179D Energy Efficiency Deduction

Service description

A federal tax deduction of $0.59 to $1.19 per square foot (up to $5.94 per square foot when prevailing wage and apprenticeship requirements are met), for building owners, tenants, or designers of buildings that meet or exceed a certain energy and power standard, and only for buildings whose construction began on or before June 30, 2026. Tenants may be eligible if they make energy efficient construction expenditures. If the system or building is installed on federal, state, or local government property, the 179D tax deduction may be taken by the person primarily responsible for the system's design, with the government owner's approval to transfer the deduction (that the public entity cannot use). The 179D tax deduction does not apply to other non-tax paying entities, including but not limited to NGOs or churches, unless there exists an energy-as-a-service agreement that is owned by a tax paying company.

Benefit

Claim a federal deduction for energy-efficient commercial building work; on tax-exempt owners' projects it may be allocated to the project's designers.

ROI

Median ranges from 5:1 to 20:1.

When you benefit

Federal tax benefit realized by a reduction in federal tax payments or, in the case of Net Operating Losses, in the year(s) in which the loss created by the deduction is applied.

What it costs

See ROI.

When you pay

Provider dependent. Typical arrangements include (1) Full payment up front, (2) Progress payments, and (3) Full payment upon completion. Depending on the time of year, payments usually occur before benefit is realized.

Your commitment

Provide service provider with building drawings and specifications, costs associated with the purchase or construction of the building, allow for a site visit and access to building utility systems which typically take less than a day (requires a contact/representative on site), and contact with tax preparer.

Documents to gather

• The signed allocation letter from the tax-exempt building owner, if claiming as the designer
• Construction drawings or specifications for the envelope, HVAC, or lighting work
• Certified payroll or wage records, where prevailing wage applies
• The energy model output, if one was produced
• Placed-in-service documentation for each building

Risks to know

This is a relatively low risk tax position since a certified engineer is required for sign off. Low audit rates and easy to prove if audited.

When risks arise

This tax deduction is not currently a red flag to the IRS so audits of the 179D Deduction would most likely happen, if at all, 2-3 years from the date filed.

The process

Provide documentary information listed above, arrange and execute site visit, service provider calculates benefit (and maybe delivers a report) and will have an engineer certified in this deduction sign off, then the deduction is included in the tax return and filed. A change in accounting method form can be included in the current year tax return to claim benefits from prior tax years.

Common industries

Manufacturing and Commercial Development. Not restricted to any specific industry, just need an energy efficient building.

Further research

(i) United States Code, 26 USC §179D (ii) Consolidated Appropriations Act 2021 makes the law permanent. (iii) There are various Internal Revenue Bulletins, Public Laws, IRS Memoranda, and IRS Notices that update and change the provisions of the original law.