Qualified leasehold improvements are a pre-2018 tax category for interior renovations made under a commercial lease, and the term still turns up in leases, accounting files, and older tax guidance. For any work placed in service after December 31, 2017, the category no longer exists on its own. The Tax Cuts and Jobs Act folded it into a broader designation called qualified improvement property, which drops the lease requirement and covers most interior work on nonresidential buildings. Improvements placed in service in 2026 carry a 15-year depreciation life and qualify for 100% bonus depreciation under the One Big Beautiful Bill Act.
What the Old QLIP Category Required
Before 2018, Section 168(e)(6) defined qualified leasehold improvement property with a narrow set of tests. The work had to be to the interior of a nonresidential building, done under or pursuant to a lease, by the lessee, sublessee, or lessor. The lease could not be between related parties, which shut out family members and entities with overlapping ownership and blocked self-dealing lease structures set up to accelerate depreciation.
The three-year rule was the other hurdle. The building had to have been placed in service at least three years before the improvement. A tenant that moved into a newly built space and immediately renovated could not use the category. Improvements that cleared every test got a 15-year recovery period instead of the 39 years that otherwise applies to commercial buildings. That faster write-off was the whole point of the classification, and its narrowness is why owner-occupied renovations and work on newer buildings fell outside it.
How the Rules Changed in 2018
The Tax Cuts and Jobs Act consolidated qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property into a single designation: qualified improvement property, or QIP. The consolidation applies to property placed in service after December 31, 2017.
The current test is short. An improvement qualifies as QIP if it is made to the interior of a nonresidential building and placed in service after the building itself was first placed in service. The lease requirement is gone. The three-year waiting period is gone. The related-party restriction is gone. A building owner renovating their own space qualifies on the same terms as a tenant renovating under a lease.
Congress originally intended QIP to be 15-year property eligible for bonus depreciation, but a drafting error in the 2017 Act left it as 39-year property with no bonus eligibility. The CARES Act fixed this retroactively in 2020, assigning QIP its intended 15-year life and restoring bonus depreciation back to 2018. Taxpayers who filed on the 39-year schedule could amend or use an automatic change in accounting method to catch up.
What Counts as Qualified Improvement Property
Common examples of QIP include installing partition walls, upgrading lighting or electrical systems, replacing flooring or ceiling tiles, adding interior plumbing, and reconfiguring office layouts. If the work happens inside the building’s exterior walls and isn’t one of the specific exclusions, it likely qualifies.
The improvement has to be made by the taxpayer claiming the deduction. If a landlord pays for the build-out, the landlord depreciates it. If the tenant funds the work, the tenant depreciates it. The deduction follows the economic cost, not occupancy.
Exterior work never qualifies. Roof replacement, facade work, parking lot resurfacing, and exterior signage are all outside the definition. Certain building systems can still qualify for immediate expensing under Section 179 even when they fall outside QIP, which is covered below.
Interior Work That Still Doesn’t Qualify
Three statutory exclusions carve interior work out of QIP even when everything else lines up. Miscategorizing these costs pushes them onto a 39-year schedule, so the distinctions matter.
Building Enlargement
Any project that increases total square footage is disqualified. Adding a mezzanine, extending a floor plate, or building into previously unenclosed space all count. The IRS treats these as structural expansions rather than interior upgrades, regardless of scale.
Elevators and Escalators
Installing, replacing, or upgrading elevators and escalators does not qualify for 15-year treatment. These are treated as part of the building’s general infrastructure. When elevator modernization is part of a larger renovation, those costs have to be broken out separately on the depreciation schedule.
Internal Structural Framework
Modifications to the building’s load-bearing skeleton are excluded. Treasury regulations define the internal structural framework to include all load-bearing internal walls and other structural supports, such as columns, girders, beams, trusses, and spandrels. Moving a non-load-bearing partition to change an office layout is QIP; reinforcing or relocating a load-bearing wall is not. The line often requires an architect or structural engineer, and misclassifying structural work can produce back taxes, interest, and penalties if the IRS adjusts the schedule on audit.
Depreciation Life and Bonus Depreciation in 2026
Under the General Depreciation System, QIP is 15-year property depreciated using the straight-line method, with half-year or mid-quarter conventions in the first and last years. Nonresidential real property that doesn’t qualify as QIP depreciates over 39 years. On a $500,000 renovation, the difference between the two schedules is roughly $20,000 in additional annual deductions for the first 15 years.
QIP is also eligible for bonus depreciation, which lets a business deduct a percentage of the cost in the first year. The recent history has moved around. The CARES Act set 100% bonus for 2018 through 2022. The rate then began phasing down: 80% for 2023, 60% for 2024, 40% for 2025.
For 2026 the picture is different. The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying assets acquired after January 19, 2025, and QIP is specifically included. An interior improvement acquired and placed in service during 2026 can be deducted in full that year, with no phasedown or sunset under current law.
The 100% rate depends on when the property was acquired, not just when it was placed in service. Improvements acquired before January 20, 2025, but not placed in service until 2026, still fall under the old phasedown schedule, which allows only 20% bonus depreciation for 2026. Most work acquired and completed in 2026 will meet the acquisition-date test without issue.
Section 179 as an Alternative
A business can also elect to expense QIP under Section 179 instead of using bonus depreciation. For 2025 the Section 179 deduction allows up to $2,500,000 in immediate expensing, with a phase-out starting at $4,000,000 in total qualifying purchases. Both thresholds adjust for inflation. Section 179 is especially useful for improvements acquired before the OBBBA’s January 20, 2025, cutoff, which don’t qualify for full bonus depreciation.
Section 179 also reaches building systems that fall outside the QIP definition. Roofs, HVAC, fire protection and alarm systems, and security systems placed in service in a nonresidential building can be expensed under Section 179 even though they aren’t interior improvements for QIP purposes.
The ADS Trade-Off
Some businesses have to use the Alternative Depreciation System instead of GDS. The most common trigger is electing out of the Section 163(j) business interest limit, which real property trades or businesses and farming operations frequently do. Under ADS, QIP has a 20-year recovery period on a straight-line basis: five years longer than GDS but still far shorter than 39 years.
Property depreciated under ADS is not eligible for bonus depreciation. That is the central trade-off of the 163(j) election: an unlimited business interest deduction in exchange for slower depreciation on real property improvements. For capital-intensive businesses carrying significant debt, the comparison can go either way.
Tenant Improvement Allowances
When a landlord provides cash or a rent reduction for a tenant build-out, the tax treatment depends on the lease. Under Section 110, a tenant improvement allowance is excluded from the tenant’s gross income if three conditions are met: the lease is for retail space, the term is 15 years or less including renewal options, and the allowance is spent on improvements to nonresidential real property that reverts to the landlord when the lease ends. The lease has to say expressly that the allowance is for that purpose.
Section 110 is narrower than many tenants expect. It applies only to retail space, so an office tenant receiving a build-out allowance under a standard commercial lease does not get the same automatic exclusion. Outside Section 110, treatment turns on who owns the improvements for tax purposes and whether the allowance is a lease incentive, which is typically recognized as income by the tenant and deducted by the landlord over the lease term.
When a Lease Ends Before the 15 Years Do
A 15-year schedule doesn’t always match the lease term. If a tenant leaves before fully depreciating the improvements, the remaining basis isn’t lost. Under the MACRS disposition regulations, a leasehold improvement is treated as a separate asset, and the tenant is generally deemed to have abandoned it at the end of the lease. Abandonment produces a loss deduction equal to the remaining adjusted basis.
The deduction is available only if the tenant actually gives up the improvement. If the tenant is compensated by the landlord for the remaining value, the transaction is treated as a sale or exchange, and different rules apply. Tracking the adjusted basis of each improvement separately keeps the loss calculation clean if the lease ends early.
Older Improvements Still on the Books
The QIP rules apply only to improvements placed in service after December 31, 2017. Anything placed in service before that date and classified as qualified leasehold improvement property continues to follow the old rules for the rest of its depreciation life. The lease requirement, the three-year rule, and the related-party restriction still matter for those assets. If the original classification was wrong, the change in law going forward doesn’t cure it.