QIP Depreciation: 15-Year Life, Bonus, and Form 3115

Qualified Improvement Property (QIP) depreciation is the accelerated write-off available for interior improvements to commercial buildings: a 15-year recovery period under MACRS instead of the 39 years assigned to the building itself, and, for property acquired after January 19, 2025, a permanent 100% first-year bonus depreciation deduction under the One, Big, Beautiful Bill signed in July 2025.¹ Classified and claimed correctly, a qualifying renovation can be deducted entirely in the year it goes into service rather than spread across nearly four decades.

What Counts as QIP

The Internal Revenue Code defines QIP as any improvement to an interior portion of a nonresidential building, placed in service after the building itself was first placed in service.² Nonresidential means commercial: offices, retail, warehouses, restaurants, factories. Apartments and other residential rental buildings are out, though improvements to a commercial portion of a mixed-use structure, such as ground-floor retail, can qualify.

Common qualifying work includes new flooring, ceilings, interior lighting, electrical wiring, plumbing, non-load-bearing partition walls, and interior doors. A tenant gutting and rebuilding the inside of a leased retail space is the textbook case.

Three categories are excluded by statute even when the work happens inside the building:²

Enlargement of the building. Adding square footage by extending a wall or building a new wing is not QIP, even if the added space sits inside the envelope.
Elevators and escalators. Installing or replacing either one is out, regardless of where it sits.
Internal structural framework. Work on load-bearing walls, columns, foundations, and structural roof supports does not qualify.

Roofs, HVAC, Fire Protection, and Security Systems Are Not QIP

Roofs, heating and air conditioning systems, fire protection and alarm systems, and security systems are not treated as interior improvements, so they fall outside the QIP definition.³ They are not stuck with 39-year depreciation either. Congress made all four categories eligible for Section 179 expensing, which can produce a similar first-year deduction under a different set of rules.

The Building Has to Be in Service First

Timing catches more taxpayers than any other rule here. An improvement only qualifies as QIP if the building was already placed in service before the improvement was done. A building is placed in service when it is ready and available for its intended use. Buy a vacant commercial building, renovate the interior, and then open for business, and the renovations are part of the building’s original cost, depreciated over 39 years.² To create QIP, the building has to be operational first, and the improvement work has to come after.

Who Gets the Deduction

The improvement must be made by the taxpayer, and that person or entity claims the depreciation. If a tenant pays for and builds out interior improvements, the tenant takes QIP treatment. If a landlord funds the work, the landlord does. A later buyer of the building cannot reclassify improvements a prior owner made. Related-party leasing arrangements above a threshold of common ownership are also disqualified.⁴

The 15-Year Life and 100% Bonus Depreciation

Under MACRS, QIP is 15-year property.⁵ That 15-year life is what makes it eligible for bonus depreciation in the first place, because bonus depreciation applies only to property with a recovery period of 20 years or less.

The One, Big, Beautiful Bill (OBBB), signed on July 4, 2025, permanently restored 100% first-year bonus depreciation for qualified property acquired after January 19, 2025.¹ QIP falls squarely within that provision. For any qualifying interior improvement acquired and placed in service after that date, the entire cost is deductible in year one, and there is no scheduled phase-down.

Property acquired before January 20, 2025 is a different story. Under the Tax Cuts and Jobs Act phase-down that the OBBB repealed going forward, bonus depreciation had been dropping: 80% in 2023, 60% in 2024, 40% in 2025. If you acquired QIP before the OBBB cutoff and placed it in service in 2025 or 2026, the old rates may still apply to that property. The IRS issued Notice 2026-11 with transition guidance for those situations.¹

Electing Out

You can skip bonus depreciation and instead depreciate QIP straight-line over the standard 15 years. The election applies to every piece of QIP placed in service that year, not asset by asset, and it is irrevocable once the return is filed. Reasons to elect out include unusable net operating losses, an expected jump into a much higher bracket in later years, or a desire to avoid the larger recapture that follows a big upfront deduction.

Section 179 as an Alternative

Bonus depreciation is not the only way to write off QIP immediately. Section 179 allows taxpayers to expense qualifying property, including QIP, in the year it is placed in service.³ For 2026, the maximum Section 179 deduction is $2,560,000, phasing out dollar-for-dollar once total qualifying property placed in service during the year exceeds $4,090,000.

Three practical differences between the two paths drive most planning decisions:

Section 179 can be applied selectively to individual assets. Bonus depreciation applies to every asset in a class. If you want to accelerate some improvement costs but not others, Section 179 gives you that control.
Section 179 cannot create or increase a net business loss. It is capped at aggregate business income for the year, with any excess carrying forward. Bonus depreciation has no such cap.
Section 179 covers items that are not QIP at all, including roofs, HVAC, fire protection, alarms, and security systems on commercial buildings. For those items, Section 179 is the main accelerated-deduction route.³

There is also a recapture cost to using Section 179 on QIP. Property expensed under Section 179 falls under Section 1245, meaning gain on sale up to the amount of the deduction is taxed as ordinary income.⁶ QIP depreciated with bonus or regular MACRS stays under Section 1250, where the rate on prior depreciation is capped at 25%. On a large project, that gap matters.

The Section 163(j) Real Estate Election Trade-Off

A real property trade or business can elect out of the Section 163(j) limits on business interest expense. The price is that the taxpayer must then use the Alternative Depreciation System (ADS) for all nonresidential real property, residential rental property, and QIP.⁷

Under ADS, QIP is depreciated straight-line over 20 years rather than 15, and it becomes ineligible for bonus depreciation.⁷ The election is irrevocable. Any real estate business with meaningful interest expense should model both scenarios before filing: unlimited interest deductions with slower depreciation, or capped interest deductions with 100% first-year bonus on QIP. Neither answer is universal, and it shifts with the size of the improvement project relative to the interest bill.

What Happens When You Sell

Large upfront deductions reduce basis, which increases the gain on a future sale. How that gain is taxed depends on which deduction method you used.

QIP depreciated under MACRS or bonus depreciation is Section 1250 property. On sale, prior depreciation falls under the unrecaptured Section 1250 gain rules, with the federal rate capped at 25% on the portion of gain attributable to that depreciation. Gain above total depreciation taken is taxed at long-term capital gains rates, generally 15% or 20%.

QIP expensed under Section 179 is treated as Section 1245 property. The entire Section 179 deduction is recaptured as ordinary income on disposition, up to the amount of the gain.⁶ Ordinary rates can reach 37%. If you expect to sell the building within a few years, that difference should weigh on the choice between Section 179 and bonus depreciation up front.

How to Claim It

Form 4562 on the Current Return

Bonus depreciation and regular 15-year MACRS deductions for QIP are both reported on Form 4562, Depreciation and Amortization, with your annual return.⁵ Bonus depreciation for QIP goes on Part II, line 14. If you have elected out, the QIP is reported in Part III, Section B, as 15-year property under the general depreciation system.⁸ The one classification mistake to watch for is putting QIP into the 39-year nonresidential real property line. That single entry forfeits the accelerated deduction.

Form 3115 to Fix Prior-Year Mistakes

Taxpayers who depreciated QIP over 39 years on earlier returns can correct the error without amending each year. Form 3115, Application for Change in Accounting Method, lets you switch from the 39-year life to the correct 15-year life and claim missed bonus depreciation in the current tax year.⁹ The relevant change is Designated Change Number (DCN) 244, which covers QIP placed in service after December 31, 2017.¹⁰

The correction runs through a Section 481(a) adjustment: total depreciation that should have been claimed minus what was actually claimed. When that adjustment is negative, meaning you underdeducted in prior years, it is taken entirely in the year of change as a catch-up deduction.¹¹ Amending individual prior returns is possible where they are still within the statute of limitations, but Form 3115 is usually faster and does not require multiple amendments. File it with a timely filed return for the year of change and send a copy to the IRS National Office.

Cost Segregation on Larger Projects

On a significant build-out, a cost segregation study earns its fee by sorting project costs into their correct depreciation categories. For QIP, the study separates true interior improvements (15-year, bonus-eligible) from structural work, exterior work, and other longer-lived items. On a large commercial renovation, these studies routinely move 20% to 40% of total project costs into faster categories. Study fees range from a few thousand dollars on a straightforward project into five figures on complex properties, and first-year tax savings often exceed the fee by a wide margin. Without a study, project accounting frequently defaults costs to 39-year property and leaves the QIP deduction unclaimed.

1
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
2
Cornell Law Institute. 26 USC 168(e)(6) – Definition: Qualified Improvement Property
3
Internal Revenue Service. Depreciation Expense Helps Business Owners Keep More Money
4
Internal Revenue Service. Publication 946, How To Depreciate Property
5
Internal Revenue Service. Instructions for Form 4562, Depreciation and Amortization
6
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
7
Office of the Law Revision Counsel. 26 USC 168: Accelerated Cost Recovery System
8
Internal Revenue Service. Form 4562 Depreciation and Amortization
9
Internal Revenue Service. Instructions for Form 3115
10
Internal Revenue Service. Rev. Proc. 2022-14
11
Internal Revenue Service. 4.11.6 Changes in Accounting Methods