How Do I Depreciate Leasehold Improvements (QIP) to Save on Taxes?

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📅 Published Jun 21, 2026 · Updated Jun 21, 2026

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How Do I Depreciate Leasehold Improvements (QIP) to Save on Taxes?

Direct Answer

Most interior buildout work qualifies as Qualified Improvement Property (QIP), which the tax code depreciates over 15 years instead of the old 39-year schedule — and because 15 years is under the 20-year threshold, QIP is eligible for bonus depreciation. The money move: classify your buildout as QIP, then take bonus depreciation to write off a large share of it in year one rather than dribbling deductions out over four decades.

The mechanics: QIP is any improvement made by the taxpayer to the interior of nonresidential real property *after* the building was first placed in service. It specifically excludes three things — building enlargements, elevators/escalators, and structural framework.

Everything else inside the box — new walls, flooring, lighting, ceilings, interior doors, electrical, plumbing fixtures, HVAC distribution inside the space — generally qualifies.

The CARES Act fix matters here. Before 2020, a drafting error in the 2017 tax law accidentally gave QIP a 39-year life with no bonus eligibility (the infamous "retail glitch"). The CARES Act retroactively corrected it to 15-year property, restoring bonus eligibility back to 2018.

So if you placed QIP in service in 2018 or 2019 and used 39 years, you can still catch up.

Run the numbers on a $500,000 leasehold buildout that's all QIP. With 2026 bonus depreciation at 40% (it phases down — 100% through 2022, then 80/60/40/20%; confirm the current-year rate, since Congress has repeatedly restored 100%), you deduct $200,000 in year one, then the remaining $300,000 straight-line over 15 years (~$20,000/year).

At a 37% federal rate, that $200,000 year-one deduction is $74,000 in tax saved up front — versus the ~$4,700/year you'd get dribbling $500,000 over 39 years the old way. The NPV gain at an 8% discount rate is roughly $50,000 to $80,000 on a half-million-dollar buildout.

What Counts as QIP — and What Doesn't

flowchart TD A[Buildout cost item] --> B{Interior improvement to existing nonresidential building?} B -- No, exterior or structural --> C[39-year property] B -- Yes --> D{Enlargement, elevator/escalator, or framework?} D -- Yes --> C D -- No --> E[Qualifies as QIP - 15-year] E --> F{Recovery life 20 yrs or less?} F -- Yes --> G[Bonus depreciation eligible] G --> H[Year-one write-off + 15-yr balance]

Qualifies as QIP (15-year, bonus-eligible):

Interior non-load-bearing walls and partitions
Flooring, ceilings, interior lighting
Interior doors, drywall, finishes
HVAC distribution, electrical, and plumbing *inside* the leased space
Fire protection and security inside the space

Does NOT qualify as QIP:

Enlargement of the building (an addition increasing square footage)
Elevators and escalators
Structural framework — load-bearing walls, the roof structure, foundation
Exterior work — parking lots, sidewalks, signage (those are 15-year *land improvements*, a separate category that's also bonus-eligible)

QIP vs. Section 179 vs. Bonus — Stacking the Three

You have three tools, and the smart play is stacking them in the right order.

Bonus depreciation (Section 168(k)): Applies automatically to all bonus-eligible property unless you elect out. No dollar cap, and it can create or increase a net operating loss that carries forward. Use this for the bulk of QIP.
Section 179 expensing: Lets you immediately expense up to roughly $1.25 million (2026, indexed) of qualifying property, but it cannot create a loss — it's limited to your taxable income. Section 179 *also* covers roof, HVAC, fire, and security systems on nonresidential property that even bonus can't reach. Use 179 for the items bonus misses, or to fine-tune the exact deduction you want.
Straight-line 15-year: Whatever you don't bonus or 179 depreciates evenly over 15 years.

The ordering rule: Section 179 is applied first, then bonus depreciation on what's left, then straight-line on the remainder. A common mistake is taking 179 on everything when you have income limits — sometimes letting bonus do the heavy lifting (because it *can* create a loss to carry forward) is the better cash-flow move.

Model both with your CPA.

Tenant vs. Landlord: Who Gets the Deduction

The deduction follows who pays for and owns the improvement, not whose building it is.

Tenant pays and owns the improvements: The tenant depreciates them as QIP, regardless of the lease term. Even if your lease is 5 years and the QIP life is 15, you depreciate over 15 — and if you leave early, you can write off the remaining basis as an abandonment loss when you vacate and surrender the improvements.
Landlord pays via a TI allowance: The landlord owns and depreciates those improvements. If a landlord gives you a $50/sq ft allowance and you spend it, the landlord typically capitalizes and depreciates that as QIP; the allowance is generally not taxable income to you if it's a true construction allowance under a qualified lease.
Tenant overspends the allowance: The portion you fund out of pocket is your QIP to depreciate. Track the split carefully — it's the line between your deduction and the landlord's.

Catching Up on Missed QIP Depreciation

If you placed QIP in service in 2018–2020 and used the wrong 39-year life (the retail-glitch era), you can recover it without amending returns. File Form 3115, Change in Accounting Method, and take a Section 481(a) catch-up adjustment — a single deduction in the current year equal to the depreciation you should have taken.

On a large prior buildout, this can be a six-figure current-year deduction. Alternatively, you could amend the affected returns, but Form 3115 is usually cleaner and avoids reopening old years.

How the Deduction Flows in Year One

flowchart LR A[$500K QIP buildout] --> B[Section 179 if income allows] A --> C[Bonus depreciation on remainder] C --> D[$200K year-1 at 40% bonus] A --> E[$300K straight-line / 15 yrs] E --> F[~$20K per year] D --> G[x 37% = $74K tax saved year 1] G --> H[NPV gain $50K-$80K at 8%]

The number to anchor on: every $100,000 of QIP you accelerate from 39-year straight-line into a year-one bonus deduction is worth roughly $15,000 to $25,000 in NPV, depending on your bracket and discount rate. That's the financing benefit — interest-free money from the IRS for the time value of the deferral.

FAQ

What is Qualified Improvement Property, exactly? QIP is any improvement to the interior of an existing nonresidential building, made after the building was placed in service — excluding enlargements, elevators/escalators, and structural framework. It depreciates over 15 years and qualifies for bonus depreciation because 15 years is under the 20-year threshold.

Can I write off my whole buildout in year one? Often a large chunk, yes. With bonus depreciation plus Section 179, you can frequently deduct the majority of a QIP buildout in the placed-in-service year. The exact percentage depends on the current-year bonus rate (phasing down from 100%) and your taxable income limits under Section 179.

As a tenant, can I still depreciate improvements over 15 years if my lease is only 5 years? Yes. QIP is depreciated over 15 years regardless of lease length. If you vacate before then, you can take an abandonment loss for the remaining undepreciated basis when you surrender the improvements to the landlord.

Does the QIP fix really apply back to 2018? Yes. The CARES Act retroactively corrected the "retail glitch," making QIP 15-year, bonus-eligible property back to January 1, 2018. If you used 39 years in 2018–2020, file Form 3115 for a Section 481(a) catch-up rather than amending.

Sources

IRS, Section 168 and Qualified Improvement Property definition (post-CARES Act)
IRS Publication 946, "How to Depreciate Property" (MACRS, QIP recovery period)
IRS, Section 179 expensing limits and Section 168(k) bonus depreciation rules
IRS Revenue Procedure 2020-25 (QIP change of accounting method, Form 3115)
CARES Act (P.L. 116-136), QIP technical correction
RSMeans and CBRE buildout cost benchmarks (component classification)
BDO / RSM CRE tax advisory, QIP and bonus depreciation stacking guidance

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# How Do I Depreciate Leasehold Improvements (QIP) to Save on Taxes?

## Direct Answer

Most interior buildout work qualifies as **Qualified Improvement Property (QIP)**, which the tax code depreciates over **15 years** instead of the old **39-year** schedule — and because 15 years is under the 20-year threshold, QIP is **eligible for bonus depreciation**. The money move: classify your buildout as QIP, then take **bonus depreciation** to write off a large share of it in **year one** rather than dribbling deductions out over four decades.

The mechanics: **QIP** is any improvement made by the taxpayer to the **interior of nonresidential real property** *after* the building was first placed in service. It specifically **excludes** three things — building **enlargements**, **elevators/escalators**, and **structural framework**. Everything else inside the box — new walls, flooring, lighting, ceilings, interior doors, electrical, plumbing fixtures, HVAC distribution inside the space — generally qualifies.

The **CARES Act fix** matters here. Before 2020, a drafting error in the 2017 tax law accidentally gave QIP a 39-year life with no bonus eligibility (the infamous "**retail glitch**"). The CARES Act **retroactively corrected it to 15-year property**, restoring bonus eligibility back to **2018**. So if you placed QIP in service in 2018 or 2019 and used 39 years, you can still catch up.

Run the numbers on a **$500,000** leasehold buildout that's all QIP. With **2026 bonus depreciation at 40%** (it phases down — 100% through 2022, then 80/60/40/20%; confirm the current-year rate, since Congress has repeatedly restored 100%), you deduct **$200,000** in year one, then the remaining **$300,000** straight-line over 15 years (**~$20,000/year**). At a **37%** federal rate, that **$200,000** year-one deduction is **$74,000** in tax saved up front — versus the **~$4,700/year** you'd get dribbling **$500,000** over 39 years the old way. The **NPV gain** at an 8% discount rate is roughly **$50,000 to $80,000** on a half-million-dollar buildout.

## What Counts as QIP — and What Doesn't

```mermaid
flowchart TD
    A[Buildout cost item] --> B{Interior improvement to existing nonresidential building?}
    B -- No, exterior or structural --> C[39-year property]
    B -- Yes --> D{Enlargement, elevator/escalator, or framework?}
    D -- Yes --> C
    D -- No --> E[Qualifies as QIP - 15-year]
    E --> F{Recovery life 20 yrs or less?}
    F -- Yes --> G[Bonus depreciation eligible]
    G --> H[Year-one write-off + 15-yr balance]
```

**Qualifies as QIP (15-year, bonus-eligible):**
- Interior **non-load-bearing walls** and partitions
- **Flooring**, ceilings, interior **lighting**
- Interior **doors**, drywall, finishes
- **HVAC distribution**, electrical, and plumbing *inside* the leased space
- Fire protection and security inside the space

**Does NOT qualify as QIP:**
- **Enlargement** of the building (an addition increasing square footage)
- **Elevators and escalators**
- **Structural framework** — load-bearing walls, the roof structure, foundation
- **Exterior** work — parking lots, sidewalks, signage (those are 15-year *land improvements*, a separate category that's also bonus-eligible)

## QIP vs. Section 179 vs. Bonus — Stacking the Three

You have three tools, and the smart play is stacking them in the right order.

- **Bonus depreciation (Section 168(k)):** Applies automatically to all bonus-eligible property unless you elect out. No dollar cap, and it can create or increase a **net operating loss** that carries forward. Use this for the bulk of QIP.
- **Section 179 expensing:** Lets you immediately expense up to roughly **$1.25 million** (2026, indexed) of qualifying property, but it **cannot create a loss** — it's limited to your taxable income. Section 179 *also* covers roof, HVAC, fire, and security systems on nonresidential property that even bonus can't reach. Use 179 for the items bonus misses, or to fine-tune the exact deduction you want.
- **Straight-line 15-year:** Whatever you don't bonus or 179 depreciates evenly over 15 years.

**The ordering rule:** Section 179 is applied **first**, then bonus depreciation on what's left, then straight-line on the remainder. A common mistake is taking 179 on everything when you have income limits — sometimes letting bonus do the heavy lifting (because it *can* create a loss to carry forward) is the better cash-flow move. Model both with your CPA.

## Tenant vs. Landlord: Who Gets the Deduction

The deduction follows **who pays for and owns the improvement**, not whose building it is.

- **Tenant pays and owns the improvements:** The **tenant** depreciates them as QIP, regardless of the lease term. Even if your lease is 5 years and the QIP life is 15, you depreciate over 15 — and if you leave early, you can **write off the remaining basis** as an abandonment loss when you vacate and surrender the improvements.
- **Landlord pays via a TI allowance:** The **landlord** owns and depreciates those improvements. If a landlord gives you a **$50/sq ft** allowance and you spend it, the landlord typically capitalizes and depreciates that as QIP; the allowance is generally **not taxable income** to you if it's a true construction allowance under a qualified lease.
- **Tenant overspends the allowance:** The portion **you** fund out of pocket is **your** QIP to depreciate. Track the split carefully — it's the line between your deduction and the landlord's.

## Catching Up on Missed QIP Depreciation

If you placed QIP in service in **2018–2020** and used the wrong 39-year life (the retail-glitch era), you can recover it without amending returns. File **Form 3115, Change in Accounting Method**, and take a **Section 481(a) catch-up adjustment** — a single deduction in the current year equal to the depreciation you should have taken. On a large prior buildout, this can be a **six-figure** current-year deduction. Alternatively, you could amend the affected returns, but Form 3115 is usually cleaner and avoids reopening old years.

## How the Deduction Flows in Year One

```mermaid
flowchart LR
    A[$500K QIP buildout] --> B[Section 179 if income allows]
    A --> C[Bonus depreciation on remainder]
    C --> D[$200K year-1 at 40% bonus]
    A --> E[$300K straight-line / 15 yrs]
    E --> F[~$20K per year]
    D --> G[x 37% = $74K tax saved year 1]
    G --> H[NPV gain $50K-$80K at 8%]
```

The number to anchor on: every **$100,000** of QIP you accelerate from 39-year straight-line into a year-one bonus deduction is worth roughly **$15,000 to $25,000** in NPV, depending on your bracket and discount rate. That's the financing benefit — interest-free money from the IRS for the time value of the deferral.

## FAQ

**What is Qualified Improvement Property, exactly?**
QIP is any improvement to the **interior of an existing nonresidential building**, made after the building was placed in service — excluding **enlargements, elevators/escalators, and structural framework**. It depreciates over **15 years** and qualifies for **bonus depreciation** because 15 years is under the 20-year threshold.

**Can I write off my whole buildout in year one?**
Often a large chunk, yes. With **bonus depreciation** plus **Section 179**, you can frequently deduct the majority of a QIP buildout in the placed-in-service year. The exact percentage depends on the current-year bonus rate (phasing down from 100%) and your taxable income limits under Section 179.

**As a tenant, can I still depreciate improvements over 15 years if my lease is only 5 years?**
Yes. QIP is depreciated over **15 years** regardless of lease length. If you vacate before then, you can take an **abandonment loss** for the remaining undepreciated basis when you surrender the improvements to the landlord.

**Does the QIP fix really apply back to 2018?**
Yes. The **CARES Act** retroactively corrected the "retail glitch," making QIP **15-year, bonus-eligible property** back to **January 1, 2018**. If you used 39 years in 2018–2020, file **Form 3115** for a Section 481(a) catch-up rather than amending.

## Sources

- IRS, Section 168 and Qualified Improvement Property definition (post-CARES Act)
- IRS Publication 946, "How to Depreciate Property" (MACRS, QIP recovery period)
- IRS, Section 179 expensing limits and Section 168(k) bonus depreciation rules
- IRS Revenue Procedure 2020-25 (QIP change of accounting method, Form 3115)
- CARES Act (P.L. 116-136), QIP technical correction
- RSMeans and CBRE buildout cost benchmarks (component classification)
- BDO / RSM CRE tax advisory, QIP and bonus depreciation stacking guidance

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How Do I Depreciate Leasehold Improvements (QIP) to Save on Taxes?

How Do I Depreciate Leasehold Improvements (QIP) to Save on Taxes?

Direct Answer

What Counts as QIP — and What Doesn't

QIP vs. Section 179 vs. Bonus — Stacking the Three

Tenant vs. Landlord: Who Gets the Deduction

Catching Up on Missed QIP Depreciation

How the Deduction Flows in Year One

FAQ

Sources

What does the score mean?