Depreciation Opportunities for QIP and Production Property

Depreciation Opportunities for Qualified Improvement Property and Qualified Production Property

Article Summary

Businesses that invest in buildings, renovations, and production facilities often face a familiar tax question: how quickly can the cost be recovered? Federal depreciation rules usually require real property to be deducted over many years. However, two important categories—qualified improvement property and qualified production property—can allow eligible taxpayers to accelerate deductions and improve cash flow.

This article explains the general rules, tax benefits, applicable dates, and examples of when each category may apply. Because these rules are technical and fact-specific, taxpayers should evaluate projects before construction begins, when property is placed in service, and before filing the tax return claiming the benefit.

Qualified Improvement Property: Interior Improvements to Existing Commercial Buildings

Qualified improvement property, often called QIP, generally includes certain improvements made by a taxpayer to the interior of a nonresidential building after the building has already been placed in service. In practical terms, QIP often applies to interior buildouts and renovations for offices, retail stores, restaurants, medical practices, professional service firms, and other commercial spaces.

To qualify, the improvement must be made to the interior of nonresidential real property and must occur after the building was first placed in service. QIP does not include an enlargement of the building, elevators or escalators, or improvements to the internal structural framework. It also does not apply to residential rental property or to original construction costs that are part of placing a new building in service for the first time.

Common examples of QIP may include interior walls, drywall, ceilings, lighting, interior plumbing, flooring, and certain interior finishes. A tenant improvement allowance, restaurant remodel, or office reconfiguration may include QIP if the costs are properly identified and the statutory requirements are met.

Tax Benefits and Applicable Dates for QIP

QIP is generally assigned a 15-year recovery period for federal income tax purposes. Because bonus depreciation is available only for property with a recovery period of 20 years or less, this 15-year classification is what allows eligible QIP to qualify for bonus depreciation.

Under current federal rules enacted as part of the One Big Beautiful Bill Act, 100% bonus depreciation was restored for qualified property acquired and placed in service after January 19, 2025. For QIP that satisfies the requirements, this can allow the full eligible cost to be deducted in the year the property is placed in service, rather than depreciated over 15 years. Property acquired before January 20, 2025 may remain subject to the prior phase-down rules, including 40% bonus depreciation for many assets placed in service during 2025.

Example: A professional services firm leases space in an existing commercial building and pays for new interior walls, lighting, flooring, and conference rooms after the building has already been placed in service. The interior improvements may qualify as QIP. If the project is acquired and placed in service after January 19, 2025, the firm may be able to deduct 100% of the eligible QIP costs in the first year, subject to applicable elections and limitations.

Qualified Production Property: A New Opportunity for Domestic Production Facilities

Qualified production property, or QPP, is a newer and more targeted depreciation incentive. It generally applies to the portion of nonresidential real property used by the taxpayer as an integral part of a qualified production activity. Unlike QIP, which focuses on interior improvements, QPP can apply to certain production-related real property that otherwise might have been depreciated over 39 years.

A qualified production activity generally includes manufacturing, chemical production, agricultural production, or refining that results in the substantial transformation of property into a qualified product. The rules are intended to encourage investment in domestic production facilities and are limited to property placed in service in the United States or its territories.

To qualify, the property must generally be depreciable under MACRS, used by the taxpayer as an integral part of a qualified production activity, and designated as QPP through an election. The original use of the property must generally begin with the taxpayer, although special rules may allow certain acquired property to qualify if it was not previously used in a qualified production activity during specified periods and other acquisition requirements are met.

Only the portion of a facility used in the qualifying production activity is eligible. Areas used for offices, administrative services, sales, research, software development, engineering, lodging, parking, or other nonproduction functions generally do not qualify. Property leased to another party may also require careful review, because the benefit is generally aimed at property used by the taxpayer in its own qualified production activity.

Tax Benefits and Applicable Dates for QPP

For eligible QPP, taxpayers may elect to deduct up to 100% of the unadjusted depreciable basis in the year the property is placed in service. This is a significant benefit because nonresidential real property is normally depreciated over 39 years. The ability to deduct qualifying production facility costs immediately can materially accelerate tax savings and improve the after-tax economics of a project.

The applicable dates are especially important. In general, QPP must be placed in service after July 4, 2025 and before January 1, 2031. For newly constructed property, construction generally must begin after January 19, 2025 and before January 1, 2029. For certain acquired property, the taxpayer generally must acquire the property after January 19, 2025 and before January 1, 2029, and the property must satisfy additional used-property requirements.

Example: A manufacturer constructs a new facility in Utah to produce tangible goods. The production floor, specialized production areas, and building systems directly supporting manufacturing may be eligible QPP if the statutory requirements are met and the facility is placed in service during the applicable period. However, office space, administrative areas, employee parking, and sales functions would need to be separated from the eligible production portion.

Example: An agricultural producer builds a facility used directly in processing crops into a substantially transformed product. The portion of the building used in the qualifying production activity may be eligible QPP if construction and placed-in-service dates fall within the required windows. By contrast, a warehouse used only for storage or a retail area where products are sold to customers may not qualify.

Planning Considerations

Both QIP and QPP can create valuable deductions, but documentation matters. Taxpayers should maintain project invoices, construction contracts, placed-in-service records, cost allocations, floor plans, and support for how each portion of a building is used. Cost segregation studies may also help identify property categories, allocate costs between qualifying and nonqualifying uses, and support depreciation positions.

Taxpayers should also consider the interaction of these deductions with other tax rules, including Section 179 expensing, interest expense limitations, passive activity rules, basis limitations, net operating losses, state conformity, and potential depreciation recapture if property later ceases to qualify or is disposed of.

Key Takeaway

Qualified improvement property and qualified production property serve different purposes, but both can accelerate tax deductions for businesses investing in real estate. QIP is generally aimed at eligible interior improvements to existing nonresidential buildings, while QPP is aimed at eligible domestic production facilities and qualifying production-related real property. With 100% bonus depreciation restored for many qualifying assets acquired and placed in service after January 19, 2025, and a separate QPP deduction available for property placed in service after July 4, 2025 and before January 1, 2031, businesses should evaluate these provisions early in the planning process.

Larson & Company can help evaluate whether building improvements, renovations, or production facility investments may qualify for accelerated depreciation treatment. Contact your Larson & Company advisor before beginning a project or placing property in service so the tax planning, documentation, and elections are addressed at the right time.

Frequently Asked Questions

What is the main difference between QIP and QPP? QIP generally applies to eligible interior improvements made to an existing nonresidential building after the building has already been placed in service. QPP, by contrast, generally applies to certain production-related real property used in qualifying domestic production activities, such as manufacturing, agricultural production, chemical production, or refining.

Can the same project include both QIP and QPP? Possibly. A larger construction or renovation project may include multiple types of property. For example, a production facility may include QPP for qualifying production areas, while separate interior improvements to existing nonresidential space may qualify as QIP. Costs should be separately identified and documented.

Why are the placed-in-service dates important? The placed-in-service date generally determines when depreciation begins and whether a property falls within the applicable effective date window. For QIP, 100% bonus depreciation generally applies to qualified property acquired and placed in service after January 19, 2025. For QPP, the property generally must be placed in service after July 4, 2025 and before January 1, 2031.

What documentation should businesses maintain? Businesses should keep invoices, contracts, cost detail, placed-in-service records, floor plans, and support showing how each area of a building is used. For larger projects, a cost segregation study may help identify eligible assets and allocate costs between qualifying and nonqualifying property.

Should taxpayers claim these benefits automatically? No. These provisions can be valuable, but they require careful review of the facts, elections, limitations, and state tax treatment. Taxpayers should consult their tax advisor before claiming accelerated depreciation or beginning a project intended to qualify.

For additional guidance, please contact the Larson Small to Medium Business Team.