Energy Efficient Commercial Buildings Deduction (Section 179D)
Internal Revenue Service
Up to $5.65/sq ft (2024)
Deduct up to $5.65/sqft for efficient buildings
A federal tax deduction of up to $5.65 per square foot (inflation-adjusted for 2024) for commercial buildings that achieve at least 25% energy savings over ASHRAE baseline. Buildings meeting prevailing wage and apprenticeship requirements qualify for the full rate ($2.50–$5.00/sqft base, inflation-adjusted to $2.68–$5.65/sqft in 2024). A major IRA expansion in 2023 allows tax-exempt building owners — governments, nonprofits, schools, and tribes — to allocate the deduction to the architect, engineer, or contractor primarily responsible for the energy-efficient design, giving design firms access to a credit previously unavailable to them on public/nonprofit projects.
- Funding type
- Tax Credit
- Level
- Federal
- Amount
- 2024 inflation-adjusted rates: $0.58–$1.16/sqft (base, 25–50% energy savings without prevailing wage) or $2.90–$5.81/sqft (prevailing wage/apprenticeship compliant). Base increments: +$0.02/sqft per percentage point above 25% energy savings; prevailing wage increment: +$0.10/sqft. Pre-2023 (before IRA): flat cap of $1.80/sqft. Note: specific 2024 IRS-published amounts vary slightly by year; use IRS Rev. Proc. for applicable tax year.
- Realistic amount
- A 100,000 sqft office building achieving 50% energy savings with prevailing wage compliance earns a ~$581,000 deduction…
- Deadline
- Ongoing — deduction claimed on annual tax return for the year the qualifying property is placed in service. No expiration date — permanent provision with inflation adjustment.
- Status
- active
- States
- Nationwide
- Payment model
- tax offset
Who qualifies
- Qualifying property: interior lighting systems, heating/cooling/ventilation/hot water systems (HVAC), or building envelope of a commercial building located in the United States
- Building must achieve at least 25% annual energy and power cost reduction compared to ASHRAE 90.1 reference standard
- Full deduction rate requires prevailing wage and apprenticeship compliance for all installation workers
- Eligible claimants: building OWNERS (for-profit and tax-paying entities) for property they own and use in their business
- DESIGNER allocation (IRA expansion, 2023+): Tax-exempt entities (federal, state, local governments; §501(c) nonprofits; Indian tribal governments; Alaska Native Corporations) may allocate the deduction to the person 'primarily responsible for designing the property' — typically the architect of record, mechanical/electrical engineer, or general contractor
- Each eligible system (lighting, HVAC, envelope) can qualify separately — partial deductions are available for systems meeting the 25% threshold even if the whole building doesn't
- Prior-year deductions reduce the current-year maximum (basis reduction carries forward)
- Property must be depreciable or amortizable under the Internal Revenue Code
What it covers
Eligible expenses
- Interior lighting systems (fixtures, controls, LEDs replacing older lighting)
- HVAC systems (chillers, boilers, heat pumps, air handlers, controls, hot water heaters)
- Building envelope improvements (insulation, windows, doors, roofing contributing to energy savings)
- Integrated energy management systems that control qualifying equipment
- Design and engineering costs capitalized into the energy system cost basis (for owner deductions)
Ineligible expenses
- Residential buildings (single-family homes, apartments with fewer than 4 floors — those use §25C/§25D residential credits)
- Buildings not located in the United States
- Equipment achieving less than 25% energy/power cost reduction vs ASHRAE baseline (no partial credit below threshold)
- Systems not covered by the three eligible categories (lighting, HVAC, envelope) — e.g., renewable energy systems (those qualify under §48 ITC instead)
- Buildings already receiving equivalent deductions under prior years that exhaust the per-sqft cap
How to apply
-
1
Commission energy modeling certification
Engage a qualified energy modeling engineer to perform energy analysis against ASHRAE 90.1 baseline. The certification must demonstrate ≥25% energy/power cost reduction. For designer allocations, the tax-exempt building owner commissions the certification and executes a written allocation agreement identifying the allocated person.
~20 hrs
-
2
Obtain qualified inspected and tested certification
A qualified individual (licensed engineer or contractor) must inspect and test the property to certify compliance. IRS Notice 2006-52 and subsequent guidance detail certification requirements. The certification must be in writing and include the energy savings calculation methodology.
~8 hrs
-
3
Document prevailing wage compliance (for maximum rate)
If claiming the full prevailing wage rate (5x the base rate), maintain certified payroll records for all installation workers, confirm Davis-Bacon wage rates for the county, and document apprenticeship ratios. Compliance is required for construction, alteration, and repair through the placed-in-service date.
~6 hrs
-
4
Calculate deduction amount and basis impact
Multiply the qualified square footage by the applicable deduction rate (base or prevailing wage, adjusted for inflation per IRS Rev. Proc. for the applicable year). Identify any prior-year 179D deductions for the same building that reduce the current-year cap. Reduce the property's depreciable tax basis by the deduction amount.
~4 hrs
-
5
File with tax return and maintain documentation
Report the deduction on the applicable tax form (Schedule C, Form 1120, Form 1065, etc.). Attach the certification documentation. Maintain records for at least 3 years after filing. Designer allocatees must retain the written allocation from the tax-exempt building owner.
~4 hrs
Industry & certifications
NAICS codes: 236220, 541310, 541330, 531120, 721110
Architects designing government or nonprofit buildings are now eligible for the deduction via allocation — a new revenue stream post-IRA. One LEED-certified school design can yield $200K+ in deductions per project with prevailing wage documentation.
Deadline & timing
The IRA expanded §179D starting January 1, 2023. Pre-2023 rules (flat $1.80/sqft cap, government buildings only for designer allocation) applied to property placed in service before that date. ASHRAE reference standard: projects placed in service before 2027 reference ASHRAE 90.1-2007; 2027 and later reference ASHRAE 90.1-2019. Verify applicable ASHRAE year against placed-in-service date.
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Last reviewed 2026. GrantCompass is an independent funding-discovery tool and is not affiliated with any government agency. Always confirm details on the official program page.