179D Deduction: Energy-Efficient Buildings
Last Updated: May 11, 2025
Discover how the 179D Deduction can provide significant tax savings for designing or owning energy-efficient commercial and multi-family buildings.
Explore 179D Savings (quote) →What is the Section 179D Deduction?
The Section 179D Energy-Efficient Commercial Building Deduction is a federal tax incentive designed to encourage the construction and renovation of energy-efficient commercial and multi-family buildings (four stories or higher).
Originally made permanent in 2020 and significantly enhanced by the Inflation Reduction Act of 2022, 179D allows building owners and, in some cases, the designers of government-owned buildings to claim a deduction for installing qualifying energy-efficient systems.
These systems typically include improvements to the building's interior lighting, HVAC, and building envelope.
Who Qualifies for the 179D Deduction?
Commercial Building Owners
Owners of new or existing commercial buildings who invest in qualifying energy-efficient property can claim the deduction.
Designers of Government-Owned Buildings
Architects, engineers, and contractors who design qualifying systems in new or renovated government-owned buildings may be allocated the deduction.
Special Allocation for Designers of Tax-Exempt Buildings
A unique and highly beneficial feature of the 179D deduction, significantly expanded by the Inflation Reduction Act, allows for its allocation to the designers of energy-efficient systems in buildings owned by tax-exempt entities.
Who are "Tax-Exempt Entities"?
This includes:
- Government entities (federal, state, local, and tribal).
- Non-profit organizations (e.g., private schools, universities, hospitals, charities).
- Religious institutions.
- And other organizations exempt from federal income tax.
Who Can Receive the Allocated Deduction?
The entity that owns the building can allocate the 179D deduction to the person or company primarily responsible for designing the energy-efficient commercial building property or system. This typically includes:
- Architects
- Engineers
- Energy Service Companies (ESCOs)
- Design-build contractors
Key Considerations for Designers:
- Formal Allocation Letter: The building owner must provide a formal, written allocation letter to the designer.
- Responsibility for Design: The designer must have created the technical specifications for the installation of the energy-efficient property.
- IRA Impact: The Inflation Reduction Act not only expanded the types of tax-exempt entities whose building projects qualify (beyond just government buildings for projects starting 2023) but also increased the potential deduction amounts, making this allocation even more valuable for design professionals.
If you are an architect, engineer, or contractor involved in designing energy-efficient systems for public or non-profit buildings, you could be eligible for a significant tax benefit. TaxClaimPro can help you understand the allocation process and documentation requirements.
Qualifying Energy-Efficient Improvements
The 179D deduction is available for improvements in three key areas:
💡Interior Lighting Systems
🌬️HVAC Systems
🧱Building Envelope
Improvements must be certified by a qualified third-party as meeting specific energy savings targets.
Impact of the Inflation Reduction Act (IRA) on 179D
The IRA (2022) significantly enhanced the 179D deduction for projects placed in service from Jan 1, 2023. Here’s a breakdown of the key changes:
New Deduction Tiers & Amounts:
The IRA introduces a two-tiered deduction system:
- Base Deduction: Starts at $0.50 per square foot for achieving 25% energy cost savings, increasing by $0.02 for each percentage point of savings above 25%, up to a maximum of $1.00 per square foot (at 50% savings).
- Bonus Deduction (with Prevailing Wage & Apprenticeship): If P&A requirements are met, the deduction significantly increases. It starts at $2.50 per square foot for 25% energy cost savings, increasing by $0.10 for each percentage point above 25%, up to a maximum of $5.00 per square foot (at 50% savings).
Prevailing Wage & Apprenticeship (P&A) Requirements:
To qualify for the 5x bonus deduction rates, taxpayers must ensure that:
- Prevailing Wages: All laborers and mechanics employed by the taxpayer (or any contractor/subcontractor) in the construction, alteration, or repair of the facility are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality as determined by the Secretary of Labor.
- Apprenticeship Requirements: Taxpayers must ensure that a specific percentage of the total labor hours for the construction, alteration, or repair work on the facility are performed by qualified apprentices.
- For projects where construction begins before January 1, 2024: At least 12.5% of total labor hours.
- For projects where construction begins on or after January 1, 2024: At least 15% of total labor hours.
- Crucial Record-Keeping for P&A: Meticulous record-keeping is essential to substantiate compliance with both prevailing wage and apprenticeship requirements. This includes maintaining certified payroll records for all laborers and mechanics, documentation of apprentice registration and hours, and evidence of any good faith efforts to meet apprenticeship requirements for at least 5 years after the deduction is claimed. Failure to maintain adequate records can jeopardize the bonus deduction.
For detailed guidance, refer to IRS information on Prevailing Wage and Apprenticeship Requirements (including Notice 2022-61).
Crucial Note: Meeting these P&A requirements is essential for accessing the higher deduction amounts. Failure to comply results in reverting to the much lower base deduction rates.
Lowered Minimum Energy Savings Threshold:
The minimum required energy cost savings (compared to ASHRAE 90.1 reference building) has been lowered from 50% to 25% to qualify for the deduction, making it accessible to more projects.
Expanded Allocation for Designers:
As detailed in the spotlight section on designer allocations, designers can now receive allocations for projects in buildings owned by a broader range of tax-exempt entities, not just government entities.
179D: Pre-IRA vs. Post-IRA (Simplified)
| Feature | Pre-IRA | Post-IRA (2023+) |
|---|---|---|
| Max Deduction | Up to $1.88/sq.ft. | Up to $5.00/sq.ft. (with PWA bonus) |
| Min. Energy Savings | 50% | 25% |
| Designer Allocation | Govt. buildings | Expanded to other tax-exempts |
179D Deduction Examples (Post-IRA)
Example 1: Office Building (Bonus Rate)
Building Size: 100,000 sq. ft.
Energy Savings Achieved: 35% (vs. ASHRAE 90.1-2007 or later reference for projects after 2022)
P&A Requirements: Met.
Calculation:
- Base amount for 25% savings: $2.50/sq.ft.
- Additional for 10% over 25% (35%-25%): 10 * $0.10 = $1.00/sq.ft.
- Total deduction rate: $2.50 + $1.00 = $3.50/sq.ft.
Estimated Total 179D Deduction:
$3.50/sq.ft. * 100,000 sq.ft. = $350,000
Example 2: Warehouse (Base Rate)
Building Size: 200,000 sq. ft.
Energy Savings Achieved: 28%
P&A Requirements: Not Met.
Calculation:
- Base amount for 25% savings: $0.50/sq.ft.
- Additional for 3% over 25% (28%-25%): 3 * $0.02 = $0.06/sq.ft.
- Total deduction rate: $0.50 + $0.06 = $0.56/sq.ft.
Estimated Total 179D Deduction:
$0.56/sq.ft. * 200,000 sq.ft. = $112,000
Note: These are simplified examples. The reference ASHRAE standard version depends on when construction began. Consult with a 179D specialist at TaxClaimPro for precise calculations.
Documentation & Certification for 179D
Claiming the 179D deduction requires meticulous record-keeping and third-party certification. Here’s what you need to focus on:
1. Qualified Third-Party Certification
This is non-negotiable. A qualified third-party, typically a licensed engineer or contractor unrelated to the taxpayer claiming the deduction, must perform a site visit. They will use IRS-approved energy modeling software (e.g., DOE/IRS qualified software) to verify that the installed property meets the required energy savings targets compared to a reference building (ASHRAE Standard 90.1). This certification is crucial for substantiating your claim.
2. Energy Modeling & ASHRAE Standards
The energy model must compare your building's performance to a reference building that meets the minimum requirements of the relevant ASHRAE Standard 90.1. The specific version of ASHRAE 90.1 to be used depends on when construction of the energy-efficient commercial building property began or, in some cases, when it was placed in service:
- Generally, for property where construction begins after December 31, 2022, the reference standard is the most recent version of ASHRAE 90.1 that has been affirmed by the Secretary of Treasury (in consultation with the Secretary of Energy) as of the date that is two years prior to the date that construction of the property begins. (Currently, this often points to ASHRAE 90.1-2019 or later, per recent IRS guidance for certain periods).
- For property where construction began before January 1, 2023, the reference standard is typically ASHRAE 90.1-2007.
It is critical to consult the latest IRS guidance for the 179D Deduction (such as Announcement 2024-24) or a qualified 179D professional to determine the correct ASHRAE standard for your specific project timeline, as this is a complex area subject to precise rules.
3. Detailed Project Records
Maintain comprehensive records of the energy-efficient improvements, including:
- Design documents, blueprints, and technical specifications.
- Invoices for materials and labor.
- Contracts with installers and designers.
- Placed-in-service dates for the improvements.
4. Prevailing Wage & Apprenticeship (P&A) Documentation (for Bonus Rate)
If aiming for the bonus deduction rates, you MUST maintain detailed records proving compliance with P&A requirements. This includes certified payroll records, apprentice registration documents, evidence of good faith efforts (if applicable), etc.
5. Allocation Letter (for Designers)
If you are a designer claiming an allocated deduction, you must obtain a formal, signed allocation letter from the tax-exempt building owner that meets IRS requirements.
TaxClaimPro can help ensure your documentation is robust and meets all IRS guidelines.
Synergies: 179D and Other Incentives
The federal 179D deduction can often be claimed in conjunction with other energy efficiency incentives offered by state governments, local municipalities, or utility companies. These might include:
- State-level energy tax credits or deductions.
- Utility rebates for installing specific energy-efficient equipment (e.g., high-efficiency HVAC, LED lighting).
- Grants or low-interest loans for green building projects.
Important Note: While often complementary, it's crucial to understand how these incentives interact. For instance, some programs might reduce the depreciable basis of the property. Careful planning is needed to maximize your overall financial benefit from all available programs.
TaxClaimPro can help you identify and navigate the landscape of federal, state, and local incentives to optimize your project's financial returns.
FAQs (179D)
Is third-party certification needed for the 179D deduction?
Yes, absolutely. A qualified third-party (typically a licensed engineer or contractor unrelated to you) must perform a site visit and use DOE/IRS qualified software to certify that the energy savings meet requirements against an ASHRAE Standard 90.1 reference building. This certification is essential.
Can 179D be claimed for improvements to existing buildings or only new construction?
The 179D deduction can be claimed for both new construction and for energy-efficient retrofits or improvements made to existing commercial buildings. The key is that the improvements meet the specified energy reduction targets.
What are the typical energy savings required to qualify?
For projects placed in service from January 1, 2023, the Inflation Reduction Act (IRA) set the baseline at a 25% reduction in total annual energy and power costs compared to a reference building that meets the minimum requirements of ASHRAE Standard 90.1. The deduction amount increases for each percentage point of energy savings above 25%, up to a maximum. Significantly higher deduction amounts are available if prevailing wage and apprenticeship requirements are also met.
Can I claim 179D for a partial improvement, like just new lighting?
Yes, the deduction can be claimed for improvements to individual building systems: interior lighting systems, HVAC (heating, ventilation, and air conditioning) and hot water systems, or the building envelope. Each system has specific energy reduction targets it must meet to qualify for a partial deduction. You don't necessarily have to upgrade the entire building if one system qualifies.
How long is the 179D deduction available?
The Section 179D deduction was made permanent by the Consolidated Appropriations Act of 2021. The Inflation Reduction Act of 2022 further enhanced and modified its provisions, particularly for projects placed in service on or after January 1, 2023, indicating its continued availability.
What is the "designer allocation" for buildings owned by tax-exempt entities?
Since government entities and other tax-exempt organizations (like non-profits, schools, etc.) do not pay federal income tax, they cannot directly benefit from the 179D deduction. However, they can allocate the deduction to the primary designer (e.g., architect, engineer, contractor, or energy services provider) responsible for the energy-efficient system's design and installation. The Inflation Reduction Act expanded this allocation beyond just government buildings to include buildings owned by all tax-exempt entities for projects starting in 2023.