The section 179D deduction rewards owners, and in some cases the designers of buildings owned by governments and tax-exempt organizations, for energy efficient commercial building property. Public Law 119-21 ended it for property the construction of which begins after June 30, 2026. A client whose construction began on or before that date can still claim the deduction when the property is placed in service. Any project that breaks ground after that date cannot.
What the deduction is
Section 179D(a) allows a deduction for the cost of energy efficient commercial building property placed in service during the year, limited by section 179D(b). The cap for a building is the applicable dollar value times the square footage, reduced by deductions taken for the building in the three prior years. The property must be depreciable, installed on or in a building located in the United States and within the scope of Reference Standard 90.1, installed as part of the interior lighting systems, the heating, cooling, ventilation and hot water systems, or the building envelope, and certified as installed under a plan designed to reduce total annual energy and power costs of those systems by 25 percent or more against a reference building meeting Reference Standard 90.1. The calculations must be prepared by qualified computer software (section 179D(d)(2)).
Dollar values for 2026
The statutory base values are inflation adjusted. For taxable years beginning in 2026, Revenue Procedure 2025-32 sets:
- Base rate: $0.59 per square foot, increased by $0.02 for each percentage point of certified energy cost reduction above 25 percent, but not above $1.19.
- Increased rate: $2.97 per square foot, increased by $0.12 for each percentage point above 25 percent, but not above $5.94.
The increased rate applies when the prevailing wage requirement in section 179D(b)(4) is met, and the apprenticeship requirement in section 179D(b)(5) is met, for the installation. Prevailing wage means laborers and mechanics employed by the taxpayer or any contractor or subcontractor are paid wages not less than the prevailing rates for similar construction in the locality as determined by the Secretary of Labor. Rules similar to section 45(b)(7)(B) apply for correction and penalty. The statute also provides that property qualifies for the increased amount if installation begins before 60 days after the Secretary publishes guidance on those requirements.
The cutoff
Section 179D(i) provides that the section does not apply to property the construction of which begins after June 30, 2026. The Revenue Procedure notes that the OBBBA terminated 179D on that basis. The construction start date is a fact to document. Collect the building permit, the signed construction contract with the notice to proceed, and the first invoice for physical work, and agree them to the date the client uses.
Worked example
A client places a 100,000 square foot warehouse in service in 2026. Construction began in March 2026. The certified energy cost reduction is 40 percent, and the wage and apprenticeship requirements were met.
- Percentage points above 25: 40 minus 25, or 15.
- Increased rate: $2.97 plus 15 times $0.12, which is $2.97 plus $1.80, or $4.77.
- Maximum deduction: $4.77 times 100,000 square feet, or $477,000.
Without the wage and apprenticeship compliance, the rate is $0.59 plus 15 times $0.02, or $0.89, and the maximum is $89,000. The difference of $388,000 is the value of the labor compliance records.
Designers and the retrofit alternative
When property is installed on or in a building owned by a specified tax-exempt entity, which includes the United States, a State or political subdivision, an Indian tribal government, an Alaska Native Corporation and any organization exempt from tax, section 179D(d)(3) directs the Secretary to allow the deduction to be allocated to the person primarily responsible for designing the property. That person is treated as the taxpayer.
Section 179D(f) offers an alternative deduction for energy efficient building retrofit property, taken in the year of the qualifying final certification. It applies to a building originally placed in service at least five years before the retrofit plan is established. The plan, prepared by a licensed architect or engineer, must be expected to cut the building's energy use intensity by 25 percent or more from the baseline, and the final certification qualifies only if the certified energy use intensity is not more than 75 percent of the baseline. The termination in section 179D(i) turns on when construction of the property begins, so the same start-date evidence applies to both deductions.
Second worked example: prior deductions and basis
A client places in service a 50,000 square foot office building with a certified 30 percent energy cost reduction. The wage and apprenticeship requirements were not met, and construction began in 2025.
- Percentage points above 25: 5.
- Rate: $0.59 plus 5 times $0.02, or $0.69.
- Ceiling before prior deductions: $0.69 times 50,000, or $34,500.
- Prior deductions for the building in the three preceding years: $10,000, which reduce the ceiling under section 179D(b)(1)(B), leaving $24,500.
The deduction is also limited to the cost of the qualifying property. If that cost is $20,000, the deduction is $20,000, not $24,500. Under section 179D(e) the basis of the property is reduced by the deduction allowed, so the depreciable basis falls by the same $20,000.
Common errors
- Testing the June 30, 2026 cutoff against the placed-in-service date instead of the date construction begins.
- Applying the increased rate without payroll evidence from every contractor and subcontractor.
- Forgetting the prior three years of deductions on the same building in the ceiling.
- Taking the deduction on the full project cost when only lighting, HVAC, hot water or envelope property qualifies.
- Not reducing basis, so depreciation is overstated.
- Using last year's dollar values. The values are adjusted annually under section 179D(g).
Engagement checklist
- Confirm the construction start date against the permit and contract.
- Obtain the qualified individual's certification and energy modeling report.
- Collect certified payrolls from every contractor and subcontractor, as covered in Davis-Bacon certified payroll records.
- Confirm the cost basis of the qualifying systems and the prior three years of deductions for the building.
- Coordinate with the depreciation analysis, because the 179D deduction reduces the basis of the property it covers.
Sources
- Legal Information Institute, 26 U.S.C. 179D, Energy efficient commercial buildings deduction: https://www.law.cornell.edu/uscode/text/26/179D
- Internal Revenue Service, Revenue Procedure 2025-32 (2026 dollar values and the 179D termination note): https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
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