Manufacturing CFOs: Do you know your business may already qualify for energy tax incentives?
- Manufacturers should be aware that a federal energy efficiency tax incentive called Section 179D can provide a large tax deduction for certain everyday building upgrades, including HVAC or lighting improvements.
- You can claim 179D for work you have already completed in the past, but the deadline for new, qualifying projects to begin construction is June 30, 2026.
- Talk to your tax advisor as soon as possible to see if you can claim 179D on any new or past building upgrade projects.
Manufacturing businesses routinely upgrade lighting, HVAC and other elements of their facilities or plants. But did you know those upgrades may qualify for a clean energy tax incentive?
Under Section 179D, businesses that make certain energy efficiency upgrades may be eligible for a substantial tax deduction. And because this provision contains a lookback period, you may be able to claim tax relief for work you have already completed, even if it has nothing to do with clean energy like wind or solar.
However, 179D is sunsetting at the end of June (although you can still claim the deduction after June 30 under certain circumstances), which means you may need to act quickly to take advantage. Keep reading to learn more.
Federal energy efficiency tax incentives aren’t just about wind and solar
Manufacturing CFOs who may have previously overlooked energy tax incentives as a profitability booster should turn their attention to Section 179D. Unlike other clean energy incentives, which typically apply to wind or solar projects, 179D allows businesses to claim a tax deduction for making a building more energy efficient.
This makes it more directly applicable to manufacturing businesses than other energy incentives — especially because manufacturers may be making qualifying energy efficiency upgrades without even realizing it.
Why does Section 179D matter for manufacturers?
179D is a valuable tax incentive for manufacturers for two reasons. The deduction often applies to necessary plant upgrades that manufacturers already make, including work that was completed years ago. It’s also calculated on a per-square-foot basis, meaning manufacturing facilities, which tend to be in the 50,000+ square foot range, can often claim a substantial deduction.
- Section 179D grants a tax deduction for plant upgrades like lighting, HVAC, hot water and the building envelope, so long as those upgrades make your facility more energy efficient.
- Energy efficiency is measured against a 2007 baseline, which means most modern systems will automatically exceed that baseline.
- 179D allows you to claim a deduction of up to $5.81 per square foot, which means installing a new lighting system on a 100,000 square foot plant could mean a tax deduction of almost $600,000.
- You can use Section 179D to substantially reduce (or even cover) the costs of needed facilities upgrades — even if you made those upgrades several years ago. Think of 179D as a way to make necessary building improvements more cost-effective.
It’s worth noting that manufacturers will need to meet prevailing wage requirements to claim the maximum deduction. However, you can still claim a smaller deduction even if you don’t meet those requirements.
What does it mean that Section 179D is sunsetting on June 30, 2026?
The One Big Beautiful Bill Act (OBBB), which was passed in 2025, phased out several energy tax incentives. Section 179D now has a sunset date of June 30, 2026, which means that you have to perform certain qualifying activities by that date in order to remain eligible to claim the deduction.
- If you want an energy efficiency upgrade project to qualify for Section 179D, you need to meet either the physical work test or the 5% cost test by June 30, 2026.
- The physical work test means proving that substantial on-site construction has begun by June 30.
- The 5% cost test means that you have incurred at least 5% of project costs by June 30.
- However, June 30, 2026, is not the last day you can claim 179D — just the last day to meet certain eligibility requirements.
- Projects that you have either already completed or that qualify by June 30 will continue to remain eligible to claim 179D for years to come.
What are some common examples of how manufacturers use Section 179D?
Section 179D is especially useful for manufacturers because it applies to upgrades manufacturers already make to their plants or facilities. These include lighting, HVAC and improvements to the building envelope.
For example, let’s say your plant HVAC system unexpectedly fails. This system is essential to the operations of your facility, so you need to replace it. But doing this would represent a significant cost-burden to your business — unless you leverage 179D to claim a large tax write-off that helps balance the scales.
Or consider the lighting upgrade you completed in 2023. This improved your building’s energy efficiency when measured against the 2007 baseline the IRS uses, so you can claim a 179D deduction now, even though the work was done years ago.
What should you do to claim Section 179D?
To find out if you qualify for Section 179D, talk to your tax advisor. You’ll want to do this quickly, because you’re running out of time to make sure that an upgrade project you’re planning or just beginning will still qualify for the tax deduction.
Be sure to talk to your advisor about not just current building upgrade projects, but work that you’ve done in the past as well. Your advisor can help you identify which projects may earn you a tax break, and help you provide the necessary documentation to qualify.
How Wipfli can help
We advise businesses on how to claim valuable energy tax incentives like Section 179D. Let’s talk about how your business can qualify for an energy tax break even if you have nothing to do with wind or solar. Start a conversation.
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