Qualified Improvement Property (known as QIP) is a valuable tax advantage that commercial and industrial businesses can leverage to help reduce the upfront cost of an LED lighting retrofit and other facility improvement projects. Recent federal tax law changes have significantly increased the value of this incentive, creating new opportunities for organizations investing in energy-efficient infrastructure upgrades.
For businesses operating large facilities, including manufacturing plants, warehouses, industrial sites, commercial buildings, retail locations, automotive facilities, hospitality properties, and managed real estate portfolios, these changes can substantially improve project economics. Organizations that previously delayed lighting upgrades due to capital constraints may now find that available tax incentives accelerate the return on investment while supporting long-term energy-reduction goals.
While the value of this bonus depreciation benefit was scheduled to gradually diminish, current tax law has officially reversed the phase-out, permanently restoring the full 100% first-year write-off.
Read this short write-up to learn:
- How qualified improvement property applies to LED upgrades
- The general requirements of QIP, and;
- How recent tax law changes impact bonus depreciation for qualifying projects.
What Is Qualified Improvement Property?
Qualified Improvement Property (QIP) is a term used by the IRS to categorize improvements made to the interior of a commercial property (business or income-producing building). Property improvements that qualify under QIP are eligible for bonus depreciation, which allows taxpayers to recognize up to 100% of the project’s depreciation expense in the first year of acquiring the asset, reducing the business’s annual taxable income and thus, saving money on taxes.
To qualify, improvements must be:
- Made to a building that is already “in service” and;
- Are expected to last longer than one year.
It is important to note that QIP applies only to improvements made to the interior of a nonresidential building. Interior lighting upgrades in manufacturing facilities, warehouses, commercial buildings, and other business environments may qualify, while exterior improvements generally do not. For example, a warehouse LED lighting retrofit may qualify as QIP, but exterior parking lot lighting upgrades typically fall outside the scope of Qualified Improvement Property.
Projects eligible for bonus depreciation include the installation or replacement of drywall, interior doors, lighting, flooring, ceilings, fire protection, and plumbing.
This means that commercial and industrial LED lighting retrofits are generally considered qualified improvement properties, and are therefore eligible for bonus depreciation.
How Bonus Depreciation Rules Have Changed
Many businesses researching Qualified Improvement Property may still be working from information published several years ago. Under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation was originally scheduled to phase down, leading many organizations to believe that the value of this tax incentive would continue shrinking through 2026.
Under the original phase-down schedule, bonus depreciation was expected to decrease from 100% to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. As a result, many facility owners and financial decision-makers accelerated projects to capture larger deductions before the anticipated reductions took effect.
However, federal tax law has changed significantly since those projections were published. IRS Notice 2026-11 confirms that qualifying property acquired and placed in service after January 19, 2025, is eligible for permanent 100% bonus depreciation. This change effectively reverses the previously scheduled phase-down for qualifying new acquisitions, creating a substantial opportunity for businesses investing in facility improvements.
For organizations considering commercial and industrial LED lighting upgrades for Qualified Improvement Properties, the restored 100% first-year deduction can have a meaningful impact on project economics. Rather than depreciating qualifying improvements over many years, businesses may be able to deduct the entire eligible amount in the year the project is placed in service, potentially improving cash flow and accelerating return on investment.
Businesses that entered binding contracts before January 19, 2025, may remain subject to the previous phase-down rules depending on their specific circumstances. However, new projects initiated after that date and placed in service in 2026 can generally qualify for the restored 100% bonus depreciation treatment. As always, organizations should consult their tax professionals to determine how current regulations apply to their individual situation.
Defining “Placed in Service” for Qualified Improvement Property
The IRS depreciation fact sheet states that property is generally considered to be ‘placed in service’ when it is “ready and available for a specific use, regardless of whether or not it is actually used at the time.” This means that the date the QIP project being undertaken is completed will be the date recognized for the bonus depreciation rate (i.e., if you are implementing an LED retrofit, the project would need to be completed in 2023 to receive the 80% bonus depreciation).
Disclaimer: this article is intended to provide general information and should not be taken as financial advice. Businesses interested in QIP should consult with their accounting teams to learn how the policy applies to them.
See How You Could Benefit From a Turnkey LED Retrofit
With the permanent restoration of 100% bonus depreciation for qualifying projects, commercial and industrial organizations have a new opportunity to improve the financial return of LED lighting upgrades and other facility improvements. Combined with long-term energy savings, these incentives can make large-scale retrofit projects more attractive than they were under the previous phase-down schedule.
PEC helps businesses identify energy-saving opportunities, evaluate project ROI, and navigate available tax incentives, utility rebates, and other incentive programs that may support facility improvements. Get in touch using the form below to connect with one of our experts and learn how we can potentially make an impact on your facility.
Sources
https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-cuts-and-jobs-act
https://pro.bloombergtax.com/insights/corporate-tax-planning/qualified-improvement-property/
https://www.irs.gov/pub/irs-news/fs-06-27.pdf
