIP) refers to interior improvements made to an existing nonresidential building after that building has already been placed in service.

The improvements that typically fall under QIP include:

•    Interior lighting and electrical upgrades

•    Flooring, ceiling, and drywall replacements

•    HVAC, plumbing, and similar system enhancements

However, QIP doesn’t cover every kind of renovation. The IRS specifically excludes:

•    Structural modifications (like beams, columns, or load-bearing walls)

•    Expansions or additions that enlarge the building’s footprint

•    Installation of elevators, escalators, or any work on the building’s exterior

In short, if you’re improving what’s inside an already operating commercial space without changing the structure your project likely falls under QIP.

This distinction matters because QIP is eligible for accelerated depreciation, which can dramatically shorten the time it takes to recover your investment through deductions.

The Evolution of QIP: From Complex Rules to Simplified Classification

Before 2017, the tax code treated various types of interior improvements differently. Property owners had to navigate multiple classifications such as:

•    Qualified Leasehold Improvement Property (QLIP)

•    Qualified Retail Improvement Property (QRIP)

•    Qualified Restaurant Property (QRP)

Each category came with its own eligibility criteria and depreciation timelines, which often caused confusion and inconsistent treatment of similar improvements across industries.

Then came the Tax Cuts and Jobs Act (TCJA) of 2017. The intent behind the TCJA was to simplify things by merging all those categories into one Qualified Improvement Property and make it uniformly eligible for a 15-year depreciation life.

However, during the legislative process, a drafting error often referred to as the “retail glitch” accidentally omitted the 15-year recovery period from the final law. As a result, QIP was mistakenly classified as 39-year property, the same as a standard nonresidential building.

That error meant taxpayers could not take advantage of accelerated or bonus depreciation on interior improvements, eliminating one of the law’s intended benefits.

Fortunately, the CARES Act of 2020 corrected this mistake retroactively, confirming that QIP placed in service after December 31, 2017, is:

•    15-year property under the General Depreciation System (GDS)

•    20-year property under the Alternative Depreciation System (ADS)

This correction had a major impact. Businesses that had already filed returns under the incorrect 39-year classification were now allowed to reclassify those improvements and claim additional deductions even retroactively.

Why This Correction Matters

Depreciating property over 15 years instead of 39 years means faster write-offs, improved cash flow, and higher immediate tax deductions.

Let’s put that into perspective. Imagine you spent $600,000 upgrading the interior of an office building in 2018. Under the 39-year rule, your annual depreciation would be around $15,000. Under the corrected 15-year rule, that jumps to $40,000 per year and you may also qualify for bonus depreciation, which allows you to deduct a significant portion of that cost in the first year itself.

For property owners managing multiple assets or portfolios, that difference compounds quickly.

Understanding Bonus Depreciation

The TCJA also introduced a powerful companion benefit: bonus depreciation.

This provision allows eligible taxpayers to immediately deduct a large percentage (up to 100% in early years) of qualifying property costs in the year they’re placed in service, rather than spreading those deductions over several years.

Since QIP is now officially classified as 15-year property, it qualifies for this accelerated deduction.
Although the 100% bonus depreciation rate is phasing down (80% in 2023, 60% in 2024, 40% in 2025, and so on), it still provides a substantial advantage for property owners planning upcoming renovations.

By combining QIP classification with bonus depreciation, property managers and investors can dramatically reduce taxable income.

Common Mistakes Businesses Make with QIP

Despite its clear benefits, QIP is often misunderstood or incorrectly applied. Some of the most common errors we see include:

1.    Treating all renovations as structural: Not every construction project is QIP. If you’re adding new walls, expanding the footprint, or reinforcing structures, those costs aren’t eligible.

2.    Continuing to depreciate QIP over 39 years: Many businesses never corrected their depreciation schedules after the CARES Act fix.

3.    Failing to separate non-qualifying costs: Exterior work, roofs, or landscaping often get lumped in with interior projects, leading to inaccurate classifications.

4.    Ignoring retroactive opportunities: Improvements made after 2017 can still be reclassified for tax savings, but only if you identify them and adjust your filings.

Addressing these mistakes can uncover significant missed deductions and that’s where specialized accounting expertise comes in.

How ProcStat Helps Property Owners and Managers Get It Right

At ProcStat, we specialize in outsourced accounting services for the property management and real estate industry, helping clients navigate the complexities of tax classifications, depreciation methods, and financial reporting.

Our role goes beyond bookkeeping, we act as an extension of your finance team to ensure that:

•    Every improvement is accurately categorized based on IRS guidelines

•    Depreciation schedules reflect the correct recovery period

•    Bonus depreciation is applied wherever eligible

•    Past filings are reviewed to identify and reclaim missed deductions

•    Your accounting records stay GAAP-compliant and audit-ready

Final Thoughts

Qualified Improvement Property is more than a tax term, it’s a financial tool. When used strategically, it allows property owners to recover renovation costs faster, improve liquidity, and reinvest those savings into growth.

If you’ve completed interior upgrades since 2018 or are planning renovations soon, now is the time to review how those improvements are classified. A small correction in your depreciation schedule can translate into significant financial gain.

At ProcStat, we help clients turn accounting accuracy into financial advantage ensuring your improvements don’t just look good on-site but also perform well on your balance sheet.