Qualified Improvement Property and how to get tax breaks this year!

Do you own property? Think commercial, or real estate. You could qualify for a tax break.

Consider this, if you have made Interior improvements to these properties you can deduct them fully in one year verses over multiple years.

However, the asterisk because there is always an *. The improvements must fall under the category of “qualified improvement property” or QIP.

What Is QIP?

Let’s start with the truth, Congress wants to encourage business owners to improve their properties. Consider this, the Tax Cuts and Jobs Act (TCJA) established a new category of depreciable real property: QIP

QIP (I just really like saying it, LOL) has a much shorter period of recovery than regular commercial property—15 years.

Therefore, to encourage property owners in 2021 and 2022, QIP can qualify for that immediate 100% bonus depreciation deduction.

For example, QIP includes interior renovations to any of the following:

Office building (or single offices)
Restaurant or bar
Store
Strip mall
Motel or hotel Warehouse Factory

However, QIP applies only to non-residential property, improvements to residential rental property such as an apartment building are not QIP.

Good news for you Air BnBers (Air BnBsters? I don’t really know)

Airbnb and similar short-term residential rentals qualify as non-residential property. If, they are rented on a transient basis—that is, over half the unit needs to be rented for less than 30 days at a time, by one person. In other words, no long-term rentals, that kicks you out of the QIP.

Examples of QIP improvements

Drywall
Ceilings
Interior doors
Modifications to tenant spaces (if the interior walls are not load-bearing)
Fire protection
Mechanical
Electrical
Plumbing
Heating and air interior equipment and ductwork ·
Security equipment

QIP does not include

Improvements related to the enlargement of a building,
An elevator or escalator,
The internal structural framework of a building
Structural framework includes “all load-bearing internal walls and any other internal structural supports.”

QIP for Section 179

You can use Section 179 expensing on QIP. (Say what now?)

In addition, you may use Section 179 to deduct the following improvements to a non-residential building after the building is placed in service:

Roofs
Heating, ventilation, and air-conditioning (HVAC) property
Fire-protection and alarm systems
Security systems

Something of note: These can be exterior building improvements. Technically, such improvements are not QIP. they fall under “qualified real property” for purposes of Section 179.

Placed in Service

QIP consists only of improvements made after the building was placed in service.

***Ding Ding Ding Loophole alert!*** “placed in service” is the first time the building is placed in service by any person. So, if you purchased a pre existing business, or that day the business began counts toward your “placed in service” date. Theoretically, you can renovate to your heart’s content before you reopen and it qualifies as a QIP.

However, you have to make the improvements. You can’t acquire a building and treat improvements made by a previous owner as QIP. (naughty, naughty)

How to Deduct Qualified Improvement Property

You may deduct the cost of QIP in one of three ways:

Use first-year bonus depreciation,
Use IRC Section 179 expensing,
Depreciate the cost over 15 years using straight-line depreciation.

QIP placed in service in 2021 and 2022 is eligible for 100% bonus depreciation. Starting in 2023, the bonus depreciation reduces to 20% per year until it is completely phased by 2027.

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