Energy Efficient Commercial Buildings Deduction: Rates and Sunset

The energy efficient commercial buildings deduction, known by its tax code section as 179D, lets owners of qualifying commercial buildings deduct the cost of energy-saving improvements to lighting, HVAC, hot water, and building envelope systems. For 2025, the deduction runs from $0.58 up to $5.81 per square foot, depending on how much energy the project saves and whether it meets federal labor rules. A law signed on July 4, 2025 set an end date: the deduction does not apply to any property whose construction begins after June 30, 2026.¹²

What the Deduction Is Worth

For property placed in service in 2023 or later, the deduction is calculated per square foot and rises with the level of energy savings. The base rate starts at $0.50 per square foot for a 25 percent reduction in energy and power costs, and climbs by $0.02 for each additional percentage point of savings, up to $1.00 per square foot at 50 percent savings. Those figures are adjusted for inflation each year.¹

Projects that meet prevailing wage and registered apprenticeship requirements receive five times the base amount. The inflation-adjusted ranges are:

2023: $0.54 to $1.07 per square foot (base), or $2.68 to $5.36 with the labor bonus.
2024: $0.57 to $1.13 per square foot (base), or $2.83 to $5.65 with the labor bonus.
2025: $0.58 to $1.16 per square foot (base), or $2.90 to $5.81 with the labor bonus.
2026: $0.59 to $1.19 per square foot (base), with corresponding multiples.³

The deduction can never exceed the actual cost of the property installed. It is also capped by the total 179D deductions already claimed on the same building over the prior three tax years, or four years for a deduction allocated to a designer. That rolling limit replaced the old lifetime cap, so the same building can generate deductions on a recurring cycle as new improvements are made.⁴

One more accounting point: when you claim the deduction, you must reduce the tax basis of the energy efficient property by the deduction amount. That keeps the same dollars from being recovered a second time through regular depreciation.⁵

Which Buildings and Improvements Qualify

The property has to be depreciable, located in the United States, and fall within the scope of ASHRAE/IES Standard 90.1, the industry benchmark for commercial building energy performance. Only four categories of systems count toward the deduction: interior lighting, heating ventilating and air conditioning (HVAC), service water heating, and the building envelope. Other equipment and process loads do not qualify.¹⁴

The installed improvements must be certified to cut total annual energy and power costs by at least 25 percent compared to a reference building that just meets the applicable version of ASHRAE 90.1.¹ The version of the standard used as the yardstick depends on when the property is placed in service; buildings placed in service before January 1, 2027 are generally measured against ASHRAE 90.1-2007, and newer projects will be measured against progressively stricter editions.⁶

The list of eligible owners is broad. Private taxable businesses, federal, state, and local governments, Indian tribal governments, Alaska Native Corporations, and tax-exempt organizations such as nonprofits, religious institutions, and public universities can all be behind a qualifying building.⁵ Multifamily residential buildings are not explicitly excluded, provided they fall within the scope of ASHRAE 90.1 and the property is depreciable.

Prevailing Wage and Apprenticeship Rules

The five-times multiplier is where most of the money is, and it comes with real labor requirements. Every laborer and mechanic working on the construction, alteration, or repair of the building must be paid at least the locally prevailing wage set by the Department of Labor under the Davis-Bacon Act.⁷

A share of total labor hours also has to be worked by qualified apprentices from registered programs. The share is 12.5 percent for construction that began in 2023 and 15 percent for construction beginning in 2024 or later. Any contractor or subcontractor with four or more workers on the job must employ at least one qualified apprentice.⁷

Failures can be cured. If wages fall short, the taxpayer must pay the affected worker the difference plus interest and a $5,000 penalty per worker. Apprenticeship shortfalls cost $50 per deficient labor hour, rising to $500 per hour if the failure was intentional. There is a good-faith safe harbor for apprenticeship: if you requested apprentices from a registered program and were denied or got no response within five business days, the requirement is treated as met.⁷

Designer Allocation for Government and Tax-Exempt Buildings

Governments and tax-exempt organizations cannot use a deduction against income tax. Section 179D handles that by letting these owners allocate the deduction to the person primarily responsible for designing the energy efficient property. In practice, the architect, engineer, or design-build contractor claims the deduction on their own tax return.⁵

Before the Inflation Reduction Act, the allocation was limited to designers of government-owned buildings. The IRA extended it to all tax-exempt organizations, including nonprofits, religious institutions, private schools and colleges, and nonprofit hospitals.¹ The numbers can be substantial. One national engineering firm that designed HVAC systems for K-12 schools secured over $4 million in 179D deductions through district allocations.⁸ In another project, a Texas school district’s $1.8 million in eligible deductions produced more than $550,000 in cash-value tax savings for the designer, and the district cut energy costs by 51 percent.⁹

The Retrofit Pathway for Existing Buildings

The Inflation Reduction Act added a second route aimed at existing buildings. The Energy Efficient Commercial Building Retrofit Property deduction applies to buildings originally placed in service at least five years before a qualified retrofit plan is established.¹

Instead of projecting savings through modeling, the retrofit path uses measured data. The building’s site energy use intensity is documented for the year before the work, then measured again more than one year after the property is placed in service. If measured EUI drops by 25 percent or more, the deduction is available. A licensed architect or engineer must certify both the baseline and the post-retrofit figures.⁴¹⁰ Because of that one-year measurement window, retrofit deductions were not practically available for tax years ending on or before December 31, 2023.³

Certifying and Filing the Deduction

For projects using the modeling pathway, a qualified individual — a licensed engineer or contractor unrelated to the taxpayer — must certify that the installed property meets the applicable ASHRAE 90.1 energy savings requirements. The certification includes the building address, contact information, and a declaration of compliance.¹⁰

Energy modeling has to be run in software approved by the Department of Energy. DOE maintains the list of qualified programs, which includes tools such as DesignBuilder, EnergyPlus, and TRACE 3D Plus. The DOE’s own 179D Portal estimation tool cannot be used for certification.¹¹

Taxpayers claim the deduction by filing Form 7205, Energy Efficient Commercial Buildings Deduction, with their income tax return. The form asks for the building’s information, the placed-in-service date, the energy savings percentage, whether prevailing wage and apprenticeship requirements were met, and details on the certifying professional. If those labor requirements were satisfied, a supporting statement must be attached and records kept to substantiate compliance.³

Missed the deduction in a prior year? Building owners can generally pick it up without amending returns by filing Form 3115 to change accounting methods, using Designated Change Number 152, with the missed deduction captured through a Section 481(a) adjustment. Designers who received allocations from government entities cannot use that shortcut and must file amended returns instead.¹²¹³

The June 30, 2026 Termination

Section 70507 of Public Law 119-21, the One, Big, Beautiful Bill Act signed by President Trump on July 4, 2025, added a termination provision to Section 179D. The deduction does not apply to any property whose construction begins after June 30, 2026.²¹⁴

The statute does not include explicit grandfathering or transition rules for 179D beyond that construction-begins threshold.² The practical question for any project on the drawing board is whether construction can demonstrably begin on or before June 30, 2026. Projects that are already under construction or placed in service before that date remain eligible under the existing rules, including the inflation-adjusted amounts and the five-times multiplier for meeting the labor requirements.

The 179D termination sits alongside a broader rollback of Inflation Reduction Act energy incentives in the same law. The residential clean energy credit (Section 25D) and the home improvement credit (Section 25C) end for property placed in service after December 31, 2025; the new and used clean vehicle credits (Sections 30D and 25E) end for vehicles acquired after September 30, 2025; and the alternative fuel refueling credit (Section 30C) and new energy efficient home credit (Section 45L) share the June 30, 2026 deadline.¹⁵

1
IRS. Energy Efficient Commercial Buildings Deduction
2
U.S. Congress. Public Law 119-21
3
IRS. Instructions for Form 7205
4
U.S. Department of Energy. 179D Energy Efficient Commercial Buildings Tax Deduction
5
Cornell Law Institute. 26 U.S. Code Section 179D
6
IRS. Announcement 2024-24
7
IRS. FAQs About the Prevailing Wage and Apprenticeship Under the Inflation Reduction Act
8
ICS Tax, LLC. 179D Tax Deduction
9
NAESCO. 179D Energy Efficient Commercial Buildings Tax Deduction
10
IRS. IRC 179D Energy Efficient Commercial Buildings Practice Unit
11
U.S. Department of Energy. Qualified Software for Calculating Commercial Building Tax Deductions
12
IRS. Instructions for Form 3115
13
CLA (CliftonLarsonAllen). Real Estate Developers Can Retroactively Claim Energy Efficiency Deduction
14
Office of the Law Revision Counsel. 26 USC 179D
15
IRS. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under Public Law 119-21