Unlocking Tax Savings: A Look at the Section 179D Deduction for Commercial Construction

Are you in the construction industry, specifically working on commercial properties? Have you recently completed or are you planning energy-efficient improvements to a building? If so, there’s a valuable tax opportunity you absolutely should know about: the Section 179D deduction.

Think of the Section 179D deduction as a potential tax savings tool designed to reward you for making smart, energy-conscious choices in your commercial building projects. It’s a way the U.S. government incentivizes energy efficiency, and for qualifying projects, the benefits can be significant.

Here’s the exciting part: this deduction can translate into a reduction in your tax liability based on the square footage of the building where improvements were made. While the exact dollar amount per square foot can change, for 2025, it can be up to $5.81 per square foot for projects that meet certain energy efficiency targets and prevailing wage and apprenticeship requirements. Even without meeting those specific labor requirements, a valuable deduction of up to $1.16 per square foot is available for achieving a high level of energy savings.

That’s a substantial potential tax benefit!

What Kind of Energy-Efficient Improvements Qualify?

The Section 179D deduction applies to eligible property installed as part of a plan to reduce a building’s total annual energy and power costs. This typically includes improvements to key building systems such as:

• Interior Lighting Systems: Upgrading to more efficient lighting.
• Heating, Ventilation, and Air Conditioning (HVAC) Systems: Installing high-efficiency units or optimizing existing ones.
• Hot Water Systems: Improving the efficiency of water heating.
• Building Envelope: Enhancements to the building’s exterior that reduce energy loss (like insulation, windows, and roofing).

Let’s Look at a Practical Example:

Imagine you’ve just completed a 100,000 square foot commercial building project, and the HVAC and interior lighting systems you installed are highly energy efficient, meeting the necessary performance standards.

If your project qualifies for, say, a $2.00 per square foot deduction (this rate depends on the level of energy savings achieved, as mentioned, the rates for 2025 go up to $5.81 with certain requirements), that translates to a $200,000 deduction. That’s a significant reduction in taxable income, simply for incorporating energy-efficient elements that you may have already planned for or considered!

Who Can Benefit?

This deduction is primarily available to builders and Building Owner. However, if you are a designer (like an architect, engineer, or contractor) for energy-efficient systems installed in buildings owned by tax-exempt entities (such as government buildings, non-profits, or Native American tribal governments), you may also be able to allocate this deduction to yourself.

Important Considerations:

• Energy Savings Threshold: To qualify, your improvements must be certified to reduce the building’s total annual energy and power costs by at least 25% compared to a baseline building meeting the minimum requirements of a ASHRAE Standard 90.1 (the specific version depends on when construction began or the property was placed in service). Higher deductions are available for greater energy savings.
• Certification is Key: To claim the deduction, the energy efficiency of the improvements must be certified by a qualified individual, often using IRS-approved energy modeling software.
• The Dollar Amount Varies: As highlighted, the per-square-foot deduction amount is tiered based on the percentage of energy savings achieved and whether prevailing wage and apprenticeship requirements are met. These amounts are adjusted annually for inflation, so it’s crucial to have the most current information.

For anyone involved in commercial construction and energy-efficient upgrades, the Section 179D deduction presents a compelling opportunity to reduce tax liability and improve project economics. It’s a tangible benefit for making environmentally conscious decisions that also have a positive impact on operating costs in the long run.

Not sure if your projects qualify or how to claim this deduction? The rules surrounding Section 179D can be complex, involving energy modeling and certification requirements. This is where professional guidance is invaluable.

We specialize in helping construction businesses like yours navigate the intricacies of tax regulations and identify opportunities for savings.Let’s talk. Click here to connect with us and explore how the Section 179D deduction might benefit your business.