The Section 179D Energy Efficient Commercial Buildings Deduction

Updated April 8, 2026

The Section 179D Energy Efficient Commercial Buildings

Deduction

The Inflation Reduction Act of 2022 (IRA; P.L. 117-169)

enacted or modified 20 energy-related tax credits. These

credits subsidize clean energy production and increased

energy efficiency, aiming to reduce greenhouse gas

emissions and thereby slow the rate of global warming.

In contrast to this wide array of credits, the IRA changed

one energy-related tax deduction, the Energy Efficient

Commercial Buildings Deduction (EECBD) in Section

179D of the Internal Revenue Code (IRC). At a high level,

the EECBD allows businesses to lower their taxable profits

(and thus their tax payments) for upgrading the energy

efficiency of their buildings. This In Focus describes the

EECBD in greater detail, starting with a description of how

it, as a deduction, differs from energy-related tax credits.

The FY2025 reconciliation law (P.L. 119-21), sometimes

referred to as the One Big Beautiful Bill Act, terminated

this deduction for property beginning construction after

June 30, 2026. The Joint Committee on Taxation (JCT)

projects that this change will increase federal revenues by

$134 million over the 10-year budget window (FY2025FY2034).

Tax Deductions vs. Tax Credits

The federal government generally provides two types of tax

breaks allowing individuals and businesses to reduce their

tax liabilities: credits and deductions. The federal tax code

also includes certain exclusions and exemptions, though

they effectively function the same as deductions.

A credit is more valuable to a taxpayer than a deduction of

the same nominal size. Whereas credits generally reduce

tax payments dollar-for-dollar, deductions reduce tax

payments by the amount of the deduction multiplied by the

tax rate.

For example, if a corporation reports $100,000 of taxable

profits and is taxed at a 21% rate, it would owe $21,000 of

taxes before taking account of any credits. If the business is

eligible for a $10,000 credit, it would pay $11,000 in taxes.

If the corporation is instead eligible for a $10,000

deduction, it reduces its taxable profits by $10,000. In this

case, it would be taxed as though its profits were $90,000

rather than $100,000. The business’s tax payment would

therefore be 21% of $90,000, or $18,900.

Tax deductions become less valuable as tax rates decrease.

At the extreme, with a tax rate of 0%, tax deductions would

hold no value, as taxpayers would not owe any taxes

regardless of the size of their deductions. This is why in the

example above, a $10,000 tax deduction reduces the firm’s

tax payments by $2,100, which is 21% of $10,000. At a

higher tax rate, reducing taxable income would lower tax

payments by a greater amount.

The Standard 179D Deduction Formula

Businesses that file corporate income taxes are taxed on

their profits, defined generally as their revenues minus their

costs. Money spent upgrading a building’s energy

efficiency is a cost, and as such, businesses may deduct

those costs from taxable profits.

These costs are not necessarily deducted in the year when

the spending occurs. Based on an economic concept known

as depreciation, the costs are instead deducted gradually

over the asset’s useful life. For commercial buildings, the

tax code allows qualifying investment costs to be deducted

in a linear fashion over the course of 39 years. If a

restaurant owner, for example, were to invest $390,000 in

upgrading the restaurant’s energy efficiency, the owner

could deduct $10,000 of investment costs each year for the

next 39 years.

As a way of incentivizing greater investments in energy

efficiency, the EECBD allows businesses to front-load a

greater portion of their total deduction. Such front-loading

is generally viewed as a benefit to businesses, as it gives

them cash now rather than in the future. The EECBD

allows firms to take the deduction as calculated below

instead of using the traditional linear deduction schedule:

1. If the business meets prevailing wage and registered

apprenticeship (PWA) requirements for the workers

installing the energy efficient equipment, and if the

equipment reduces “total annual energy and power costs

for the building” at least 25% relative to a reference

building, the EECBD is set at a minimum value of $2.90

per square foot. The EECBD then increases by 12 cents

for every additional percentage point of energy savings

above 25%, with a maximum deduction of $5.81

(achieved when energy and power costs are reduced

49.25% or more). For example, if a business owner

reduces her building’s energy costs by 30%, her

deduction per square foot would be

$2.90 + [(30 − 25) × $0.12] = $3.50 per square foot.

If this amount were applied to a building of 30,000

square feet, the total deduction would be $105,000.

Businesses not meeting PWA requirements qualify for

deductions ranging from $0.58 to $1.16 per square foot.

Deduction amounts are adjusted annually for inflation.

(The amounts described here are for 2025.)

2. Any EECBD deductions (including deductions from

§179D[f]) from the previous three years are subtracted

from the total calculated in step 1. In the example above,

if the business had claimed an EECBD of $27,000 two

years beforehand, its current EECBD would be reduced

from $105,000 to $78,000.

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The Section 179D Energy Efficient Commercial Buildings Deduction

3. The business subtracts the amount calculated in step 2

from its total costs for installing the energy efficient

equipment. It divides this remaining amount by 39. This

is the total amount the business may deduct in years 2-39

following the installation of the equipment.

4. The business then adds the amounts in steps 2 and 3.

This is the total amount that the business may deduct the

year when the equipment is installed (year 1).

If the hypothetical business described in steps 1-4 had made

an energy efficiency investment of $390,000 (as described

in paragraph two of this section), its annual deductions

would be calculated as follows:

Year 1 = $78,000 + [($390,000 – $78,000) / 39] = $86,000

Years 2-39 = ($390,000 – $78,000) / 39 = $8,000

The business will deduct $390,000 regardless of whether it

claims the EECBD. However, the EECBD increases the

first-year deduction from $10,000 to $86,000 while

lowering subsequent years’ deductions from $10,000 to

$8,000, in effect moving up the timeline for the deductions.

EECBD Requirements: Qualifying Equipment, Cost

Reduction Measurement, and Qualifying Buildings

To qualify for the EECBD, energy efficient equipment must

be installed as part of (1) the interior lighting systems;

(2) the heating, cooling, ventilation, and hot water systems;

or (3) the envelope of the building. Qualifying equipment

must be depreciable or amortizable property that adheres to

the Standard 90.1 codes published by the American Society

of Heating, Refrigerating, and Air Conditioning Engineers

(ASHRAE) and the Illuminating Engineering Society of

North America.

According to IRC Section 179D(c)(1)(D), the equipment

must be installed as “part of a plan designed to reduce the

total annual energy and power costs with respect to the

interior lighting systems, heating, cooling, ventilation, and

hot water systems of the building by 25 percent or more in

comparison to a reference building” (emphasis added). The

term reference building describes buildings meeting only

the minimum requirements of Standard 90.1. Although IRC

Section 179D(c)(1)(D) does not reference the building

envelope, equipment installed as part of the envelope

qualifies for the deduction insofar as it affects the energy

used by systems (a) and (b) from the previous paragraph.

Costs associated with those two systems constitute the total

annual energy and power costs for purposes of IRC Section

179D(c)(1)(D) and for step 1 of calculating the deduction.

Both existing and newly constructed buildings may be used

to claim the standard 179D deduction. IRC Section

179D(c)(1)(B)(ii) states that the EECBD applies to all

buildings that fall “within the scope of Reference Standard

90.1.” ASHRAE states that Standard 90.1 applies to “most

sites and buildings, except low-rise residential buildings.”

Low-rise residential buildings are defined as single-family

homes, manufactured houses, buildings that do not use

electricity or fossil fuels, and multifamily residences of

three or fewer stories. Along with traditional commercial

buildings, such as business offices and retail stores,

apartment buildings of four or more stories also qualify for

the EECBD. In addition, a notice published by the

Department of Energy clarifies that “hotels, motels, and

other transient residential building types of any height” are

covered by Standard 90.1.

The Alternative 179D(f) Deduction for Retrofitted

Commercial Buildings

Since January 2023, businesses have been able to claim an

alternative deduction under IRC Section 179D(f) for

retrofitting existing commercial buildings. The 179D(f)

deduction is calculated according to the same four-step

formula described above, though one difference is that the

alternative deduction is based on reductions in energy use,

whereas the standard 179D deduction is based on

reductions in energy costs (which are a function of both

energy use and energy prices). A second difference is that

the building’s energy use is measured relative to its own use

from one year beforehand, not in comparison to a reference

building. Installations of qualifying equipment must be part

of a qualified retrofit plan that reduces the building’s

energy use by 25% or more after accounting for

fluctuations caused by the weather. The retrofitted building

must have been placed in service five years or more “before

the establishment of the qualified retrofit plan with respect

to such building.”

Deduction Transfers for Untaxed Entities

Because they do not have taxable profits, nonprofits and

other untaxed entities generally do not benefit from tax

deductions. However, government organizations and other

tax-exempt entities that make qualifying energy efficiency

improvements are eligible for the 179D and 179D(f)

deductions. Although such entities cannot reduce their own

liabilities, they may transfer the deduction to the building’s

designer (or the designer of the retrofits). This may allow

untaxed entities to bargain down the pretax installation or

purchase prices of energy efficient equipment.

Recent Legislative Reforms and Impact

Under Prior Law

In its 2024 tax expenditures report—issued prior to the

enactment of the FY2025 reconciliation law—the JCT

projected that the EECBD would cost less than $250

million over the FY2024-FY2028 budget window. This

implied that relatively few businesses would have claimed

the deduction, that businesses would have deducted

relatively small amounts, or both. One reason for this

projected limited impact may owe to the EECBD’s

complexity, which may have hindered public understanding

of the deduction. In addition to the complications described

elsewhere in this In Focus, Section 179D requires

organizations to verify their EECBD eligibility via complex

modeling software approved by the Department of Energy.

As noted earlier, the FY2025 reconciliation law terminated

the EECBD for property beginning construction after

June 30, 2026. This change and others are discussed in CRS

Insight IN12625, IRA Tax Credit Repeal in the FY2025

Reconciliation Law: Part 2, by Nicholas E. Buffie.

Nicholas E. Buffie, Analyst in Public Finance

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IF12862

The Section 179D Energy Efficient Commercial Buildings Deduction

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