What is Section 179D Energy Efficient Commercial Building Tax Deduction (Section 179D)?
The Section 179D deduction allows building owners or designers of such buildings to claim a tax deduction, which reduces the basis in the building for the installation of qualifying systems that promote energy efficiency. The qualifying system types include:
- Interior Lighting
- Heating, Ventilation and Air Conditioning (HVAC)
- Upgrades to the Building Envelope
This applies to property placed in service as part of a new construction or a building upgrade project.
How did Section 179D change after the Inflation Reduction Act (IRA) of 2022?
This deduction was enhanced in the IRA, and it now allows for:
- A deduction of up to $5.81 per square foot of the subject property (up from $1.88) for tax year 2025
- The ability for tax exempt entities to allocate the tax deduction to designers (previously, only government owners could allocate the deduction to the building designer)
- The ability to re-claim the deduction on the same building every four years for additional upgrades
- The establishment of a prevailing wage and apprenticeship standard, which requires prevailing wages to be paid to construction workers and exposure for apprentices in order to maximize the deduction
How is the Section 179D deduction calculated?
Section 179D(b)(2) Base Deduction: The base amount of the deduction is 58 cents per square foot, and the deduction is increased by 2 cents for each percentage point in energy efficiency increase that exceeds 25%, up to $1.16 per square foot.
- For every percentage point, the building’s energy efficiency exceeds a 25% threshold (described in more detail below), and the deduction increases incrementally up to a 50% energy savings threshold.
Section 179D(b)(3) Enhanced Deduction: For buildings meeting the prevailing wage and apprenticeship requirements, a bonus deduction of $2.90 per square foot is available.
- The deduction can also be increased by 12 cents for each percentage point increase in energy efficiency above 25%, up to $5.91 per square foot.
The deduction cannot be more than the amount spent on the upgrades.
How does a building qualify?
The HVAC, interior lighting or building envelop equipment must be installed on or in a building that is located in the U.S.
Notice 2006-52 provides for the use of Department of Energy approved software to complete an energy modeling analysis using the plans and specifications of the subject property referencing the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) standard 90.1 (2007) and the Illuminating Engineering Society of North America, as of 2025.
It must be property for which depreciation or amortization is allowable. Then, the energy modeling analysis must be certified by a licensed professional engineer in the state where the building is located. It should demonstrate that the total annual energy and power costs for the specified systems are reduced by at least 25% compared to a reference building that meets the minimum requirements of Reference Standard 90.1.
How do I qualify as a building owner or designer?
Notice 2008-40 allows designers — such as architects, engineers, contractors and environmental service providers who create technical specifications for the installation of energy-efficient commercial building property — to receive an allocation (transfer) of the tax savings that cannot be used by tax-exempt entities.
Can both an architect and engineer who completed a project together be allocated Section 179D savings from a tax-exempt project?
Yes, Notice 2008-40 provides guidance in the event of multiple designers for one building. Cherry Bekaert’s advisors can assist with reaching out to eligible parties of the design team to establish an agreement between designers before presenting a request to the building owner. The agreement is generally established according to the business relationship between the designers. Ultimately, the building owner may choose how much deduction to allocate to each party.
What were the building types that were eligible for allocation to designers prior to and following the 2023 IRA?
Buildings eligible for Section 179D allocation to designers prior to the IRA in 2023:
- University Dorms — 4 Stories or More Above Grade
- Airports — State, Municipal, Federally Owned
- Libraries — State, Municipal, Federally Owned
- Courthouses — State, Municipal, Federally Owned
- K-12 Schools, Higher Education Buildings
Additional buildings eligible for Section 179D allocation to designers after the IRA in 2023:
- K-12 Private Schools — Recreational Facilities
- Religious Institutions — Churches, Children Schools
- Tribal or Native American Owned Buildings
How do I confirm what the prevailing wages should be for my upcoming construction project?
Wage and hour determinations are available online at sam.gov which produces prevailing wage data for local counties.
I started construction before 2023 and did not pay a prevailing wage or have apprentices. Is there any recourse?
If your construction project started before January 30, 2023, prevailing wages and apprenticeship hours are not required.
If I am a developer, does the deduction work well for a build and sell strategy?
The Section 179D deduction is in lieu of capitalizing the costs of HVAC, interior lighting and building envelopes during construction. The deduction is treated as depreciation and is subject to recapture upon disposition of the property. This recapture period is contingent upon many factors.
How are tax savings transferred from a tax-exempt entity to a designer?
Notice 2008-40 provides guidance on the transfer of tax savings to designers via the allocation letter. The allocation letter contains the following:
- The owner’s name
- The address of the building
- The cost of the project
- The final allocation amount
- The signature of the designer and building owner’s representatives (under penalties of perjury)
Cherry Bekaert can draft, pursue and secure these allocation letters on your behalf.
Do contractors qualify as designers for purposes of Section 179D?
Contractors who create or participate in the creation of technical specifications are specifically enumerated as qualified recipients of the Section 179D tax incentive. Examples include:
- Performance specifications that address the operational requirements of an installation
- Prescriptive specifications that contain detailed descriptions of what specific materials must be used, as well as the installation instructions
- Proprietary specifications that demand that only one specific product be used for a given installation
If a project or renovation was not performed specifically for the purposes of energy efficiency, could it still qualify?
Yes. Section 179D subsection (d)(5) references qualification requirements for HVAC, interior lighting and building envelope component installation as required by a plan to designed to reduce the total annual energy and power costs.
The use of Department of Energy approved software during energy modeling analysis, along with in-person certification of the energy modeling analysis by a registered professional engineer in the state the construction project is completed, serves a fulfilment of this requirement.
In Edwards Engineering v. IRS (2018), the Tax Court ruled that the establishment of a subjective intent to achieve energy efficiency is not required if the result of construction and certified energy modeling analysis achieved energy targets above the required ASHRAE standard.
Does the building need to be new construction to qualify?
No, both renovations and new construction projects qualify for Section 179D. To date, energy modeling requirements mandate the use of ASHRAE Standard 90.1-2007. Many conditioned buildings renovated to modern codes or placed in service after 2008 are likely to qualify for this tax incentive.
Am I able to take advantage of Section 179D as a not-for-profit entity?
As part of the Inflation Reduction Act (IRA), all non-profit entities can now allocate the Section 179D Deduction to the designers of upgrades to their commercial buildings. While this deduction is not directly available to non-profit entities, they are sovereign in their decision to participate in this program and/or to whom they allocate.
There are opportunities for the non-profit sector to negotiate with designers to share in the Section 179D benefit. This can take the form of reduced fees, extended warranties or a donation to the non-profit which is tax-deductible in itself. Any such agreement should be contractually agreed upon before construction starts.
As a provider of Section 179D services, Cherry Bekaert can help non-profit entities analyze the energy efficient features and estimated Section 179D benefits of upcoming or recently completed projects. This provides a starting point for discussions with designers.
Your Guide Forward
Cherry Bekaert’s team of engineers, CPAs and attorneys have decades of experience identifying, certifying and delivering substantial tax savings for building owners and designers via the Section 179D Tax Deduction. We can help determine your eligibility and estimated value, perform requisite field inspection and energy modeling analysis, secure the allocation letters (for designers only), and ultimately file the deductions on your annual federal tax return. If you have significant federal tax liability, the sooner you reach out to us, the sooner we can help you potentially achieve substantial permanent tax savings.
