Guide to Section 179D for Construction Companies

Most construction companies focus on Section 179 depreciation when tax season rolls around. But there’s another “179” that could put significantly more money back in your pocket. Section 179D offers deductions of up to $5.81 per square foot for energy-efficient commercial building projects, though the deduction is capped at the cost of the energy-efficient property placed in service. The catch? Construction must begin before June 30, 2026 or the opportunity disappears entirely.

What Is Section 179D?

Section 179D, known as the Energy Efficient Commercial Building Deduction, provides federal tax deductions for installing energy-efficient property in commercial buildings. Originally created by the Energy Policy Act of 2005, this incentive was made permanent in 2020 and significantly expanded by the Inflation Reduction Act of 2022.

The U.S. Department of Energy confirms that construction projects meeting prevailing wage and apprenticeship requirements can qualify for deductions ranging from $2.90 to $5.81 per square foot for tax year 2025, depending on the level of energy efficiency achieved. Projects that don’t meet these labor requirements still qualify for a base deduction of $0.58 to $1.16 per square foot.

Buildings must demonstrate energy cost savings of at least 25% compared to a reference building meeting ASHRAE Standard 90.1 minimum requirements. The qualifying improvements fall into four categories: 

1. Interior lighting systems
2. HVAC systems
3. Hot water systems
4. The building envelope

A qualified individual, typically a licensed professional engineer in the state where the building is located, must certify that the energy savings thresholds have been met.

For a mid-sized contractor working on commercial projects, these numbers add up quickly. A general contractor completing a 50,000-square-foot office building with high-efficiency HVAC and lighting systems that meets the 50% energy reduction threshold and satisfies prevailing wage requirements could generate a deduction of approximately $290,000 on that single project, subject to the cost cap.

Who Qualifies for Section 179D

Commercial building owners who install qualifying energy-efficient property can claim the deduction directly on their tax returns. This applies to property placed in service as part of new construction or building upgrade projects.

The more significant opportunity for many contractors lies in the designer allocation provision. When a building is owned by a tax-exempt entity, the owner cannot use the deduction because they don’t pay federal income taxes. However, they can allocate the deduction to the designer primarily responsible for creating the technical specifications for the energy-efficient improvements. Qualifying designers include architects, engineers, contractors and energy service providers.

Tax-exempt entities eligible to allocate the Section 179D deduction include:

• Federal
• State
• Local government agencies
• Indian tribal governments
• Alaska Native corporations
• Nonprofit organizations
• Religious institutions
• Hospitals
• Private schools
• Universities

If your construction company designs or performs design-build work on schools, municipal buildings, fire stations, courthouses, nonprofit hospitals or university facilities, you may be eligible to receive the allocated deduction.

Design-build contractors often have the strongest claims because they maintain primary responsibility for both design and construction. General contractors engaged solely in construction without design input typically don’t qualify unless their contract specifically requires participation in the design process.

The June 2026 Deadline You Cannot Ignore

Construction companies considering Section 179D should be aware of an urgent timeline. The One Big Beautiful Bill Act, signed into law on July 4, 2025, establishes a firm termination date for this deduction. According to the IRS, the Section 179D deduction will not be allowed with respect to any property the construction of which begins after June 30, 2026.

This deadline is tied to the beginning of construction, not when the building is placed in service. Projects that break ground before July 1, 2026 remain eligible for the deduction even if construction continues into 2027 or beyond. However, any project where construction starts on or after July 1, 2026 will be permanently ineligible, regardless of how energy-efficient the building may be.

If you have projects in the pipeline that could qualify for Section 179D, accelerating the construction start date could preserve substantial tax benefits. For a large commercial project, this could mean the difference between claiming hundreds of thousands of dollars in deductions or receiving nothing.

How to Claim the Deduction

Claiming Section 179D requires careful documentation. The first step is completing an energy modeling analysis using IRS-approved software. This analysis compares the building’s energy performance against a reference building that meets ASHRAE Standard 90.1 requirements. The energy model must demonstrate that the building achieves at least 25% energy cost savings to qualify for the base deduction.

Certification by a qualified individual is mandatory. This must be a licensed professional engineer or contractor in the state where the building is located who can certify that the required energy savings have been achieved.

For designers claiming allocated deductions from tax-exempt building owners, securing an allocation letter is essential. This letter documents the building owner’s decision to transfer the tax benefit to the designer and must include specific information about the property, the deduction amount and the parties involved.

The deduction is claimed using IRS Form 7205. For those seeking the enhanced deduction rates, documentation of compliance with prevailing wage and apprenticeship requirements is also necessary.

Build Your Section 179D Strategy Now

The Section 179D deduction represents one of the most substantial tax-saving opportunities available to construction companies today. However, the window to claim this benefit is closing. Construction must begin before June 30, 2026 for projects to qualify, making proactive planning essential.

Whether you’re a commercial contractor building office complexes, a design-build firm working on municipal facilities or a general contractor with government projects in your portfolio, Section 179D deserves a place in your tax planning strategy. At James Moore, our construction industry specialists help contractors identify Section 179D opportunities and ensure proper documentation to support your deduction claims. Contact a James Moore professional today to discuss how Section 179D and other construction tax strategies can benefit your company before this valuable deduction expires.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.