Key points covered in this article:

  • Section 179D, a tax deduction for energy-efficient commercial building improvements, will expire for projects starting construction after June 30, 2026, urging contractors and building owners to act quickly.
  • Other energy-related tax credits, including those for clean vehicles, home improvements, and renewable energy systems, are also set to expire by the end of 2025 or mid-2026.
  • Early planning, compliance with prevailing wage requirements, and collaboration with tax advisors are essential to maximize these benefits before the deadlines.

Because of the One Big Beautiful Bill Act (OBBBA), there’s now a firm deadline for one of the popular tax incentives for energy-efficient buildings. Section 179D, a widely used deduction for commercial building improvements, will not be available for projects that begin construction after June 30, 2026. That means contractors and building owners only have a limited time to claim the benefit. Several other energy credits are also scheduled to expire much sooner than expected. These changes to the tax code mean anyone looking to use energy-related tax credits to help fund projects will need to take steps for careful planning.

Background on Section 179D

Section 179D has been part of the tax code for nearly 20 years, and it was created to encourage investment in energy-efficient commercial buildings. Historically, the deduction has applied to improvements in three main areas: the building envelope, interior lighting, and HVAC systems.

Importantly, higher deduction amounts can be claimed when projects meet prevailing wage and apprenticeship requirements. This has made Section 179D one of the most valuable incentives for energy upgrades, especially in the commercial sector.

Eligibility has widened over the years, mostly due to the Inflation Reduction Act of 2022. REITs may use the deduction, and designers of tax-exempt buildings can receive an some of the funds when the building owner has no tax liability. In the latter case, eligible projects generally include schools, nonprofit hospitals, universities, places of worship, museums, and government, municipal, or Tribal buildings.

Another key feature is the ability to claim the deduction more than once. A building may take the deduction every three years if there are additional qualifying upgrades. This option has helped retrofit and repurpose older buildings across the country.

How to Qualify for Section 179D

To qualify for Section 179D, projects must start construction by June 30, 2026. Additionally, improvements must reduce energy use compared with the applicable ASHRAE efficiency standard.

The rules apply to both new construction and retrofits. For example, a developer who completes a 100,000-square-foot office building and achieves at least a 25% reduction in energy use with more efficient HVAC and lighting systems could qualify for deduction. Additionally, a 20-year-old warehouse could qualify if similar improvements reduce energy use. These projects would generate an even greater tax benefit by meeting prevailing wage requirements.

For reference, the base deduction is $0.58 per square foot for a 25% reduction in energy consumption, and it increases up to $1.16 per square foot for a 50% reduction. As noted, there’s a larger benefit when the prevailing wage requirements are met. Here, the deduction increases to between $2.90 and $5.81 per square foot.

Another sticking point in the construction start date. The IRS defines “beginning construction” in two different ways. The first way is called the physical work test; that means significant on-site work has started. The second test is called the 5% safe harbor test; that means at least 5% of total project costs have been met. These definitions are important for contractors and building owners looking to lock in eligibility before the cutoff date.

Please note, all projects must be certified by a qualified professional like a CPA.

Key Considerations

Any business planning to take advantage of the 179D deduction will want to plan ahead. The date may sound distant, but the complexities of planning, design, and material procurement can easily consume months or even years. Also, new tariffs and supply chain bottlenecks are unpredictable, which makes starting early that much more important.

Owners of older buildings may want to consider retrofits now. Upgrades to lighting and HVAC systems can often be completed within a shorter time frame, and there’s no telling when or Section 179D will return.

Stakeholders looking to maximize the deduction will want to check for compliance with prevailing wage and apprenticeship requirements. Coordinating between outside contractors and tax advisors is encouraged.

Other Energy-Related Credits Expiring Soon

There are several other energy credits set to expire sooner than expected:

  • Commercial Clean Vehicle Credit (45W): Available for businesses that buy electric or other qualifying clean vehicles; this credit is no longer available as of September 30, 2025.
  • Energy Efficient Home Improvement Credit (25C): A popular option for homeowners upgrading doors, windows, insulation, and HVAC systems; ending for property placed in service after December 31, 2025.
  • Residential Clean Energy Credit (25D): Appliances like solar panels, wind turbines, and geothermal systems fall under this credit; ending for purchases made after December 31, 2025.
  • New Energy Efficient Home Credit (45L): Designed to reward builders of efficient residential units; expiring for newly completed homes after June 30, 2026.
  • Alternative Fuel Refueling Property Credit (30C): Helps with costs of EV chargers and other clean-fuel stations; ending for property placed in service after June 30, 2026.

Conclusion

Section 179D has helped pivot commercial buildings toward energy for nearly two decades. But with the upcoming deadline, the clock is ticking. Anyone who wants to secure the benefit, or any other energy-related credits, will want to act soon. For more information, contact Jennifer French, Partner on PBMares’ Construction & Real Estate team.