Section 179D Tax Deduction for Energy-Efficient Commercial Buildings

Who Qualifies for 179D?

Building owners. In most cases, the owner of the building claims the deduction for qualifying property installed in it.

Designers of government and tax-exempt buildings. Public schools, government offices and nonprofit buildings can’t use a tax deduction themselves. So the law lets the owner allocate the deduction to the person primarily responsible for designing the property, such as the architect or engineer. The allocation must be in writing. Owners that can allocate include federal, state and local governments, Indian tribal governments, Alaska Native Corporations and tax-exempt organizations. Someone who only installs, repairs or maintains the property isn’t a designer.

What Buildings and Systems Qualify?

To qualify, the property must be:

• Installed in or on a building located in the United States
• Within the scope of ASHRAE Standard 90.1, which covers most commercial buildings
• Depreciable property
• Part of the building’s interior lighting; heating, cooling, ventilation and hot water systems; or building envelope

Offices, warehouses, retail, industrial, hotels and many other building types can qualify. See all the property types we serve.

How the 179D Deduction Is Calculated

Energy savings compared to a reference building

An energy model compares the building’s projected annual energy and power costs with a reference building that meets ASHRAE Standard 90.1. The deduction starts when the certified savings reach 25%, and it grows as the savings go up.

A per-square-foot amount that scales with savings

The deduction is figured per square foot of the building, and the rate rises for each percentage point of savings above 25%. For tax years beginning in 2026, the IRS amounts are:

• Standard rate: $0.59 per square foot at 25% savings, plus $0.02 for each additional point, up to $1.19.
• Prevailing wage and apprenticeship met: $2.97 per square foot at 25% savings, plus $0.12 for each additional point, up to $5.94.

For tax years beginning in 2025, the maximums were $1.16 and $5.81. The deduction can’t be more than the cost of the qualifying property, and it’s reduced by any 179D taken on the same building in the prior 3 tax years (4 years for an allocated deduction). Source: IRS Revenue Procedure 2025-32 and the IRS Instructions for Form 7205.

The prevailing wage and apprenticeship multiplier

The higher amounts apply when workers installing the property are paid prevailing wages and registered apprentices perform the required share of the labor hours. They also apply if installation began before January 29, 2023. Payroll and apprenticeship records support the claim, so it pays to collect them as the work happens.

The Alternative Path for Retrofits

Upgrades to an existing building can qualify under a separate retrofit path. The building must have been placed in service at least 5 years before a qualified retrofit plan is put in place, and the plan must aim to cut the building’s energy use intensity by at least 25%. A licensed architect or engineer certifies energy use before the work and again afterward, with the final certification more than 1 year after the property is placed in service. The deduction is then based on the measured reduction.

Certification and Energy Modeling

Every 179D claim needs a certification that the property meets the energy savings target. For new property, the certification comes from a qualified individual: a licensed engineer or contractor in the building’s state who isn’t related to the person claiming the deduction. It’s based on energy modeling of the building’s systems. Your CPA then claims the deduction on Form 7205.

How 179D Pairs With Cost Segregation

A cost segregation study and a 179D review look at the same building from two angles. Cost segregation sorts a building’s costs into shorter depreciation lives of 5, 7 and 15 years. 179D adds a separate deduction for energy-efficient lighting, HVAC, hot water and envelope work.

Because the 179D deduction reduces the tax basis of the property it covers, the two need to use the same numbers so nothing is counted twice. We coordinate both on the same building so your CPA gets one consistent set of schedules. New to cost segregation? Start with our beginner’s guide.

Our 179D Services

• 179D Eligibility and Construction-Start Date Review
• Energy Modeling and Certification Coordination
• Prevailing Wage and Apprenticeship Documentation Review
• Designer Allocations for Government, Tribal and Nonprofit Buildings
• Retrofit Project Reviews (energy use before and after)
• Form 7205 Support for Your CPA
• Coordination With a Cost Segregation Study

CPAs and advisors: see our Referral Partnership Program.