Can You Take Section 179 on Leasehold Improvements?

Yes — you can take Section 179 on leasehold improvements, as long as the work meets the federal definition of qualified improvement property (QIP) and your business stays within the annual dollar, investment, and income limits. For tax years beginning in 2026, the maximum Section 179 deduction is $2,560,000, and interior improvements to leased nonresidential space are expressly on the list of eligible property.¹ The One, Big, Beautiful Bill also restored 100% bonus depreciation for property acquired after January 19, 2025, giving you a second path to a full first-year write-off on the same improvements.

Which Leasehold Improvements Qualify

The tax code groups eligible commercial improvements under a single label: qualified improvement property. QIP covers any improvement made to the interior of a nonresidential building, provided the work happens after the building was first placed in service.² The original build-out on a newly constructed building is not QIP. Later upgrades are.

Common qualifying work includes new drywall, updated electrical wiring, plumbing modifications, flooring, lighting, and interior partition walls. Three categories are excluded no matter how much they cost:

Enlargements that add square footage, such as a new wing or mezzanine.
Elevators and escalators.
Internal structural framework, meaning load-bearing walls, columns, or the building’s skeleton.

The building itself must be nonresidential real property. Improvements to apartment buildings, single-family rentals, or other housing do not qualify as QIP.

Who Claims the Deduction, Landlord or Tenant

Either party can claim Section 179 on a leasehold improvement, but only the one who actually pays for the work and places it in service. If you hire the contractors, pay for materials, and put the finished space to use in your business, the deduction is yours. If your landlord performs the build-out before delivering the space, the landlord claims it.

Tenant improvement allowances complicate things. When a landlord gives a tenant cash or rent credit to fund a build-out, Section 110 of the Internal Revenue Code governs the arrangement for short-term leases of retail space (15 years or less). Under that section, the tenant excludes the allowance from income as long as the money is actually spent on qualifying long-term improvements. The improved property is then treated as belonging to the landlord for depreciation purposes.³ That means the landlord, not the tenant, would claim any Section 179 deduction on those improvements.

When the lease term exceeds 15 years or the space is not retail, Section 110 does not apply, and the tax treatment of the allowance turns on the specific lease terms. In those situations, the allocation between landlord and tenant can get genuinely complicated, and getting it wrong means one party claims a deduction they were not entitled to.

The 2026 Dollar Limit, Phase-Out, and Income Cap

QIP is listed as eligible Section 179 property, so a qualifying business can deduct the full cost of the improvement in the year it is placed in service instead of spreading the deduction over 15 years.⁴ Three caps limit how much you can actually claim.

Dollar Limit

For 2026, the maximum Section 179 deduction is $2,560,000. That ceiling covers all Section 179 property placed in service during the year, not just improvements. If you also expense equipment, vehicles, or software under Section 179, every dollar counts toward the same cap. The 2025 baseline was $2,500,000, and the figure adjusts annually for inflation.¹

Investment Phase-Out

The deduction shrinks dollar-for-dollar once total Section 179 property placed in service during the year exceeds $4,090,000. Place $4,590,000 of qualifying property in service, and you lose $500,000 of the maximum deduction. The deduction disappears entirely at $6,650,000 in total qualifying purchases.

Taxable Income Limitation

Even inside the dollar and phase-out ceilings, the Section 179 deduction cannot exceed your net taxable income from all active trades or businesses for the year.⁴ Spend $800,000 on improvements but earn only $500,000 in taxable income, and this year’s deduction is capped at $500,000. The remaining $300,000 carries forward indefinitely and becomes available in any future year with enough taxable income to absorb it.⁵

Roofs, HVAC, and Other Building Systems

Some of the priciest improvements to commercial buildings fall outside the QIP definition because they involve the building’s structural systems rather than its interior layout. Congress addressed this by adding a separate category of “qualified real property” eligible for Section 179. That category specifically covers improvements to roofs, heating and air conditioning systems, fire protection and alarm systems, and security systems for nonresidential real property.⁶

This matters because a full HVAC replacement may not meet the QIP definition if it touches the building’s structural framework, yet it can still be expensed under Section 179 through the qualified real property rule. The same dollar limit, phase-out, and income limitation apply. A tenant paying for a new rooftop unit under a lease obligation should confirm with a tax advisor whether the cost falls under QIP, the qualified real property category, or both.

How to Elect Section 179

Section 179 is not automatic. You have to elect it on Form 4562 filed with the original return for the year the property was placed in service, or on an amended return filed within the time the law allows.¹ Miss that window, and the deduction is forfeited for that property. The election also lets you pick how much of a given asset’s cost to expense; you do not have to run the full amount through Section 179.

Section 179 vs. 100% Bonus Depreciation

The One, Big, Beautiful Bill, enacted in 2025, permanently restored 100% first-year bonus depreciation for qualifying property acquired after January 19, 2025.⁷ QIP qualifies because its 15-year recovery period sits inside the 20-year threshold for bonus-eligible property.⁸

For improvements placed in service during 2026, bonus depreciation produces the same first-year write-off as Section 179 but without the dollar cap, the investment phase-out, or the taxable income limitation. It is also the default: it applies automatically unless you elect out. Section 179 requires an affirmative election.

So why still use Section 179? A few reasons come up in practice:

State tax differences. Some states conform to Section 179 but decouple from bonus depreciation, so a Section 179 election may produce a state-level deduction that bonus depreciation would not.
Strategic income timing. Section 179 lets you expense a controlled portion of the cost and depreciate the rest, which bonus depreciation’s all-or-nothing default does not.
Property acquired before January 20, 2025. Improvements placed in service earlier in 2025 but acquired before the bill’s effective date may not qualify for 100% bonus depreciation, leaving Section 179 as the route to immediate expensing.

Recapture When Use Drops or You Sell

Section 179 savings are not permanent in every scenario. Two events can trigger recapture, meaning you pay back some or all of the tax benefit.

The first is a drop in business use. If business use of the property falls to 50% or less after it is placed in service, the IRS requires recapture of the excess deduction. The recapture amount is the difference between the Section 179 deduction originally claimed and the depreciation that would have been allowed under normal MACRS rules for the period the property was in service.⁹ That amount is added back as ordinary income on the return for the year use dropped below the threshold.

The second is a sale or disposition. QIP expensed under Section 179 is treated as Section 1245 property, so any gain on sale is recaptured as ordinary income up to the amount of depreciation (including Section 179 expensing) previously claimed.⁴ Expense $200,000 of improvements and later sell at a gain, and up to $200,000 of that gain is taxed at ordinary income rates rather than the lower capital gains rate. Recapture is reported on Form 4797.

Check State Conformity Before You Elect

Federal eligibility for Section 179 does not guarantee the same treatment on your state return. A number of states decouple from one or both federal accelerated depreciation provisions. California does not follow the federal Section 179 limits or bonus depreciation rules. Delaware and Michigan have decoupled from the reinstated 100% bonus depreciation. Other states impose their own Section 179 caps or require businesses to add back the federal deduction and depreciate the improvement on a longer schedule for state purposes.

The practical effect: you might expense $500,000 of improvements on your federal return but have to depreciate the same cost over 15 or even 39 years on your state return, creating a timing difference that needs tracking for years. Businesses operating across multiple states face separate depreciation calculations for each. Checking state conformity before you make the Section 179 election is easy to skip and expensive to fix later.

1
Internal Revenue Service. Instructions for Form 4562 (2025)
2
Cornell Law Institute. Qualified Improvement Property From 26 USC 168(e)(6)
3
Office of the Law Revision Counsel. 26 USC 110 – Qualified Lessee Construction Allowances for Short-Term Leases
4
Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
5
eCFR. 26 CFR 1.179-2 – Limitations on Amount Subject to Section 179 Election
6
Internal Revenue Service. Depreciation Expense Helps Business Owners Keep More Money
7
Internal Revenue Service. One, Big, Beautiful Bill Provisions
8
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
9
Internal Revenue Service. Instructions for Form 4797 – Sales of Business Property