Section 179D provides significant tax deductions for owners and designers of energy-efficient commercial properties, worth as much as $5.81 per square foot in 2025. On a 20,000 square-foot warehouse, hospital, headquarters, retail center, factory or other commercial use, that amounts to a six-figure deduction.
The deduction is a function of the size of the building and the scope of the energy savings, and can be enhanced by meeting prevailing wage and apprenticeship hour requirements. Architects and engineers that design the energy-saving elements of these buildings, like the lighting system and building envelope, can claim the deduction alongside the actual property owners.
Changes for Tax Year 2025 boost the value of the deduction. The base deduction under §179D increases to $0.58 per square foot for buildings that hike power cost savings by 25%, and increases $0.02 per square foot for each percentage point over 25% up to $1.16 per square foot at 50%.
For businesses that meet prevailing wage and apprenticeship requirements, the deduction starts at $2.90 per square foot, increasing $0.12 per square foot for every percentage point over 25% up to $5.81 per square foot. This provides an incentive to generate and use electricity sustainably while supporting workforce development.
How Do We Meet 179D Prevailing Wage Requirements?
The prevailing wage requirement is complex, but generally speaking, it requires that laborers, mechanics, contractors and subcontractors employed by the business applying for the deduction be paid at least the minimum hourly rates established by the Secretary of Labor as prevailing in the construction industry localized to the region in which the facility is located. Additionally, a certain number of project hours must be completed by apprentices.
Lookback provisions in the tax code allow qualified property owners to claim the tax deduction for any project completed in 2006 or later. For architects and engineers the lookback period is limited to three years.
Because there is no limit to the number of projects that any taxpaying entity can qualify for the deduction, an architecture or engineering firm focused on sustainable development can claim several deductions every year at a savings that could conceivably run into the millions of dollars.
The many requirements of the 179D Tax Deduction are a web of interlocking complexities that are likely to flummox any taxpayer unfamiliar with the process. This is where it is wise to engage the services of professionals experienced in maximizing these sorts of deductions.
The engineers and tax experts at National Tax Group can help you with energy modeling and analysis that assesses your building’s energy performance, calculate potential savings, provide necessary certifications to support deduction claims and offer guidance through the process to ensure adherence with all IRS requirements on energy savings and prevailing wage requirements.
The law requires third-party certification by a licensed engineer to confirm the energy reduction claims.
How Can We Prepare for a 179D Deduction Claim?
Although this is primarily a green-building tax break, most of its potential value comes when super-sized by meeting prevailing wage and apprenticeship requirements. Investigate whether it is worthwhile to raise pay rates for employees and subcontractors to meet these benchmarks for greater tax savings.
While a tax specialist like National Tax Group can navigate the details of your Section 179D deduction claim and help you file Form 7205, there are several steps your business can take to fast-track it. First, incorporate tax planning into your energy-efficient designs and document everything necessary to comply with the deduction requirements. That includes maintaining hiring and payroll records for employees and sub-contractors. The more documentation prepared in advance, the less that must be captured retroactively when filing the claim.
When working with tax professionals, make sure to stay informed about any tax law changes, actual or potential, in order to conform your practices to new provisions. This will be particularly important with a change in administration at the federal level in 2025.
Section 179D tax savings are a bonanza of benefits for businesses that can increase cash flow, gain a competitive edge, attract green tenants and promote their own sustainability.
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