If you own commercial real estate for your business, you’ve probably heard that certain building improvements can be deducted much faster than the typical 39-year depreciation schedule. That’s great news—but here’s what many business owners don’t realize: maximizing your deductions in year one isn’t always the smartest tax move.
At Padgett, we help business owners navigate these decisions every day. Let’s break down what you need to know about qualified improvement property (QIP) and when it makes sense to take the full deduction versus spreading it out.
What Counts as Qualified Improvement Property?
QIP is any improvement you make to the interior of a commercial building after the building was already in use. This could include things like:
- New flooring or finishes
- Interior walls or partitions
- Updated electrical or plumbing (inside the building)
- HVAC systems (when using Section 179)
- Roofing replacements (when using Section 179)
- Fire protection and security systems (when using Section 179)
What doesn’t qualify: Enlarging the building, adding elevators or escalators, or changes to the building’s structural framework.
The normal depreciation period for QIP is 15 years, but there are two ways to speed that up significantly.
Two Ways to Deduct Improvements Faster
1. Bonus Depreciation (100%)
Thanks to the One Big Beautiful Bill Act signed in July 2025, you can now deduct 100% of qualifying improvements in the first year if the property was acquired and placed in service after January 19, 2025. Even better—this 100% bonus depreciation is now permanent.
Important timing note: If you acquired property between January 1 and January 19, 2025, bonus depreciation is only 40% for that period. In this case, you’d want to use Section 179 first (see below) to maximize your first-year deduction.
2. Section 179 Expensing (Up to $2.5 Million)
Section 179 also lets you deduct the full cost of improvements immediately, but it has annual limits. For 2025, you can deduct up to $2.5 million (doubled from the previous $1.25 million limit). This begins to phase out once your total asset purchases exceed $4 million for the year.
One important restriction: Section 179 can only offset your net income—it can’t create a business loss.
One advantage of Section 179 over bonus depreciation is that it covers a broader range of improvements, including HVAC systems, roofs, and security systems placed in service after the building was already in use.
Why You Might NOT Want to Maximize First-Year Deductions
While taking a huge deduction upfront sounds appealing, there are three situations where spreading out your depreciation over 15 years might actually save you more money:
1. You Could Trigger the Excess Business Loss Rule
If you’re a sole proprietor, partner, or S-corporation owner, there’s a limit on how much business loss you can deduct in a single year. For 2025, that limit is $313,000 (or $626,000 if you’re married filing jointly).
If your bonus depreciation pushes you over this limit, you won’t lose the deduction—it just gets carried forward to next year. But it won’t help you this year, so the timing advantage is lost.
2. You’ll Pay More Tax When You Sell
Here’s something many business owners don’t consider: when you take large first-year deductions and later sell the property, you’ll owe “depreciation recapture” tax at your ordinary income rate—up to 37%, plus potentially 3.8% net investment income tax.
If you spread out the depreciation using the standard 15-year schedule instead, any gain from that depreciation is taxed at only 25% (plus the 3.8% if applicable) when you sell.
3. Your Tax Rate Might Be Higher in the Future
When you claim big deductions now, you’re reducing the deductions you’ll have available in future years. If your income increases significantly or tax rates go up, those future-year deductions could have been worth more than your current deductions.
While the recent tax law made current rates “permanent,” that just means there’s no expiration date—Congress could still raise rates down the road.
So What Should You Do?
The right answer depends on your specific situation:
- What’s your current income level?
- Do you expect your income to increase or decrease?
- How long do you plan to hold the property?
- Are you close to any income thresholds that affect your taxes?
Your Padgett advisor can help you:
- Calculate the tax impact of taking deductions now versus spreading them out
- Model different scenarios based on your business plans
- Identify the depreciation strategy that saves you the most over time
- Help make you’re meeting all the requirements to claim these deductions
Real estate depreciation is one area where the “obvious” choice isn’t always the best choice. Let’s talk through your situation and make sure you’re taking the approach that makes the most sense for your business, both now and in the future.
Contact your local Padgett office to discuss your real estate improvement plans.