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If you own and rent out non-residential property and make improvements to it, you may deduct the full expenses in the year you spend the money rather than spreading it out over multiple years.
The improvements made must fall under the Qualified Improvement Property tax code. Here’s what you must know.
What Is QIP?
The Tax Cuts and Jobs Act created QIP to motivate small businesses to make improvements to their property. The original tax code allowed business owners to depreciate their business over 15 years versus 39, giving them larger deductions each year.
For tax years 2021 and 2022, though, they’ve made it even better. If you qualify, you deduct 100% of the depreciation deduction.
What are the Requirements?
To qualify for QIP, the property must meet these requirements:
• The property must be non-residential. This includes properties, such as office buildings, stores, factories, and warehouses, just to name a few.
• If the property is residential, it must be used for short-term rentals, only, such as an Airbnb. At least half of the rental period throughout the year must be from renters who occupied the property for 30 days or less.
• The property must have been placed in service. There’s a loophole, though. It doesn’t mean placed in service by you. If you bought an existing business that was already in operation, the improvements you make from day one could count.
• You must make the improvements yourself. You cannot take the deduction for improvements a previous owner made before you owned the business.
How QIP Works
You have three ways to deduct the cost of QIP:
• Take advantage of first-year bonus depreciation
• Depreciate the cost over 15 years rather than 39 years
• Use IRC Section 179 expensing
The 100% depreciation bonus is only for tax years 2021 and 2022. In 2023 the depreciation decreases by 20 percent per year until year 2027 when it is completely dissolved.
Examples of QIP
Each business will have its own improvements needed, but the most common QIP deductions are for mechanical renovations, plumbing, HVAC/AC, drywall/ceilings, and security equipment. QIP doesn’t include renovations to expand a building, add an elevator or escalator, or do any internal structural work.
If you’d like to learn more about how QIP works and how it can benefit you, contact us today at 714-383-2307.