The 179D deduction ends soon, but savings are still possible
As the landscape of tax incentives continues to shift under the recently enacted , taxpayers planning energy-efficient capital improvements must act swiftly to take advantage of the Section 179D deduction before it sunsets.
Here’s what taxpayers need to know before the cutoff:
What is the 179D deduction?
Section 179D provides a valuable tax deduction for energy-efficient improvements made to commercial buildings. Originally introduced under the Energy Policy Act of 2005, the deduction was aimed at incentivizing the design and construction of buildings that reduce energy consumption.
Eligible taxpayers can deduct up to a specified amount per square foot for qualifying improvements to:
- Interior lighting systems
- Hot water systems, heating, ventilation and air conditioning (HVAC)
- The building envelope (e.g., insulation, windows and roofing)
The specified amount for 2025 differs depending on whether the project meets prevailing wage and apprenticeship (PWA) requirements:
- If a project does meet PWA requirements, deductions range from $2.90 to $5.81 per square foot, depending on the qualifications the project meets.
- If a project does not meet PWA requirements, deductions range from $0.58 to $1.16 per square foot, depending on the qualifications the project meets.
The deduction is available to building owners and, in the case of government or nonprofit-owned buildings, can be allocated to the designers or contractors responsible for the improvements.
What’s changing under OBBB?
The OBBB, signed into law on July 4, 2025, eliminates several energy tax credits, including the termination of the 179D deduction for projects that begin construction after June 30, 2026. This legislative change marks a significant shift in how energy-efficient commercial building projects are incentivized at the federal level.
To qualify for the deduction before the 179D cutoff date:
- Construction must begin on or before June 30, 2026.
- The project must meet the energy efficiency standards in place at the time of construction.
- Proper documentation and certification must be obtained, including an energy study and allocation forms. For example, projects involving government-owned buildings may require proper allocation of the deduction to the designer.
Why the 179D cutoff matters
The OBBB 179D repeal significantly reduces the tax benefits available for energy-efficient construction on future projects. This change could have far-reaching implications for developers, architects and building owners who have relied on the deduction to offset upfront costs and improve project ROI.
For taxpayers, the cutoff may require:
- Accelerated timelines: Projects that were previously on a long-term schedule may need to be expedited. With the June 30, 2026, construction start deadline looming, stakeholders may need to fast-track design, permitting and procurement processes. Delays in any of these areas could result in missed opportunities for substantial tax savings.
- Strategic planning: Early and ongoing coordination with tax advisors, engineers and contractors is essential to help ensure eligibility. Tax professionals can help interpret evolving IRS guidance, while engineers and contractors play a critical role in ensuring that energy efficiency targets are met and properly documented.
Your next steps
The 179D sunset under OBBB is a call to action for taxpayers considering energy-efficient capital improvements. With proper planning and execution, there’s still time to capture this valuable deduction —but the window is closing fast.
While the IRS has yet to finalize its guidance, the Treasury Department is expected to introduce a “facts and circumstances” test to assess whether a project meets the timing requirements. To qualify, a project must either complete significant physical work or incur at least 5% of the total project costs.
Importantly, projects must also demonstrate continuous progress. Relying solely on the 5% test without ongoing development could jeopardize eligibility.
If you’re still unsure whether your project qualifies or how to proceed, now is the time to consult with your tax team. The savings could be substantial, but only if you act before the deadline.
How Wipfli can help
Wipfli’s experienced tax team can help you take advantage of energy incentives, including 179D, before they phaseout. With a team including tax professionals, architects and engineers, we can support you at any stage of your project, so that you can maximize your credit and incentive opportunities. Reach out today to discuss the next steps for your energy projects.
See our energy incentives servicesAccess the latest OBBB news on our policy updates page, or get more insights with these additional resources:
