Section 179D Deduction: What It Covers and When It Ends

The section 179D deduction, the energy efficient commercial buildings deduction, is often searched as the "179D tax credit." It is a deduction: the owner of a commercial building, or the designer of a building owned by a government or tax-exempt entity, deducts the cost of qualifying lighting, HVAC and hot water, or building envelope property, up to a per-square-foot ceiling that rises with certified energy savings. Congress ended it in 2025 for property whose construction begins after June 30, 2026. What follows covers what qualifies, the 2026 amounts, the wage and apprenticeship rules that multiply them, the retrofit alternative, designer allocations, certification, and Form 7205, from section 179D, Rev. Proc. 2025-32 and the Form 7205 instructions (Rev. December 2025).

What the 179D deduction covers

Section 179D(c)(1) defines energy efficient commercial building property by four conditions. It must be depreciable (or amortizable) property. It must be installed on or in a building in the United States that is within the scope of ASHRAE Reference Standard 90.1. It must be part of the interior lighting systems, the heating, cooling, ventilation and hot water systems, or the building envelope. And it must be certified as installed under a plan designed to reduce the building's total annual energy and power costs for those systems by 25% or more, compared with a reference building that just meets Standard 90.1. The IRS page on the deduction, updated July 31, 2026, notes which edition applies: Standard 90.1-2007 for buildings that began construction before January 1, 2023 or are placed in service before January 1, 2027, and Standard 90.1-2019 for buildings that began construction on or after January 1, 2023 and place the property in service on or after January 1, 2027 (Announcement 2024-24).

The deduction under section 179D(a) equals the cost of the property placed in service during the year, but section 179D(b) caps it at the applicable dollar value times the building's square footage, minus the section 179D deductions taken for the same building in the 3 preceding tax years (4 years where the deduction was allocated to someone other than the owner). Under prior law every earlier deduction counted against the cap for the life of the building; for property placed in service after 2022 only that 3- or 4-year window counts.

The 2026 amounts per square foot

The statute sets $0.50 rising by $0.02 per percentage point of savings above 25%, capped at $1.00, and five times those figures ($2.50, $0.10 and $5.00) for property that meets the prevailing wage and apprenticeship requirements. Section 179D(g) indexes every dollar amount for tax years beginning after 2022. Rev. Proc. 2025-32, section 4.25, gives the 2026 values: $0.59, $0.02 and $1.19 for the base deduction, and $2.97, $0.12 and $5.94 for the increased deduction. The Form 7205 instructions add that the base amount tops out at 55% savings and the 2025 base ran from $0.58 to $1.16.

At 40% certified savings, the increased rate is $2.97 plus 15 times $0.12, or $4.77 per square foot. Across 50,000 square feet that caps the deduction at $238,500; if the qualifying lighting and HVAC work cost $200,000, the deduction is $200,000.

Prevailing wage and apprenticeship: the five-times multiplier

The increased amount depends on section 179D(b)(4) and (5). Laborers and mechanics employed by the taxpayer, or by any contractor or subcontractor, in installing the property must be paid at least the prevailing rates for similar construction in the locality as most recently determined by the Secretary of Labor under the Davis-Bacon rules, with correction and penalty rules borrowed from section 45(b)(7)(B). The apprenticeship rules of section 45(b)(8) apply too: not less than the applicable percentage of total labor hours on the installation must be performed by qualified apprentices. The instructions say the increased amount is also available where installation began before January 29, 2023, which corresponds to the statute's 60-day window after the IRS published its wage and apprenticeship guidance.

The paperwork is not optional. The Form 7205 instructions require a statement attached to a timely filed return (extensions included) showing that the wage and apprenticeship requirements were met, and records, including books of account for the work performed by the laborers who installed the property, kept to support it.

The alternative deduction for retrofits

Section 179D(f) offers an election for existing buildings. The building must have been placed in service at least 5 years before a qualified retrofit plan is established. That plan is a written document prepared by a qualified professional, a licensed architect or licensed engineer, specifying changes expected to cut the building's energy use intensity by 25% or more from a baseline the professional certifies within the year before the property is placed in service. More than a year after the property is placed in service, the professional certifies the energy use intensity again; if it is 75% or less of the weather-adjusted baseline, that is the qualifying final certification, and the deduction is allowed in the year that includes it.

The amount is the lesser of the per-square-foot maximum, computed on energy use intensity in place of energy and power costs, or the aggregate adjusted basis of the retrofit property placed in service under the plan. Because the second certification comes more than a year after the property is placed in service, the retrofit deduction always lands in a later tax year than the work. Property counted under this election is excluded from the regular deduction for the same building.

Designers of government and tax-exempt buildings

A government or a tax-exempt organization pays no income tax, so a deduction is worthless to it. Section 179D(d)(3) allows the deduction for property installed in a building owned by a specified tax-exempt entity to be allocated to the person primarily responsible for designing the property, who is then treated as the taxpayer. Since 2023 the list of owners covers the United States, any state or political subdivision and their agencies, Indian tribal governments, Alaska Native Corporations, and any organization exempt from tax under chapter 1. The Form 7205 instructions require the allocation to be in writing and to satisfy Notice 2008-40, section 3.04; the designer identifies itself and the allocation in Parts I and IV of the form. Similar allocation rules apply to the retrofit deduction under section 179D(f)(8)(B)(ii).

Certification and Form 7205

Section 179D(d)(5) puts the certification in the hands of qualified individuals recognized by an organization the IRS certifies, with inspection and testing procedures. The Form 7205 instructions spell out who qualifies: an individual not related to the person claiming the deduction, properly licensed as a professional engineer or contractor in the jurisdiction where the building is located, who has represented in writing that they hold the qualifications to certify under Notice 2006-52, section 4, or to perform its inspection and testing. The energy model must be run on qualified computer software, and every certification must include an explanation to the building owner of the building's energy efficiency features and projected annual energy costs.

Form 7205 (Rev. December 2023) is filed with the return for property placed in service after 2022. Part I lists each building and whether the filer is the owner or a designer; Part II computes the deduction, applying the per-square-foot cap and the prior-year reduction; Part III records the qualified individual; Part IV records the designer allocation. The line 3 total also goes on the return itself; the instructions give Form 1120, line 25, as the example. The deduction reduces the property's basis under section 179D(e), so a cost segregation study that separates the building's components has to be reconciled with it. Solar and other energy property is handled by the credit in the investment tax credit guide, not by section 179D.

The June 30, 2026 cutoff

P.L. 119-21, section 70507, added section 179D(i): "This section shall not apply with respect to property the construction of which begins after June 30, 2026." Three things follow from the wording. The test is the start of construction of the property, not the placed-in-service date. Property whose construction began on or before June 30, 2026 stays inside the section as written, even if it is finished and placed in service later. And the statute itself does not define when construction begins for this purpose; the IRS FAQ of August 21, 2025 (FS-2025-05) restates the date without adding a definition, and Rev. Proc. 2025-32, section 2.11, and the Form 7205 instructions repeat it. Owners and designers with 2026 projects should keep contracts, permits and the dates physical work started with the certification file.

Sources: 26 U.S.C. 179D; P.L. 119-21, section 70507; IRS, Rev. Proc. 2025-32, sections 2.11 and 4.25; IRS, Instructions for Form 7205 (Rev. December 2025); IRS, Form 7205 (Rev. December 2023); IRS, Energy efficient commercial buildings deduction; IRS, FS-2025-05, FAQs on the accelerated termination of energy provisions under P.L. 119-21. Rules and figures checked against these sources on September 26, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.