Qualified Improvement Property and 100% Bonus Depreciation: Writing Off a Los Angeles Build-Out in Year One
A Los Angeles business spends $500,000 on a tenant build-out. Under one classification that cost is recovered over 39 years at roughly $12,800 a year. Under another, the entire $500,000 is deductible in year one. The difference is whether the work qualifies as qualified improvement property, and a law change in 2025 made that distinction more valuable than it has been in years. Pathfinding Consultants provides business tax preparation Los Angeles business owners rely on to classify improvement costs correctly before a return is filed.
IRS DISCLAIMER: This article is for general informational purposes only and is not tax, legal, or accounting advice. Depreciation classification depends on the specific improvements made, acquisition and placed-in-service dates, prior elections, and current IRS guidance. Always consult a qualified tax professional, Enrolled Agent, or CPA before relying on this guide for a specific filing decision. Pathfinding Consultants encourages every Los Angeles business owner to seek personalized guidance for their own business. |
What Qualifies as Qip
Qualified improvement property is defined under IRC Section 168(e)(6) as any improvement made to the interior portion of a nonresidential building, placed in service after the date the building itself was first placed in service (source: IRC Section 168(e)(6)). Common examples include tenant build-outs, interior partition walls, drop ceilings, flooring, lighting, plumbing modifications, and HVAC work inside the building envelope.
The qualified improvement property definition carries four exclusions that matter. Enlargements of the building, elevators and escalators, and any work on the internal structural framework are all outside the definition. Nonresidential is also a strict limit — residential rental buildings such as apartment complexes do not generate qualified improvement property regardless of how extensive the interior work is. Improvements that are part of the original construction do not qualify either, because they were not placed in service after the building was.
The 15 Year Recovery Period and the Retail Glitch
Qualified improvement property carries a 15 year recovery period under the general depreciation system, depreciated straight-line, compared with the 39 years that applies to nonresidential real property generally. Under the alternative depreciation system the period is 20 years.
That 15 year recovery period was not always the rule as written. The Tax Cuts and Jobs Act contained a drafting error — widely called the retail glitch — that left qualified improvement property assigned a 39-year life and therefore ineligible for bonus depreciation. The CARES Act corrected it retroactively, assigning the 15 year recovery period to property placed in service after December 31, 2017 (source: IRC Section 168(e)(3)(E); CARES Act). That correction is what put qualified improvement property under the 20-year threshold that governs bonus depreciation eligibility in the first place.
100 Percent Bonus Depreciation Is Back and Permanent
Bonus depreciation had been phasing down — 80% in 2023, 60% in 2024, and scheduled to fall to 40% in 2025 and 20% in 2026 before disappearing entirely. The One Big Beautiful Bill Act, signed July 4, 2025, permanently restored 100 percent bonus depreciation for qualified property acquired and placed in service after January 19, 2025 (source: One Big Beautiful Bill Act; IRC Section 168(k)).
The bonus depreciation 2026 landscape is therefore simpler than it looked a year ago. The bonus depreciation 2026 rules did not change which property qualifies — OBBBA restored the rate while keeping the same categories eligible under prior law. Tangible personal property with a MACRS recovery period of 20 years or less remains the broad category, and qualified improvement property sits inside it at 15 years. The date boundary is strict: property acquired before January 20, 2025, including property under a binding contract signed before that date, stays on the legacy phase-down schedule regardless of when it is placed in service.
Planning a tenant build-out or interior renovation this year?
Pathfinding Consultants — Business Tax Preparation, Los Angeles & Southern California
(949) 620-1036 | pathfindingconsultants.com
Section 179 as an Alternative
Qualified improvement property may alternatively be expensed under Section 179 rather than through bonus depreciation, and modeling both is worthwhile because they behave differently. For tax years beginning in 2026, the maximum section 179 expensing amount is $2,560,000, with the phaseout threshold beginning at $4,090,000 and the deduction fully phased out once qualifying purchases exceed $6,650,000, with these amounts adjusted annually for inflation (source: IRC Section 179; IRS inflation-adjusted limits for 2026).
The practical differences drive the choice. Section 179 expensing is elected asset by asset, giving precise control over how much deduction is taken, while bonus depreciation applies automatically to an entire class unless the taxpayer elects out. Section 179 also cannot create or increase a net operating loss, which limits its usefulness in a loss year — bonus depreciation carries no such restriction. A business with income near break-even often finds bonus depreciation the only method that actually delivers the deduction.
The Ads Election Trap
One prior-year decision can eliminate the benefit entirely. A real property trade or business that elected out of the Section 163(j) business interest limitation is required to use the alternative depreciation system, and property depreciated under ADS is not eligible for bonus depreciation at all (source: IRC Section 163(j)(7); IRC Section 168(g)).
That interaction is worth revisiting rather than assuming. A Los Angeles real estate operation that made the election in a year when bonus depreciation was phasing toward zero may have given up very little at the time. With 100 percent bonus depreciation permanently restored, the same election now carries a materially higher cost. The election is generally irrevocable, so the analysis is about understanding the current position rather than undoing it — but knowing which schedule the property sits on determines whether a build-out deduction exists at all.
Why Classification Happens at Invoice Level
A cost segregation study is the mechanism most Los Angeles commercial property owners use to separate a renovation invoice into its component classifications. The engineer identifies which improvements meet the qualified improvement property definition, allocates cost to them, and applies the 15 year recovery period with bonus depreciation where eligible — while separating out enlargements and structural framework work that must stay on the 39-year schedule.
A cost segregation study becomes considerably more valuable when bonus depreciation sits at 100 percent, because every dollar reclassified into a 20-year-or-less category converts directly into a first-year deduction. Business consulting near me searches from Los Angeles owners spike after a renovation is complete and a single lump-sum contractor invoice offers no basis for allocating cost between categories.
Why the Invoice Structure Matters Before the Work Begins
Pathfinding Consultants is an Enrolled Agent firm providing business tax preparation Los Angeles business owners have relied on to structure renovation invoicing so that qualified improvement property can be separated from structural work at the time the contract is signed, not reconstructed afterward from a single line item.
Owners planning improvements should also review our guide to small business tax deductions, and our bookkeeping services overview covers how fixed asset detail supports the classification. A business consulting near me conversation before the contractor is engaged is what makes an itemized allocation possible, and business tax preparation Los Angeles clients who plan the invoicing that way capture materially more in year one.
Common Mistakes with Qualified Improvement Property
Treating interior work on a residential rental building as qualified improvement property, when the definition covers nonresidential buildings only
Including enlargements, elevators, escalators, or internal structural framework in the qualified improvement property allocation
Assuming 100 percent bonus depreciation applies to property under a binding contract signed before January 20, 2025, which stays on the legacy phase-down
Overlooking that a prior Section 163(j) real property trade or business election forces ADS and eliminates bonus depreciation eligibility
Accepting a lump-sum contractor invoice with no component detail, leaving no basis to separate 15-year property from 39-year property
Every one of these mistakes is avoidable when improvement costs are classified against the qualified improvement property definition before the work is invoiced, with the acquisition date and any prior ADS election confirmed in advance. A business consulting near me search before the contract is signed is when a cost segregation study can still be scoped, section 179 expensing can be modeled against bonus depreciation 2026 rules, and the allocation can be built into the invoice rather than argued afterward.
Get your renovation costs classified before the invoice is finalized.
Pathfinding Consultants — Business Tax Preparation, Los Angeles & Southern California
(949) 620-1036 | pathfindingconsultants.com
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