Restaurant and Salon Renovation and Equipment Depreciation: QIP, Section 179, 100% Bonus Depreciation, Tenant Improvements, and NC Add-Backs (2026 Build-Out Tax Planning)

Author: Chenchen Liu, CPA ｜ YCL Tax, Accounting & Advisory

Bottom line

If you are opening or renovating a restaurant, nail salon, spa, studio, or retail store in Cary / RTP / Raleigh, build-out and equipment costs do not always have to be depreciated over 39 years. Interior work that qualifies as qualified improvement property (QIP) is 15-year property eligible for 100% bonus depreciation or Section 179, and kitchen equipment, nail stations, pedicure spas, POS systems, and furniture can generally be expensed in year one as well. The 2026 federal §179 limit is $2,560,000 (phasing out above $4,090,000 of purchases), and qualified property acquired after January 19, 2025 gets permanent 100% bonus depreciation. North Carolina does not follow: it requires an 85% add-back of bonus depreciation, deducted back at 20% per year over the next five years, and §179 above NC’s $25,000 / $200,000 limits is also 85% added back. If your project will be finished and in service by year-end, plan the timing and asset classes now. This article is compliance planning and education only. All amounts, rates, and thresholds are subject to current IRS/NCDOR guidance, and it does not promise an outcome.

Background

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, raised the §179 limit to $2,500,000 (indexed to $2,560,000 for 2026, with a $32,000 heavy-SUV cap) and restored permanent 100% bonus depreciation for qualified property acquired after January 19, 2025; the IRS issued interim guidance in Notice 2026-11. Property acquired earlier follows the old phase-down. QIP is an interior improvement to a nonresidential building made after the building was first placed in service, excluding enlargements, elevators / escalators, and internal structural framework; it is 15-year property eligible for bonus depreciation or §179. Roofs, HVAC, fire protection and alarm, and security systems on nonresidential buildings can be expensed under §179 but generally are not bonus-eligible (subject to current IRS guidance).

In North Carolina, NCDOR explains that the state does not adopt §168(k) bonus depreciation: you add back 85% on the state return and deduct 20% of the add-back in each of the next five tax years. For §179, NC uses its own $25,000 dollar limit / $200,000 investment limit, and 85% of the excess is added back and recovered the same way. SB 595 (S.L. 2026-31), signed July 2, 2026, moved NC’s IRC conformity date to July 5, 2025 but kept the 85% add-back and five-year recovery (all subject to current IRS/NCDOR guidance). For S corporations and partnerships, the differences flow through K-1s to owners’ NC individual returns.

What changed / options compared

Note: The comparison below contrasts before and after OBBBA and federal vs. North Carolina, by asset type. Amounts, rates, and thresholds are subject to current IRS/NCDOR guidance.

1. Bonus depreciation rate

- Before OBBBA: Phasing down to 40% for 2025 and 20% for 2026.

- After OBBBA: Permanent 100% for qualified property acquired after January 19, 2025; you may elect out by asset class.

2. Section 179 limits

- Before OBBBA: About $1,250,000 for 2025, phasing out above about $3,130,000.

- After OBBBA: $2,500,000 / $4,000,000 for 2025 and $2,560,000 / $4,090,000 for 2026; the deduction cannot exceed business taxable income, with the excess carried forward.

3. Interior build-out (QIP)

- Common misconception: All renovation is part of the building and must be depreciated over 39 years.

- Compliance framing: Qualifying interior improvements are 15-year property eligible for bonus depreciation or §179; enlargements and structural framework are excluded.

4. Roofs, HVAC, fire protection, and security

- Bonus depreciation: Generally not eligible (still 39-year nonresidential real property).

- Section 179: Can be expensed, subject to the business income limit and NC’s §179 limits.

5. Tenant improvements

- Tenant pays for the build-out: The tenant generally depreciates it as QIP or the appropriate class; any undepreciated balance can be written off when the lease ends.

- Landlord pays or gives an allowance: Ownership and whether the allowance is income depend on lease terms—review case by case.

6. Small purchases and repairs

- Common misconception: Every renovation dollar must be capitalized.

- Compliance framing: The $2,500-per-invoice-or-item de minimis safe harbor (for businesses without audited financial statements) and routine repairs can be expensed; true “improvements” must still be capitalized.

7. North Carolina differences

- Federal: 100% bonus depreciation and large §179 deductions in year one.

- North Carolina: 85% add-back of bonus depreciation and of §179 above NC limits, deducted back at 20% per year over five years—a timing difference, not a permanent denial.

Self-check: are you affected?

1. You signed a new lease in 2026 and are paying for the build-out — Separate QIP, equipment, furniture, and signage, and keep itemized contractor bids and invoices.

2. You are buying kitchen equipment, nail stations, pedicure spas, shampoo beds, or POS systems — Weigh bonus depreciation vs. §179; see 100% bonus depreciation.

3. You are replacing rooftop HVAC, fire protection, or security systems — Consider §179 and watch the business income limit.

4. Profit is modest this year but expected to jump next year — Expensing everything now may not fit; compare regular depreciation and the knock-on effect on the QBI deduction.

5. You own an S corporation or partnership — NC add-backs flow through K-1s to your personal D-400, so keep a multi-year recovery schedule.

6. You may sell the store or relocate within two to three years — Equipment sales can trigger depreciation recapture, and an early lease exit affects the build-out balance.

7. The landlord is funding part of the build-out — Confirm ownership and allowance terms in the lease before choosing the accounting treatment.

Simplified example (illustrative only)

Example — Cary nail salon build-out opening October 2026 (S corporation)

Assume Ms. Chen’s S corporation leases a new space and pays $90,000 for an interior build-out (qualifies as QIP), $40,000 for nail stations, pedicure spas, furniture, and equipment, and $20,000 for a new HVAC unit the lease assigns to the tenant, all placed in service in 2026 (figures are illustrative only).

- Federal: 100% bonus depreciation on the $130,000 of QIP and equipment; §179 on the $20,000 HVAC unit (requires enough business income); about $150,000 deducted in year one.

- NC bonus add-back: $130,000 × 85% = $110,500; the $20,000 of §179 is within NC’s $25,000 limit and total §179 property is under $200,000, so no §179 add-back.

- NC recovery: $110,500 × 20% = $22,100 deducted each year for 2027–2031; at NC’s 2026 individual rate of 3.99%, shareholders owe roughly $4,409 more NC tax for 2026—a timing difference.

- Comparison: Electing §179 on all $150,000 instead would mean an NC add-back of about ($150,000 − $25,000) × 85% = $106,250—similar, but §179 is limited by business income.

These dollars do not calculate any real case and ignore later-year regular depreciation differences. Results depend on asset classes, placed-in-service dates, business income, and owner facts; rates and thresholds are subject to current IRS/NCDOR guidance. This article does not promise any tax savings.

Action plan and timeline

1. Before signing the lease: Confirm with the landlord who pays for the build-out, any allowance, and who owns the improvements; have your attorney and CPA review the terms.

2. During construction: Ask the contractor to invoice by category—interior work, HVAC, electrical, signage, equipment—rather than one lump sum.

3. November–December 2026: Have a CPA model bonus depreciation, §179, and regular depreciation—plus NC add-backs—using January–October books.

4. By December 31, 2026: Equipment and improvements must be placed in service (ready and available for use) to deduct in 2026; paid-for but uninstalled items do not count.

5. January 2027: Build a fixed-asset register (date, cost, class), which also supports the county business personal property listing.

6. By March 15, 2027: File Form 1120-S / 1065 with Form 4562 (or Form 7004 for an extension), including NC add-back information with the K-1s.

7. From April 15, 2027 for five years: Owners add back and then deduct the recovery on NC Form D-400 and keep the schedule (subject to current IRS/NCDOR guidance). When unsure, book a YCL Free Consultation.

Related reading:

- Section 179 expensing limit increase

- 100% bonus depreciation restored

- Federal deductions that may not flow to NC

- Small business monthly close and the three financial statements

- QBI Section 199A deduction after 2025

How YCL can help

YCL Tax, Accounting & Advisory (Cary / RTP + Shanghai), with CPA Chenchen Liu and Gloria, supports Chinese-speaking small business owners with bilingual compliance planning—saving you time, reducing headaches, and keeping taxes compliant and efficient:

1. Build-out and equipment asset classification — Review contractor invoices and the lease to separate QIP, equipment, roof / HVAC, and repairs, in a bilingual asset schedule.

2. Depreciation modeling — Compare 100% bonus depreciation, §179, and regular depreciation, with NC add-backs and five-year recovery calculated side by side.

3. Monthly bookkeeping — Record build-out, equipment, and loan activity separately and maintain a fixed-asset register, so you can track your opening investment and payback.

4. Payroll service — Set up 941 / NC-5 / DES and onboarding forms as you hire for opening day, with one point of contact.

5. Annual tax filing and planning — Form 4562, Form 1120-S / 1065 / Schedule C, K-1 NC adjustments, and owner D-400s, with compliant strategies such as asset purchase timing (results vary by case).

6. IRS / NCDOR letters — Handle inquiries and assessments involving depreciation, §179, or NC add-backs (no promise of abatement).

7. Free Consultation — Cary handles U.S. filings; our Shanghai team helps cross-border investors provide documents remotely—no promised result.

FAQ

Q: Is bonus depreciation or Section 179 better?

A: There is no single answer. Bonus depreciation is not limited by business income and can create a loss; §179 can be elected asset by asset and covers roofs and HVAC; in NC, §179 up to $25,000 avoids an add-back. Most owners combine them asset by asset based on expected profits over the next few years.

Q: My store is leased. Can I still depreciate the build-out?

A: Generally yes. Interior improvements the tenant pays for are usually depreciated by the tenant and may qualify as QIP; if the landlord pays or provides an allowance, lease terms on ownership and the allowance control.

Q: Does the NC add-back mean North Carolina never allows the deduction?

A: No. After the 85% add-back, you deduct 20% of it in each of the next five years, so it is mainly a timing difference; keep a schedule and address it if you sell assets or close (subject to current NCDOR guidance).

Book a consultation

YCL Tax, Accounting & Advisory

Web: yclcpa.com ｜ Email: info@yclcpa.com

Phone: 919-802-8376 / 980-202-0666 ｜ WeChat: YCLUSA

U.S. office: 1140 Kildaire Farm Rd. STE 208, Cary, NC 27511

Shanghai office: 上海佳通路 31 弄中冶祥腾城市广场 2-516

Free Consultation: please bring your lease, contractor bids and itemized invoices, equipment purchase lists and payment records, the expected opening / placed-in-service date, a year-to-date P&L, and last year’s return (you may mask sensitive digits).

Disclaimer

This article is general information only. It is not personalized tax, legal, employment-law, or investment advice. Section 179 limits, bonus depreciation rates, the QIP definition, NC add-back and recovery rules, and NC’s IRC conformity date change with law and tax year—verify current IRS and NCDOR pages and any official notice you receive. For advice about your situation, consult a licensed professional.