Understanding Qualified Leasehold Improvements for tax deductions - section 179 vs bonus depreciation?

Wait so is there a limit to how much we can deduct in a year? And are all interior improvements considered "qualified" or are there specific types that don't count?

Yes, there are limits to Section 179 expensing. For 2025, the limit is $1,160,000, but this begins to phase out when total qualifying property placed in service exceeds $2,890,000. However, these limits apply to all Section 179 property, not just improvements. Regarding what qualifies, not all interior improvements count as Qualified Leasehold Improvements. Generally, improvements must be made to the interior portion of a nonresidential building, made by the tenant, and placed in service more than 3 years after the building was first placed in service. Improvements for elevators, escalators, building enlargements, or internal structural framework don't qualify.

How does taxr.ai handle the technical aspects of classifying improvement types? My CPA seems really confused about the difference between qualified improvement property and qualified leasehold improvements since the tax law changes.

Does it work for analyzing whether the tenant or landlord should take the deduction? My landlord is trying to claim they should get the benefit even though I paid for everything!

The system uses IRS guidelines and tax court precedents to classify each improvement type correctly. It understands the technical distinctions between QIP, QLI, and other improvement categories based on the TCJA changes and subsequent corrections. It basically walks you through a decision tree based on when improvements were made, who made them, and the specific nature of each improvement. For tenant vs landlord disputes, it analyzes your lease agreement language to determine who has the tax basis in the improvements. It highlights specific lease clauses that determine whether improvements are tenant property or become landlord property immediately. In my case, it flagged a problematic clause that would have given my landlord grounds to claim some of my improvements despite me paying for them.

How does Claimyr actually work? Do they just call the IRS for you or what? I'm confused about how they're getting through when no one else can.

Yeah right. No way they're getting through to the IRS in 20 minutes when I've been trying for weeks. Sounds like a scam to me. If it was that easy, everyone would be doing it.

They don't call for you - they reserve a spot in the IRS phone queue and then call you when they're about to connect with an agent. You're the one who actually talks to the IRS. It's basically like having someone wait on hold for you, and then they bridge you in when an agent picks up. I was skeptical too - I've wasted hours on hold with the IRS myself only to get disconnected. But they use some kind of system that keeps the connection active and navigates the IRS phone tree automatically. I'm guessing they have multiple lines going at once. Whatever they're doing, it worked when nothing else did for me.

Have your contractor provide an itemized statement breaking out costs for different components. Items that can be removed without damage (like appliances) are generally 5-year property eligible for 179. Built-ins are usually considered improvements subject to longer depreciation unless they qualify for bonus. We did something similar and saved about $18,000 in taxes by properly segregating costs. Our POS system, tables, and non-built-in fixtures were all 179 eligible, while the structural improvements qualified for bonus depreciation as QIP.

Thanks for the advice! I'll contact our contractor to see if they can provide that kind of breakdown. We've been treating everything as one big renovation cost, but separating the removable equipment from the actual improvements makes a lot of sense. I totally forgot that our POS system would be treated differently from something like the built-in bar. This could make a big difference in our cash flow if we can accelerate some of the deductions.

This is a common point of confusion! Since the Tax Cuts and Jobs Act, the terminology has changed. Now "Qualified Improvement Property" (QIP) is the main category you need to focus on. It replaces the older categories like Qualified Leasehold Improvements. For your specific situation, the improvements to your accounting firm space would be considered QIP for an owner-occupied property. The improvements to the law firm's rented space would also be QIP, but who gets the deduction depends on who paid for them. If the law firm (tenant) paid, they get the deduction. If you (landlord) paid, you get the deduction.

That makes more sense! So even though I'm both a business owner and a landlord, the tax treatment is based on the specific space and who paid for what. I paid for some common area improvements (hallway, entrance) while my tenant paid for their office renovations. So I should be able to take the deduction for the common areas under QIP rules, and they would claim their own improvements? And both would potentially qualify for bonus depreciation?

This is really helpful! I'm new to dealing with commercial property tax deductions and this thread has been incredibly informative. One question - when you mention keeping detailed records of who paid for what, what specific documentation should I be maintaining? I'm assuming receipts and invoices are obvious, but are there other types of records that would be important for an IRS audit? Like photos of the improvements, or specific language in contracts with tenants about who's responsible for what types of improvements? Also, is there a time limit on when these improvements need to be placed in service to qualify for the current bonus depreciation rules? I want to make sure I'm not missing any deadlines for this tax year.

Great questions! For documentation, you'll definitely want to keep receipts, invoices, and contracts, but also consider maintaining a renovation log with photos before/during/after the work. This helps establish exactly what improvements were made and when they were placed in service. For tenant relationships, keep copies of lease agreements that specify who's responsible for improvements, any tenant improvement allowances, and written agreements about who owns what after installation. Email correspondence about improvement decisions can also be valuable documentation. Regarding timing for bonus depreciation - the current 100% bonus depreciation is available for qualified property placed in service through 2025, but it phases down after that (80% in 2026, 60% in 2027, etc.). So you're still in the sweet spot for maximum benefits this year. The key date is when the improvements are "placed in service" - meaning when they're completed and ready for their intended use, not necessarily when you paid for them. So if you finished renovations in 2024, you can claim the full bonus depreciation on your 2024 return even if some payments happened in 2025. Just make sure to maintain separate records for each property/space since the tax treatment can differ based on use and ownership!

Welcome to the community! Great questions about timing and classification. For the timing issue, the key is when the improvements were "placed in service" - meaning when they were completed and ready for use. Since you finished in January 2025, these would go on your 2025 tax return, not 2024, regardless of when you started or made payments. Regarding your custom display cases, this is where proper documentation becomes crucial. Since they're bolted down but removable, they could potentially qualify as either personal property (Section 179 eligible) or qualified improvement property (bonus depreciation eligible). The determining factors are usually: how easily removable they are, whether they're considered part of the building structure, and how they're classified in your lease agreement. I'd suggest taking detailed photos showing how they're installed and getting documentation from your contractor about whether they're considered fixtures or personal property. Both Section 179 and 100% bonus depreciation give you the same immediate deduction result, but the classification affects other aspects like depreciation recapture if you sell. Given your accountant's unfamiliarity with the recent rule changes, you might want to consider getting a second opinion or using some of the resources others have mentioned in this thread. The distinction between old QLI rules and current QIP rules has tripped up many tax professionals!

This is exactly the kind of real-world insight I was hoping to find! Thank you for breaking down the QIP vs QLI distinction - I've been seeing both terms used interchangeably and getting confused about which rules actually apply now. Your point about the 3-year building age requirement is really important. Our shopping complex was built in 2018, so we should be good there. And you're right about reviewing the lease carefully - I need to dig into those clauses about improvement ownership before we make any tax elections. One follow-up question: when you say the improvements can't involve "structural framework," does that include things like partition walls or built-in cabinetry that's attached to walls? We did some space reconfiguration that involved adding a few non-load-bearing partition walls, and I'm wondering if that would disqualify those specific costs from QIP treatment. Also, did you end up taking the full bonus depreciation in year one, or did you split between Section 179 and bonus depreciation for any strategic reason? I'm trying to understand if there are any advantages to one approach over the other for our situation.

Great questions! For the structural framework issue, non-load-bearing partition walls are generally okay and shouldn't disqualify those costs from QIP treatment. The "structural framework" exclusion typically refers to major structural elements like load-bearing walls, columns, and the building's core support systems. Interior partitions that just divide space are usually considered part of the qualified improvements. Built-in cabinetry attached to walls is also generally fine for QIP purposes, as long as it's not part of the building's permanent structure. The key test is whether the improvements are to the "interior portion" of the building rather than the building's structural integrity. Regarding Section 179 vs bonus depreciation - I went with 100% bonus depreciation for the full amount because it was simpler administratively and there weren't any income limitations like there are with Section 179. Plus, bonus depreciation doesn't have the same phase-out thresholds that Section 179 has when you place a lot of property in service in one year. The main advantage of Section 179 would be if you had net operating losses that you wanted to preserve, since Section 179 can create NOLs while bonus depreciation generally can't take you below zero for the year. But for most profitable businesses, bonus depreciation is the cleaner approach for QIP. Just make sure to keep detailed records of each improvement type in case the IRS ever asks for cost segregation documentation!

Thank you so much for mentioning the election deadline - that's exactly the kind of detail that could save someone a lot of money! I had no idea about the original return requirement for Section 179 elections. I'm definitely going to prioritize getting our lease reviewed before we file. Based on everyone's advice here, it sounds like the lease language could make or break our ability to claim these deductions, even though we paid for everything ourselves. The IRS Publication 946 recommendation is really helpful too. I've been trying to piece together information from various sources, but having one comprehensive resource that explains the transition from old to new rules sounds like exactly what I need. One last question for the group - has anyone dealt with mixed-use improvements where part of the renovation serves both business and personal use? We added a small office area that I sometimes use for personal paperwork, and I'm wondering if that affects the deductibility of the entire improvement or just that portion. @Mei Liu Thanks again for the practical timeline advice - you probably just saved me from making a costly mistake!

For mixed-use improvements, you'll need to allocate the costs based on business vs personal use percentage. The IRS generally requires "reasonable allocation" - so if that office area is 10% of the total renovation cost and you use it personally 30% of the time, you'd only be able to deduct 70% of that 10% portion for business purposes. The rest of your renovation that's purely business use should be fully deductible. The key is being able to document your allocation method. Keep records of square footage, time usage, or other objective measures that support your business use percentage. Some taxpayers use time logs or maintain separate records for business vs personal use of mixed areas. One tip - if the personal use is minimal (like occasional personal paperwork), you might be able to argue the space is primarily business use under the "primary use" test. But be conservative and well-documented since mixed-use deductions are often scrutinized in audits. @Mei Liu is absolutely right about the election deadlines - I ve'seen too many businesses lose out on thousands in deductions just because they missed the filing deadline for these elections!

Welcome to the community @Nalani Liu! Great questions about the electrical work and state tax implications. For the electrical upgrades (new outlets, panel upgrades), this can be a bit of a gray area. Generally, electrical work that's part of interior improvements to support your business operations would qualify as QIP. However, if the panel upgrade involves major building infrastructure changes that affect the entire building (not just your leased space), that portion might fall under structural framework exclusions. The key distinction is whether the electrical work serves your specific tenant space versus the building's core systems. Adding outlets and circuits within your space should be fine, but a main panel upgrade might need closer scrutiny. I'd recommend having your electrician provide an itemized breakdown separating tenant-specific work from any building-wide improvements. Regarding state taxes - this is really important to consider! Not all states conform to federal bonus depreciation rules. Some states have their own depreciation schedules or don't allow the accelerated deductions. You'll definitely want to check with a local tax professional about your specific state's rules, as this could significantly impact your overall tax savings. The $45,000 amount is perfect for these deductions - well within all the limits and thresholds people have mentioned. Just make sure to document everything well!

This is excellent strategic thinking about the timing! I hadn't fully considered how the phase-down of bonus depreciation could impact multi-year renovation plans. That $25,600 difference you calculated for @Ava Johnson really puts it in perspective - that s'significant money that could be reinvested back into the business. Your point about front-loading renovations while the full 100% deduction is available makes a lot of sense, especially for businesses that were already planning improvements over the next few years anyway. It s'essentially a government incentive to accelerate capital investments, which could help with both tax savings and improving business operations sooner. I m'also glad you mentioned the documentation strategy with detailed contractor breakdowns and photos. As someone completely new to this, I was wondering what level of detail would be sufficient for IRS purposes. It sounds like over-documenting is much better than under-documenting when it comes to these substantial deductions. One question - do you know if there are any restrictions on how quickly you can complete and place improvements in service within a tax year? Like if someone wanted to rush multiple renovation phases into 2025 to capture the full bonus depreciation, are there any timing rules that might limit that strategy?

Great question about timing restrictions! There generally aren't specific IRS rules limiting how quickly you can complete multiple renovation phases within a tax year, as long as each improvement is legitimately "placed in service" when it's completed and ready for business use. The key is that each improvement must actually be finished and operational - you can't just rush to start projects and claim deductions before they're truly complete. But if you can legitimately complete multiple phases of renovations within 2025, you should be able to claim the full 100% bonus depreciation on all of them. One thing to watch out for is the "related party" and "disguised sale" rules if you're doing anything unusual with timing or payments, but for straightforward tenant improvements completed in normal business operations, the IRS generally respects the actual completion dates. @Ruby Garcia s'strategic thinking is spot-on - businesses with flexibility in their renovation timeline could see substantial tax benefits by accelerating work into 2025. Just make sure not to sacrifice quality or operational efficiency for tax timing, since a poorly executed rushed renovation could cost more than the tax savings! The documentation approach you both mentioned is definitely the way to go. In my experience, the IRS appreciates taxpayers who clearly document their basis for significant deductions, and it makes any potential audit much smoother.