Prior to 2016, Qualified Retail Improvement Property and Qualified Restaurant Property were eligible for Section 179 expense, but did not qualify for bonus depreciation unless the property also met the criteria for Qualified Leasehold Improvement property (QLI). Two of the requirements for an improvement to meet the definition of QLI are that the property had to be placed in service more than three years after the date the building was placed in service, and that the building must be subject to a lease between unrelated parties.
Qualified Improvement Property (QIP) is similar to QLI with a few differences. One important difference is that the building does not have to be subject to a lease between unrelated parties. Another major difference is that QIP can be placed in service any time after the building is placed in service. Therefore, taxpayers can take bonus depreciation on qualifying property even if it is placed in service within the first three years of the building being placed in service. However, if the QIP property does not also qualify as QLI, Qualified Retail Improvement Property, or Qualified Restaurant Property, the remaining basis, if any, must be depreciated over 39.5 years.
The new depreciation rules establishing QIP for 2016 should benefit many taxpayers because they expand the definition of qualifying property eligible for bonus depreciation and Section 179 expense. However, restaurant and retail taxpayers will have additional benefit from the shorter 15-year life that QIP will have when the improvements also qualify as Qualified Retail Property or Qualified Restaurant Property.