This article is educational and is not tax or legal advice. Recovery periods, bonus rates, and eligibility depend on the facts and the law in effect for your placed-in-service year — confirm your treatment with your tax advisor.
The Default Is Wrong More Often Than You Think
When a business renovates the inside of a commercial building — new partitions, ceilings, lighting, finishes, interior doors — the costs often get booked as "leasehold improvements" or simply lumped into the building and depreciated over 39 years. For a large share of those dollars, that 39-year default is the wrong answer.
Most interior, non-structural improvements to an existing nonresidential building meet the definition of Qualified Improvement Property (QIP), which carries a 15-year recovery period and, importantly, is eligible for bonus depreciation.
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What QIP Is — and What It Excludes
QIP is defined in IRC §168(e)(6) as any improvement made by the taxpayer to an interior portion of a building that is nonresidential real property, placed in service after the date the building itself was first placed in service. Three things are carved out and never qualify:
- any improvement attributable to the enlargement of the building;
- any elevator or escalator; and
- the internal structural framework of the building.
Two words in that definition do a lot of work. "Interior" means the improvement has to be inside the building envelope — a new roof or exterior work is not QIP. "Nonresidential" means QIP does not exist for residential rental property; an apartment-building interior renovation is not QIP (its components are classified on their own merits, but the 15-year QIP category is off the table). And "after" matters: QIP is a renovation concept — improvements placed in service the same day as the original building generally are not QIP.
The "Retail Glitch" and the CARES Act Fix
QIP has a famous drafting scar. The 2017 Tax Cuts and Jobs Act intended QIP to be 15-year property — and therefore bonus-eligible — but a legislative error left QIP without an assigned recovery period, which defaulted it to 39 years and disqualified it from bonus depreciation. For two years, taxpayers who renovated commercial interiors were stuck depreciating those costs over 39 years.
The CARES Act (2020) corrected the error, assigning QIP a 15-year recovery period retroactive to property placed in service after Dec. 31, 2017. Taxpayers who had been depreciating QIP over 39 years could change their method and catch up. If you placed interior improvements in service in 2018 or 2019 and never revisited them, that catch-up may still be available.
Why 15 Years Changes the Math
The jump from 39-year to 15-year property is meaningful on its own, but the larger lever is bonus depreciation. Because QIP has a recovery period of 20 years or less, it qualifies for the additional first-year depreciation allowance under IRC §168(k). After the 2017 phase-down schedule (which had bonus stepping down toward zero), the One Big Beautiful Bill Act restored a permanent 100% bonus depreciation for qualifying property — including QIP — acquired and placed in service after Jan. 19, 2025. The practical effect: for a building owner who renovated a commercial interior in that window, a large block of what was being depreciated over 39 years may instead be deductible in full in year one.
One technical nuance worth knowing: QIP is depreciated using the straight-line method over 15 years, unlike 15-year land improvements, which use 150% declining balance. When bonus applies at 100%, the method difference washes out; when bonus is reduced or elected out, it does not, and the distinction matters.
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Finding QIP Is an Engineering Exercise, Not a Label
The catch is that "QIP" is not a line on most contractor invoices. A renovation invoice bundles structural and non-structural work, interior and exterior, qualifying and non-qualifying, into lump sums. Separating the QIP-eligible interior improvements from the internal structural framework, the building enlargement, and the elevators requires walking the construction documents component by component — which is exactly what a cost segregation study does. A study identifies the interior, non-structural improvements that meet §168(e)(6), assigns them to the 15-year class, and documents the basis with reference to the underlying source records so the position is supportable.
The Practical Takeaway
If your business has renovated the interior of a commercial building — a tenant build-out, a store remodel, an office refresh, a restaurant fit-out — a meaningful portion of that spend is probably 15-year QIP rather than 39-year structure, and a portion of that may be deductible immediately under current bonus rules. The two questions worth answering before you file are simple: how much of the renovation is interior, non-structural improvement, and what is the placed-in-service year. The first is what a cost segregation study quantifies; the second determines the bonus rate that applies.
If you have a build-out or remodel on the books, run it through our free calculator to see what the QIP treatment could be worth — or start a study with your renovation cost documents.
