Manufacturers: Act Now To Claim the Sec. 179D Deduction for Energy-Efficient Building Improvements

The One Big Beautiful Bill Act (OBBBA) repeals or reduces many clean energy tax incentives, including the Section 179D deduction for energy-efficient commercial building improvements. But manufacturers can still take advantage of the deduction, which was significantly enhanced by the Inflation Reduction Act (IRA), so long as construction begins by June 30, 2026.

Making eligible improvements can reduce your operational costs over the long term. And the Sec. 179D deduction allows you to immediately write off the cost of the improvements rather than having to depreciate them over the 39-year period that typically applies — cutting your tax bill and enhancing your cash flow in the short term. Here's what you need to know to take advantage of this tax break.

How It Works

The Sec. 179D deduction was created 20 years ago to incentivize the installation of energy-efficient property in commercial buildings. It's available for property installed as part of 1) HVAC and hot water systems, 2) interior lighting systems, and 3) building envelope systems. The property must be installed as part of new construction or a building upgrade project.

To claim the deduction, a taxpayer is required to show a 25% reduction in energy and power costs (down from 50% before the IRA) relative to applicable industry standards. The base deduction for 2026 is 59 cents per square foot (up from 58 cents for 2025). But the deduction could ring in much higher. It increases by 2 cents for each percentage point of energy savings above 25%, up to a maximum deduction of $1.19 per square foot (up from $1.16 for 2025).

If you satisfy prevailing wage and apprenticeship requirements, the base deduction for 2026 is much higher: $2.97 per square foot. It increases by 12 cents for each percentage point of savings in excess of 25%, up to a maximum deduction of $5.94 per square foot (up from $5.81 for 2025).

The IRA allows taxpayers to claim the full deduction multiple times (vs. only one time before the IRA). You can generally claim the deduction every three tax years for subsequent energy-efficient improvements.

The IRA also created a new alternative deduction path for renovation projects. To be eligible, you must have a qualified retrofit plan and reduce the building's energy use "intensity" (as opposed to annual energy and power costs) by at least 25% compared to before the retrofit. The building must have been originally placed in service at least five years before the qualified retrofit plan was established. The deduction amount is limited to the total adjusted basis of the retrofit property placed in service.

Note: When the Sec. 179D deduction is claimed, the tax basis of the energy-efficient commercial building property must be reduced by the amount of the deduction.

Documentation Requirements

Your eligibility for the Sec. 179D tax deduction is based on the energy and power cost savings in a building compared with a reference building that meets certain minimum requirements — not the existing building. The reference building model generally must have the same control sequences and schedules as the proposed building model. The energy and power cost savings must be estimated with detailed hourly energy simulations using qualified software.

To claim the deduction, you'll need to obtain certification of the requirements from a licensed contractor or engineer in the jurisdiction where the building is located. The energy models can be documented by reports generated by approved modeling software, or by manually completing specified compliance forms or equivalent forms.

Energy-Efficient Buildings Can Pay Off

Investments in making a building greener can pay off in reduced energy costs and may also yield valuable tax deductions. But as explained, the Sec. 179D deduction won't be available unless construction of eligible improvements begins by June 30, 2026. So act soon to take advantage of it while you still can. Contact us for more information.