When the President signed the Inflation Reduction Act of 2022 into law, it marked a pivotal moment for the Section 179D—Energy Efficient Commercial Buildings Deduction. This legislation significantly expanded the incentive for commercial building owners, designers, and contractors, making it more powerful and accessible than ever before.

As of mid-2025, it’s crucial to understand how these changes have evolved with subsequent IRS guidance and inflation adjustments. Calvetti Ferguson has outlined the most impactful updates and how they continue to benefit eligible taxpayers.

Enhanced Deduction Rates: Up to $5.81 Per Square Foot (2025)

One of the most significant and beneficial changes introduced by the Inflation Reduction Act was the substantial increase in the maximum deduction amount.

• Pre-IRA (2022 and Prior): The maximum deduction was $1.88 per square foot (adjusted for inflation from an initial $1.80/sq ft).
• Post-IRA (2023 and Beyond): The IRA dramatically increased the potential deduction to a base of $2.50 per square foot, with a maximum of $5.00 per square foot for projects meeting specific energy savings thresholds and prevailing wage and apprenticeship requirements.

Current Inflation-Adjusted Rates: These rates are adjusted annually for inflation. For properties placed into service in 2025, the maximum deduction can reach up to $5.81 per square foot.

Tiered Deduction Structure (for properties placed in service in 2023 and later): The IRA replaced the previous partial deduction with a more granular sliding scale, offering greater benefits based on energy savings:

• Base Deduction (without Prevailing Wage & Apprenticeship):
  • Begins at $0.58 per square foot for projects achieving at least 25% energy savings compared to ASHRAE 90.1-2007 (the baseline standard).
  • Increases by $0.02 per square foot for each percentage point of energy savings above 25%, up to a maximum of $1.16 per square foot for 50% or greater energy savings (for 2025).
• Maximized Deduction (with Prevailing Wage & Apprenticeship):
  • Begins at $2.90 per square foot for projects achieving at least 25% energy savings compared to ASHRAE 90.1-2007.
  • Increases by $0.12 per square foot for each percentage point of energy savings above 25%, up to a maximum of $5.81 per square foot for 50% or greater energy savings (for 2025).

Critical Note: Prevailing Wage and Apprenticeship Requirements

Projects must adhere to strict prevailing wage and apprenticeship requirements to qualify for the significantly higher deduction rates (the “Maximized Deduction” pathway). This involves ensuring that all laborers and mechanics on the project are paid no less than the prevailing wages determined by the Department of Labor for the specific locality and type of construction. Additionally, a minimum percentage of total labor hours must be performed by qualified apprentices from a registered apprenticeship program (e.g., 15% for projects beginning in 2024 or later). Non-compliance with these rules results in the significantly lower “Base Deduction.”

Expanded Eligibility for Tax-Exempt Entities to Allocate Deductions

Prior to the Inflation Reduction Act, only government building owners could allocate the Section 179D deduction to the designers of their energy-efficient buildings. The IRA significantly expanded this, allowing a broader range of tax-exempt entities to allocate the deduction.

This crucial change now enables Indian tribal governments, Alaska Native Corporations, and other tax-exempt organizations to allocate the Section 179D deduction to the eligible designers and contractors responsible for energy-efficient improvements on their properties. This includes, but is not limited to, religious organizations, educational institutions (public and private schools, universities), hospitals, charitable organizations, and other 501(c)(3) non-profits.

This expansion immensely broadens the tax savings opportunities for the design and construction industry, allowing designers and contractors to benefit from their work on buildings that do not directly pay federal taxes.

Streamlined Deduction Calculation Methodology

The old deduction calculation method, which often involved a flat $0.60 per square foot partial deduction, has been replaced by a more beneficial sliding scale calculation (as detailed in the “Enhanced Deduction Rates” section above). This new methodology provides a more precise and often higher benefit to the taxpayer, directly correlating the deduction amount to the percentage of energy savings achieved.

Furthermore, the IRA allows for recertification every three years for existing buildings that undergo additional energy-efficient upgrades. This means building owners and designers can claim the Section 179D deduction multiple times for the same building as they continue implementing energy-saving improvements, turning it into an ongoing incentive rather than a one-time benefit.

Partner with Calvetti Ferguson for Section 179D Expertise

Navigating the nuances of Section 179D, especially with the latest Inflation Reduction Act changes and annual inflation adjustments, requires specialized knowledge. Calvetti Ferguson is uniquely positioned with both licensed CPAs and Professional Engineers (PEs) on staff, ensuring comprehensive expertise in both the tax and technical aspects of these complex incentives.

Our team has the knowledge and experience to:

• Conduct the required quantitative and qualitative energy assessments.
• Provide IRS-compliant certifications.
• Prepare all necessary documentation for submission.
• Help you understand and meet prevailing wage and apprenticeship requirements.

The result is a turnkey process that can unlock significant federal tax savings and improve the Return on Investment (ROI) for your energy-efficient building projects. If you are interested in learning more about how your company can qualify for the enhanced Section 179D benefits, contact us today to speak with an expert.

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