179D Defined

The Energy Policy Act of 2005 created a tax deduction for energy efficient buildings found in Section 179D of the Federal Tax Code. Section 179D provides a tax deduction for energy efficiency improvements to commercial buildings. A building may qualify for a tax deduction under Section 179D for as much as $1.80 per square foot or as little as $0.30 per square foot. An energy efficient envelope, heating, ventilating, and air conditioning (HVAC) system, or lighting system can qualify for the 179D tax deduction. Energy simulations are required to show compliance with the energy and power cost savings requirements.

Who can claim the 179D deduction?

There are two groups of candidates eligible to claim the 179D tax deduction:

  • Architects, engineers, ESCOs, and designers of energy efficient municipal building projects

  • Owners of energy efficient commercial properties

Owners of commercial properties that were newly constructed or retrofitted since 12/31/2005 through 12/31/2017 are eligible for the 179D tax deduction. In addition to privately owned buildings, a provision was made in 2008 to allow municipal buildings to benefit from 179D. Since municipal buildings are owned by a non-tax-paying public entity, the municipality can allocate their 179D tax deduction to the designer of the energy efficient system such as an architect, engineer, or ESCO.

Qualified Individual

A qualified individual is required to perform a modeling analysis on the building, conduct a site visit, and provide a certificate of compliance to the tax payer. According to the IRS, a qualified individual is (1) not related to the taxpayer (within the meaning of Section 45(e)(4), (2) is an engineer or contractor that is properly licensed as a professional engineer or contractor, and (3) has represented in writing to the taxpayer that he has the requisite qualifications. In other words, an independent third party who meets the above criteria is required to perform the study.

Deduction Amount

The 179D deduction is calculated based on the energy efficiency of the commercial building, as compared to an ASHRAE 90.1-2001 or ASHRAE 90.1-2007 baseline building. There are three compliance pathways to qualify for the 179D federal tax deduction:

  1. Whole building qualification with 50% energy and power cost savings shown through energy modeling.

  2. Partial qualification for envelope, HVAC, and lighting with energy and power cost savings shown through energy modeling with threshold options (see chart below).

  3. Partial qualification for lighting through the interim lighting rule based on reductions in installed lighting power.


* Savings refer to the reduction in the energy and power costs of the combined energy for the interior lighting, HVAC, and HW systems as compared to a reference building that meets the minimum requirements of ASHRAE Standard 90.1-2001. IRS Notice 2012-26 still applies to all property placed into service after 12/31/13.

** The tax deduction is prorated depending on the reduction in LPD. See IRS Notice 2006-52 for the definition of "applicable percentage".


Ideal candidates for EPAct deductions are newly constructed buildings and renovation projects with at least 50,000 square feet.  The following chart shows some examples of the 179D deduction amount you might expect to receive based on building size.