IRC §168(e)(6) Qualified Improvement Property

The facts

QIP is any improvement made by the taxpayer to an interior portion of a building that is nonresidential real property, if the improvement is placed in service after the date the building was first placed in service.

What it holds

Defines QIP and excludes expenditures attributable to building enlargement, any elevator or escalator, and the internal structural framework. After the CARES Act fix, QIP is 15-year property under section 168(e)(3)(E)(vii), carries a 20-year ADS recovery period under the section 168(g)(3)(B) table, and can qualify for bonus depreciation under section 168(k).

Background

Before 2018, the law had three overlapping categories for improvements: qualified leasehold improvement, qualified retail improvement, and qualified restaurant property. The 2017 tax law merged them into one clean category, qualified improvement property, defined in section 168(e)(6).

A drafting error then left QIP off the 15-year property list, defaulting it to 39 years and cutting it out of bonus depreciation. CARES Act section 2307 fixed that retroactively in 2020 for property placed in service after December 31, 2017. The statute as it reads today reflects the fixed version.

What it established

The definition has three working parts. The improvement must be to an interior portion of a building that is nonresidential real property. It must be placed in service after the date the building was first placed in service. And it must be made by the taxpayer.

Three exclusions then carve out structure-level work: expenditures attributable to the enlargement of the building, any elevator or escalator, and the internal structural framework. Qualifying QIP is 15-year property under section 168(e)(3)(E)(vii), uses straight-line, and the section 168(g)(3)(B) table assigns it a 20-year ADS period. Because 15-year property with the right characteristics can be qualified property under section 168(k), QIP can get bonus depreciation.

How it shows up in a study

For commercial renovations, QIP is often the single biggest acceleration bucket in the study. Interior buildout that would sit at 39 years drops to 15 years, and in 100 percent bonus years the QIP can be fully deducted up front.

The study's job is sorting. Some renovation costs are 5 or 7-year section 1245 property under the normal cost segregation analysis. Of the remainder, the study separates QIP-eligible interior work from the excluded items: enlargement costs, elevator and escalator work, and structural framework. Each bucket is documented so the QIP total can stand on its own if examined.

What it does not mean

QIP never applies to residential rental buildings. An apartment renovation does not produce QIP, no matter how interior it is. Mixed-use buildings need care, because the building must be nonresidential real property.

It also does not cover original construction. The improvement has to come after the building was first placeded in service, so day-one buildout of a brand-new building is not QIP. The made-by-the-taxpayer requirement matters too: improvements a buyer acquires with a building were not made by that buyer. And exterior work, like roofing or facades, is not an improvement to an interior portion.

Category

Bonus depreciation & expensing

Applies to

Commercial, Office, Retail, Restaurant

Status

Vetted

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