Section 179D Tax Deduction

The Section 179D tax deduction offers a significant federal tax incentive for companies involved in designing and constructing energy-efficient systems within commercial buildings. This powerful deduction encourages sustainable building practices by rewarding investments in key building systems: interior lighting, HVAC (heating, cooling, and ventilation) and hot water, and the building envelope.

Understanding the Deduction Rates

The deduction rates for Section 179D have evolved, significantly increasing with the Inflation Reduction Act of 2022.

• For properties placed into service in 2022 and prior: A tax deduction of up to $1.80 per square foot was available for installations achieving 50% or greater energy savings compared to a baseline standard. Upgrades resulting in less energy savings could still claim a $0.60 per square foot deduction. (Note: Rates for 2021 and 2022 were adjusted for inflation, resulting in slightly higher deduction rates.)
• For properties placed into service in 2023 or later: The potential deduction dramatically increased due to the Inflation Reduction Act of 2022.
  • Achieving 50% or greater energy savings can now result in a tax deduction of up to $5.00 per square foot. (Note: This maximum rate is subject to annual inflation adjustments; for 2025, it is expected to be up to $5.81 per square foot, as seen in the blog post.)
  • For upgrades resulting in at least 25% energy savings, a base deduction of $2.50 per square foot is available, with an additional $0.10 per square foot for every 1% increase in savings above 25% (up to the maximum).
  • Crucially, to qualify for these maximum rates, projects must meet prevailing wage and apprenticeship requirements. If these requirements are unmet, the base deduction is significantly lower (e.g., $0.50 per square foot for 25% savings, with an additional $0.02 per square foot for every 1% increase, up to $1.00 per square foot, also subject to inflation).

Qualifying Projects & Systems

Section 179D applies to a wide range of projects, including new construction, renovations, and additions to commercial or high-rise residential buildings (typically four stories or taller).

To qualify, energy-efficient building systems must be installed that reduce the property’s energy profile compared to a baseline standard. This baseline standard, known as ASHRAE 90.1, changes depending on the year the project was completed, ensuring that projects meet contemporary energy efficiency benchmarks.

Eligible Systems include:

• Interior Lighting Systems: Upgrades to LED lighting, advanced lighting controls (occupancy sensors, daylight harvesting), and other energy-efficient lighting solutions.
• HVAC (Heating, Cooling, and Ventilation) and Hot Water Systems: Installation of high-efficiency boilers, chillers, furnaces, heat pumps, energy recovery ventilators, and improved domestic hot water systems.
• Building Envelope Improvements: Enhancements to the building’s exterior shell, such as insulation (walls, roofs), high-performance windows, and doors that reduce heat gain or loss.

Who Can Claim the Section 179D Deduction?

The Section 179D deduction is broadly accessible to a variety of entities. While commercial building owners can directly claim the deduction for their qualifying projects, the benefits extend significantly to those in the design and construction industries, especially for projects involving government and non-profit entities.

Eligible parties include:

• Commercial Building Owners: For energy-efficient improvements to their owned properties.
• Architects: Who design energy-efficient building components.
• Engineers: (Mechanical, Electrical, Structural) who design energy systems.
• General Contractors & Construction Managers: Particularly those involved in the design or technical specifications of energy-efficient systems.
• Energy Service Providers (ESCOs): Firms that implement energy-saving measures.
• Specialty Contractors: (e.g., Mechanical, Electrical, Glazing) if they are responsible for the technical specifications of qualifying systems.

Important Note for Government and Non-Profit Projects: Since government and non-profit entities are non-taxable, they cannot directly benefit from the deduction. Instead, they can allocate the Section 179D deduction to the primary designers (architects, engineers, contractors, etc.) responsible for the energy-efficient improvements. This is a powerful incentive for design and construction firms working on public and tax-exempt buildings (e.g., schools, hospitals, municipal buildings, religious institutions).

Claiming the Section 179D Deduction with Calvetti Ferguson

Navigating the complexities of the Section 179D deduction, including eligibility, energy modeling, and IRS compliance, requires specialized expertise. At Calvetti Ferguson, we streamline this process, enabling clients across various industries to maximize their tax savings.

Our team comprises seasoned Professional Engineers (PEs) and accounting specialists who possess a deep understanding of both engineering principles and tax law. We conduct the required quantitative energy assessments and provide comprehensive certifications and documentation necessary for IRS submission.

Our Turnkey Process Includes:

1. Project Eligibility Evaluation: Analyzing project files and construction documentation to identify qualifying energy-efficient improvements and potential retroactive deductions from past projects.
2. Documentation & Allocation Management: Securing necessary allocation letters from non-taxable entities (if applicable) and ensuring a fully IRS-compliant study.
3. Technical Assessments & Energy Modeling: Performing required site visits by a Qualified Individual and developing an energy model comparison against ASHRAE 90.1 standards, leveraging a Qualified Individual for modeling and inspection.
4. Certification & Documentation Preparation: Certifying the improvements and preparing all IRS-compliant documentation, including IRS Form 7205.
5. Deduction Claiming & Compliance: Guiding you through the completion and filing of Form 7205, and navigating ongoing compliance to reduce tax liabilities, increase cash flow, and align your tax strategy with long-term energy and construction goals.

Section 179D is more than just a deduction—it’s a powerful tool for improving the Return on Investment (ROI) on energy-efficient building investments. Don’t leave money on the table. Contact Calvetti Ferguson today to learn how much you could claim.