Section 179D Tax Deduction FAQs

Section 179D is a federal tax deduction for energy-efficient commercial buildings. It allows building owners, and in some cases qualifying designers, to deduct the cost of installing energy-efficient systems when those improvements reduce building energy use by a required threshold.

The deduction applies to energy-efficient property installed as part of three main building systems:

• Interior lighting systems
• Heating, cooling, ventilation, and hot water (HVAC/HW)
• Building envelope — walls, roof, windows, insulation, and similar elements

Originally enacted under the Energy Policy Act of 2005, Section 179D was significantly expanded by the Inflation Reduction Act of 2022, which increased potential deduction amounts and broadened eligibility for both building owners and designers.

Standard tax depreciation spreads deductions over many years (often 39 years for commercial property). Section 179D is different: it provides an immediate, first-year deduction for qualifying energy-efficient improvements, subject to applicable caps and rules.

That accelerated timing can significantly improve cash flow because it allows you to offset current taxable income rather than waiting decades to recover the same costs through regular depreciation schedules.

Section 179D is a tax deduction, not a tax credit. A deduction reduces your taxable income; a credit would reduce your tax liability dollar-for-dollar.

The actual tax savings therefore depend on your marginal tax rate. For example, a $500,000 Section 179D deduction at a 37% tax bracket would translate to roughly $185,000 in tax savings.

For property placed in service on or after January 1, 2023, Section 179D is available to two broad groups:

• Building owners or lessees who incur the cost of qualifying energy-efficient property installed in a commercial building.
• Designers of qualifying energy-efficient property installed in buildings owned by specified tax-exempt entities, when the deduction is properly allocated to them.

Specified tax-exempt entities that can allocate the deduction to designers include:

• Federal, state, and local government entities
• Indian tribal governments and Alaska Native Corporations
• Tax-exempt organizations under Subtitle A, Chapter 1 of the Internal Revenue Code

This “designer allocation” significantly expands the reach of 179D, allowing architects, engineers, and certain contractors to benefit from qualifying improvements on schools, universities, government facilities, hospitals, and similar tax-exempt buildings.

In general, a building may qualify if it meets all of the following:

• Located in the United States
• Within the scope of ASHRAE Standard 90.1 (commercial building energy code reference standard)
• Property for which depreciation or amortization is allowable

Common examples include:

• Office buildings and corporate headquarters
• Retail stores and shopping centers
• Warehouses and distribution centers
• Hotels and hospitality properties
• Restaurants
• Medical facilities and hospitals
• Schools, universities, and government buildings
• Multi-family residential buildings (4+ stories)

Eligible property must be part of one of the three covered building systems and contribute to meeting the required energy savings threshold:

1. Interior lighting systems

• LED lighting upgrades and retrofits
• Advanced lighting controls and sensors
• Daylight harvesting systems
• Other qualifying high-efficiency lighting strategies

2. HVAC and hot water systems

• High-efficiency heating and cooling equipment
• Variable refrigerant flow (VRF) systems
• Energy recovery ventilation (ERV)
• High-efficiency boilers and water heaters
• Building automation and control systems

3. Building envelope

• High-performance windows and glazing
• Enhanced roof and wall insulation
• Cool roof systems
• Air sealing and related envelope improvements

For property placed in service in 2023 and later, the project must achieve at least 25% total annual energy and power cost savings relative to the applicable reference standard to qualify for any deduction.

The way this savings is measured depends on the compliance pathway used:

• Traditional (Modeling) Pathway: 25% modeled energy and power cost savings compared to a reference building that just meets the applicable ASHRAE 90.1 standard.
• Alternative (Measurement) Pathway: 25% measured site energy use intensity (EUI) savings using actual pre- and post-retrofit energy data.

As savings increase above 25%, the available deduction scales up in a linear fashion until it maxes out at 50% savings.

Yes. Section 179D applies to both new construction and eligible retrofits of existing buildings.

For the Alternative (Measurement) Pathway, which is specifically designed for retrofits:

• The building must have been placed in service at least 5 years before establishing the qualified retrofit plan (QRP).
• You must have measured pre- and post-retrofit energy data to support the required 25% (or greater) EUI savings.

The Traditional (Modeling) Pathway can also be used for retrofits by modeling the existing building and proposed improvements against the reference standard.

For property placed in service in 2023 and later, the deduction is generally the lesser of:

• The cost of the installed energy-efficient property, or
• The maximum per-square-foot amount allowed for the year, based on energy savings and prevailing wage/apprenticeship (PWA) status.

There are two tiers: a base deduction and a higher PWA-compliant deduction. Recent inflation-adjusted ranges have been:

Example: A 100,000 sq ft building that achieves 50% energy savings and meets PWA requirements in 2025 could qualify for a deduction of up to $581,000 (100,000 × $5.81 per sq ft), subject to cost and other limitations.

The Inflation Reduction Act introduced substantially higher 179D deduction amounts (roughly 5× the base amount) for projects that satisfy both prevailing wage and registered apprenticeship requirements:

Prevailing wage requirements:

• Laborers and mechanics performing construction, alteration, or repair must be paid at least the prevailing wage rates determined by the U.S. Department of Labor.

Apprenticeship requirements:

• A specified percentage of total labor hours must be performed by qualified apprentices.
• Those apprentices must be enrolled in registered apprenticeship programs.

Detailed PWA rules and correction mechanisms are outlined in IRS Notice 2022-61 and related guidance.

The deduction increases as energy savings improve above the 25% minimum threshold:

• At 25% savings: You qualify for the minimum per-square-foot amount (for 2025, $0.58 base or $2.90 with PWA).
• For each additional percentage point: The deduction increases by a fixed increment (for 2025, $0.02 per sq ft base or $0.12 per sq ft with PWA).
• At 50% savings: You reach the maximum per-square-foot amount ($1.16 base or $5.81 with PWA for 2025).

This sliding scale is designed to reward deeper efficiency improvements with larger deductions.

Yes. There are rolling lookback limits that reduce the maximum available 179D deduction if prior deductions were claimed on the same building:

• For building owners: 179D deductions claimed in the prior 3 tax years reduce the maximum deduction available in the current year.
• For designers claiming allocations: 179D deductions claimed on the same building within the prior 4 tax years reduce the current-year maximum.

This replaced the pre-2023 “lifetime cap” approach and allows buildings to qualify for additional deductions over time as new projects are placed in service, once the lookback window has passed.

Current guidance describes two primary ways to show that a project meets the 179D savings requirements:

1. Traditional (Modeling) Pathway – EECBP

• Uses energy simulation software to compare your building to a reference building that meets ASHRAE 90.1.
• Applicable to both new construction and retrofits.
• Focuses on modeled annual energy and power cost savings.
• Requires DOE-qualified software that meets specific technical criteria.

2. Alternative (Measurement) Pathway – EEBRP

• Uses measured energy data to compare pre- and post-retrofit performance.
• Applies only to retrofits (not new construction).
• Requires a qualified retrofit plan (QRP) and time-separated pre- and post-retrofit EUI measurements.

Under the modeling pathway, a qualified energy modeler:

1. Builds a reference model that meets the minimum ASHRAE 90.1 standard for the applicable version.
2. Builds a proposed model that reflects your building and the energy-efficient property you are installing.
3. Compares annual energy and power costs between the two models to determine the percentage savings.
4. Documents and certifies the results using DOE-qualified software and IRS-compliant procedures.

This pathway is often used for new construction, large complex buildings, or projects where modeling can capture savings more precisely than measurement alone.

The measurement pathway is designed for retrofits and relies on actual energy consumption data:

1. Establish a Qualified Retrofit Plan (QRP): Document the planned efficiency improvements and expected savings.
2. Measure pre-retrofit EUI: Certify the building’s site energy use intensity at a point within one year before the property is placed in service.
3. Complete the improvements: Install the energy-efficient property as laid out in the QRP.
4. Measure post-retrofit EUI: Certify the building’s EUI more than one year after the property is placed in service.
5. Calculate and certify savings: Compare pre- and post-retrofit EUI, adjusting for weather and other required factors.

The applicable ASHRAE 90.1 reference standard depends on construction timing and placed-in-service dates. Current rules often follow this pattern:

These standards serve as the “minimum code” baseline against which your building’s efficiency is measured. Newer ASHRAE versions generally make the baseline more stringent, which can influence modeled savings and project economics.

179D is intended to be an engineering-driven deduction, so documentation is critical. A typical package includes:

• Third-party certification from a qualified individual (engineer or similarly credentialed professional).
• Energy modeling files and reports (for the modeling pathway) or pre-/post-retrofit energy data and calculations (for the measurement pathway).
• Cost documentation for the installed energy-efficient property, including invoices or cost breakdowns.
• Building details: square footage, occupancy type, and system descriptions.
• Reference standard and methodology: which ASHRAE 90.1 version and software were used.
• PWA documentation if you are claiming the higher prevailing wage/apprenticeship deduction.
• Allocation letters when a tax-exempt owner allocates the deduction to a designer.

Good documentation makes it easier for your tax advisor to file the return and easier to respond if the IRS has questions later.

A qualified individual must meet specific requirements outlined in IRS guidance. In general, they should:

• Be a licensed professional engineer or contractor with appropriate credentials.
• Have training and experience in building energy modeling and systems analysis.
• Be independent of the building owner for purposes of the certification rules (subject to disclosure rules for related parties).
• Be competent in the applicable ASHRAE standards and DOE-qualified software used for the project.

Accelerate partners with experienced energy engineers who meet these requirements and focus specifically on 179D-compliant certifications.

You can generally combine Section 179D with other incentives, but you cannot double-count the same dollars in your tax basis calculation. In practice, that means:

• Utility rebates, grants, or other subsidies that reduce your net cost typically reduce the basis used to compute the 179D deduction.
• 179D cannot exceed the adjusted cost of the qualifying property after accounting for those incentives.
• Careful coordination is needed when layering 179D with credits (such as 48 ITC or 45L) or other programs.

We model the interaction of 179D with other incentives so that your tax advisor can choose the combination that delivers the best net result while staying within IRS rules.

The 179D deduction is generally claimed in the tax year the property is placed in service — in other words, the year the system is installed, operational, and ready for its intended use.

In some situations, it may be possible to claim 179D on a prior year by filing an amended return, subject to the normal statute of limitations (often three years from the original filing date). Your tax advisor decides the exact filing mechanics.

Yes. There is now a construction-start deadline.

Under the “One Big Beautiful Bill Act” (Public Law 119-21), the 179D commercial building tax deduction does not apply to property for which construction begins after June 30, 2026 as currently written.

This deadline creates a planning window for building owners, developers, and designers considering major efficiency upgrades or new projects that could benefit from 179D.

In many cases, yes. If you completed qualifying projects in prior years but did not claim 179D, you may be able to:

• File amended returns, subject to the statute of limitations; or
• Coordinate with your tax advisor to explore other filing approaches where applicable.

Key considerations include:

• The year the property was placed in service.
• Which 179D rules applied in that year (pre- or post-IRA).
• Whether prior deductions or other incentives already reduced basis.

We routinely review past projects to identify missed 179D opportunities and help your advisory team decide whether retroactive claims are worthwhile.

Accelerate provides end-to-end support on 179D projects, from initial screening through final certification and tax return support. Typical steps include:

• Eligibility assessment: Reviewing your building type, systems, and project scope to confirm 179D potential.
• Pathway selection: Recommending the modeling or measurement pathway based on your project and data availability.
• Engineering analysis: Performing DOE-qualified energy modeling or measurement analysis through our engineering partners.
• Deduction calculation: Computing maximum allowable deductions, including any PWA bonus considerations.
• Certification: Providing IRS-compliant third-party certification and supporting technical schedules.
• Documentation package: Preparing audit-ready workpapers, certification, and summary materials.
• Tax advisor coordination: Working directly with your CPA or tax team so 179D is implemented correctly on the return.

Section 179D is just one piece of a broader tax strategy. As an engineering-focused specialty firm, we help coordinate 179D with:

• Cost segregation studies: Accelerating depreciation on non-structural components that are not covered by 179D.
• R&D tax credits: Identifying qualifying design, engineering, and controls work that may generate separate credits.
• 45L and other energy incentives: Coordinating 179D with residential and clean energy incentives where applicable.
• Basis planning: Ensuring that 179D basis reductions are modeled alongside depreciation so there are no surprises later.

The goal is to maximize total after-tax benefit, not just optimize one code section in isolation.

For an initial 179D assessment, we typically ask for:

1. Basic building information: Address, square footage, building type, and use.
2. Project description: A summary of the energy-efficient systems installed or planned.
3. Cost information: Estimated or actual investment in the qualifying systems.
4. Plans and specifications: Architectural, mechanical, and electrical drawings where available.
5. Timeline: Dates for construction start and placed-in-service (or anticipated dates).

If you don’t have everything in hand, that’s okay — we can help identify what’s needed and coordinate with your design and construction teams.