On Dec. 22, 2017, the President signed the Tax Cuts and Jobs Act (“TCJA”). This act changed many provisions of the Internal Revenue Code (“IRC” or “the Code”). Some notable modifications include changes to the treatment of Qualified Improvement Property (“QIP”).

Qualified Improvement Property


As a general rule, the cost of commercial real estate improvements is recovered over 39 years via straight line depreciation. The Code carved out three exceptions to this rule:

  • Qualified Leasehold Improvements (“QLHI”)
  • Qualified Retail Improvement Property (“QRIP”)
  • Qualified Restaurant Property (“QRP”)

These three exceptions were allowed a shorter recovery period of 15 years using the straight-line method. This allowance made this property eligible for accelerated first-year depreciation, known as Bonus Depreciation. (Bonus Depreciation is explained in more detail below). However, this allowance was temporary. The Protecting Americans from Tax Hikes (“PATH”) Act of 2015, made this allowance permanent, starting Jan. 1, 2016 and onwards.

The PATH Act also introduced a brand new category of nonresidential building improvements called QIP. It expanded the use of Bonus Depreciation to include certain 39-year property.

QIP includes any improvement 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. However, it specifically excludes the following types of improvements:

  • The enlargement of a building
  • Elevators or escalators
  • The interior structural framework of a building

Improvements that meet the criteria for a QIP can also meet the criteria for QLHI and QRIP, which makes it eligible for a shorter recovery period.


In order to streamline the depreciation of leasehold improvements, the TCJA eliminated the QLHI, QRP and QRIP classifications and moved them under the QIP umbrella. This modification to the rules is effective for property placed in service after Dec. 31, 2017. The Internal Revenue Code was amended to eliminate any reference to QLHI, QRP and QRIP.

The new law was intended to amend the Code to provide a 15-year depreciation life to Qualified Improvement Property, which would also make Qualified Improvement Property eligible for 100-percent Bonus Depreciation. It was clear, under the Conference Committee’s Joint Explanatory Statement, that QIP would have a 15-year recovery period under MACRS. However, in what seems like a drafting error, the new law:

  • Repeals the QLHI, QRP and QRIP from IRC Section 168(e)(3)(E) – the subparagraph that lists those assets that are entitled to a 15-year life
  • Does not amend IRC Section 168(e)(3)(E) to include QIP

Unless a technical correction to the tax bill is passed by Congress, effective Jan. 1, 2018 and onwards, all QIP will revert to a 39-year recovery period and will not eligible for first-year 100-percent Bonus Depreciation.

Bonus Depreciation on QIP

Bonus depreciation is a method of accelerated depreciation, which allows a business to make an additional first-year deduction of the cost of qualifying property in the year it is placed in service. Qualified property must be at least one of the below:

  • Have a regular depreciation life of 20 years or less
  • Be computer software
  • Be water utility property
  • Be qualified improvement property

Assets qualifying under the bonus rules must meet both the acquisition and placed-in-service rules.


Taxpayers were allowed to deduct 50 percent of the cost of most new tangible property (other than buildings and some building improvements) and most new computer software in the year that it was placed in service. This additional depreciation was available only for new property (the first use has to start with the taxpayer).


IRC Section 168(k) was amended to provide for 100-percent bonus depreciation for property acquired and placed in service after Sept. 27, 2017. This is effective until tax year ending Dec. 31, 2022. It further relaxed the rules that the property must be new. Used and new qualified property are now eligible for the new 100-percent bonus depreciation.

However, this change removed the reference to QIP. This type of property was intended to be granted a 15-year regular depreciation life, which would then make it eligible for 100-percent bonus depreciation. However, due to drafting error, this section was not updated to include QIP as part of the assets that would be eligible for bonus.

Besides the drafting error mentioned above, another error amended the existing code section in a contradictory manner. The new law removes the QIP from the 15-year recovery period, however, this law is not effective until after Dec. 31, 2017. The 100-percent bonus eligibility is effective retroactive to assets acquired and placed in service after Sept. 27, 2017. As a result, QIP placed in service between Sept. 28, 2017 through Dec. 31, 2017, is eligible for 100-percent bonus depreciation. The updated Form 4562 instructions confirm QIP being eligible for 100-percent bonus depreciation if acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2018.

IRC Section 179 deduction on QIP

Section 179 of the Internal Revenue Code allows a taxpayer to deduct the full cost of qualifying equipment and/or software purchased or financed during the tax year, rather than depreciating it over its tax life. The deduction is available for new and used equipment and off-the-shelf software. The deduction is limited to the taxable income derived from the business, with any deduction in excess of the limitation carried forward to the next year.


Business can immediately deduct up to $510,000 of qualifying purchases, with a phase-out amount of $2.03 million for tax year ending Dec. 31, 2017.


Effective Jan. 1, 2018, businesses can immediately deduct up to $1 million of qualifying purchases, with a phase-out amount of $2.5 million. After 2018, these limits will be indexed for inflation.

The other notable change to Section 179 is the modification of the type of assets that qualify for the deduction. The expansion includes QIP and certain other improvements to nonresidential real property, such as:

  • Roofs
  • Fire alarm and security systems
  • HVAC systems