Section 179D Before It Ends: The Building Energy Deduction
A per-square-foot deduction for energy-efficient commercial building systems, the prevailing-wage multiplier, the designer allocation, and the 2026 cut-off the 2025 law imposed.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Section 179D allows an immediate deduction, per square foot, for installing energy-efficient lighting, heating and cooling, or building envelope systems in a commercial building that cut energy costs by at least 25 percent against a reference standard. It is five times larger when prevailing wage and apprenticeship rules are met. It ends for projects beginning construction after June 30, 2026.
On this page
How does it work?
| Element | Rule |
|---|---|
| Qualifying property | Interior lighting, HVAC and hot water, and building envelope improvements on a U.S. building within the scope of ASHRAE Standard 90.1 — commercial buildings and residential buildings of four or more stories above grade |
| Energy savings test | At least 25 percent reduction in total annual energy and power costs versus the applicable reference building standard, certified by a qualified professional |
| Deduction amount | Lesser of the cost of the property or a per-square-foot cap that rises $0.02 per point of savings above 25 percent — $0.58 to $1.16 for taxable years beginning in 2025; $0.59 to $1.19 for 2026 |
| Prevailing wage and apprenticeship bonus | Five times the base amount if labor requirements were met during installation — $2.90 to $5.81 for 2025 and $2.97 to $5.94 for 2026, rising $0.12 per point |
| Basis | Reduced by the deduction taken |
| Who claims it | The building owner; a tenant that owns the improvements for tax purposes; or, for buildings owned by governments, tax-exempt entities, and tribal governments, the architect, engineer, contractor, or other designer to whom the owner allocates it |
| Frequency | Deductions taken on the same building in the prior three years (four for an allocated deduction) reduce the cap, so further improvements can support a new deduction later |
Why does the designer allocation matter?
A government or nonprofit owner pays no tax and cannot use the deduction, so the law lets it allocate the deduction to the designer. Architecture and engineering firms with public-sector work — schools, hospitals, municipal buildings — have claimed substantial deductions this way, with the owner's written allocation letter and a certification study.
What did the 2025 law change?
The deduction is terminated for property whose construction begins after June 30, 2026. Property whose construction began on or before that date can still qualify when placed in service later, because the cut-off turns on when construction begins, not when the building is finished. The companion Section 45L credit for energy-efficient new homes ended for homes acquired after June 30, 2026.
What does claiming it require?
An energy model and certification by a licensed engineer or contractor, documentation of the baseline, proof of prevailing wage compliance for the bonus amount, and — for allocated deductions — the owner's allocation. Retroactive studies on buildings placed in service in open years are possible for owners; for designers, allocations are generally obtained at the time of the project.
Frequently asked questions
Can a small office building qualify?
Yes, if the systems meet the savings test; the deduction is proportional to square footage, so small buildings produce small deductions.
Does it interact with bonus depreciation?
The deduction reduces the basis of the property; remaining basis is depreciated or expensed under the usual rules.
Can a tenant claim it on improvements it paid for?
Yes, to the extent the tenant owns the improvements for tax purposes.
Is there still time?
Only for property whose construction began on or before June 30, 2026; it can still be claimed for the year it is placed in service. Property whose construction began later does not qualify unless Congress acts again.
Official sources
The IRS explains: “It must be certified as being installed as part of a plan to reduce the total annual energy and power costs for the above systems by 25% or more in comparison to a reference building meeting the minimum requirements of Reference Standard 90.1.” — Internal Revenue Service, Energy efficient commercial buildings deduction, https://www.irs.gov/credits-deductions/energy-efficient-commercial-buildings-deduction
The IRS explains: “Calculate and claim the deduction under section 179D for qualifying energy efficient commercial building property placed in service during the tax year” — Internal Revenue Service, About Form 7205, Energy Efficient Commercial Buildings Deduction, https://www.irs.gov/forms-pubs/about-form-7205
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk coordinates the certification study and the allocation letter for projects that still qualify. See pricing or book a free fit call.
Cross-border taxes, handled in one place
U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
Book a free fit call