You can still claim Section 179D after it sunsets in June — but only if you act now
- The Section 179D clean energy tax deduction sunsets after June 30, 2026, but eligible building owners, contractors or designers can still claim the deduction for a qualifying building project even after that date passes.
- However, to satisfy eligibility requirements, projects must meet either the physical work test or the 5% cost test by no later than June 30.
- Act fast and seek specific guidance from your energy tax advisor to qualify for 179D by the June 30 deadline.
Last summer, the One Big Beautiful Bill Act (OBBB) ended key energy tax incentives like the Section 179D tax deduction, which now sunsets on June 30, 2026. And you may assume that once that date passes, you can no longer qualify for 179D at all.
Don’t make that assumption. Because of the way tax rules work, you may still be able to claim 179D for building projects that you are working on right now — so long as you take action quickly.
Do you already qualify for an energy tax incentive?
Keep reading to learn more.
What is the Section 179D tax deduction?
Section 179D, also called the energy-efficient commercial buildings deduction, allows building owners to take a tax deduction for making a commercial building more energy-efficient. Under Section 179D, taxpayers can claim a deduction of up to $5.81 per square foot for making energy-saving improvements to elements of a commercial building, including:
- Interior lighting systems
- Hot water systems
- Heating, ventilation and air conditioning (HVAC)
- The building envelope, like windows, insulation and roofing.
On a large-scale commercial building, this deduction can be worth hundreds of thousands of dollars or more, and can significantly offset the upfront cost of making a building more energy efficient. You can only claim the deduction on your taxes after a building has been placed into service.
Who qualifies for 179D?
Section 179D is relevant to building owners, builders, architects and designers. The deduction can apply to commercial buildings owned by individuals, businesses, schools, government organizations and nonprofits.
Private building owners qualify directly for 179D. For projects done by public institutions like schools or government agencies, the architects or builders are eligible to claim the deduction.
When is Section 179D ending?
Section 179D is officially sunsetting after June 30, 2026. To qualify for the deduction, you must begin construction on an eligible building on or before June 30.
However, that’s not the end of the story. June 30 is the cutoff date for performing activities that make you eligible for the deduction, not for claiming the deduction itself.
Provided that you meet certain eligibility requirements, you may still be eligible to claim Section 179D after June 30 — even up until the end of a standard 39-year depreciation schedule.
How can you still claim the Section 179D deduction after it sunsets?
You have many years to claim Section 179D, but you have less than six months left to meet eligibility requirements. To be sure that any commercial building project you’re working on now remains eligible, you need to act fast to qualify under either the physical work test or the 5% cost test.
Qualifying option 1: the physical work test
The physical work test is one of two ways to qualify for Section 179D. To meet requirements, you must show that substantial on-site construction has begun before June 30, 2026.
- Qualifying work activities include excavation for foundations, pouring concrete footings, installing structural steel, or starting major systems like plumbing or HVAC.
- Preliminary steps such as land clearing, surveying, or permitting do not count.
- Once work begins, it must continue without significant interruption until completion.
- Documentation, like dated photos, construction logs and invoices, is essential to prove compliance.
Qualifying option 2: the 5% cost test
The second option to qualify for Section 179D is called the 5% cost test. To become eligible under the 5% cost test, you must incur at least 5% of total project costs on or before June 30, 2026.
- Total cost includes all capitalizable expenses such as materials, labor, engineering, and design fees.
- Costs only count if they are under a binding written contract executed before manufacturing or construction starts.
- After meeting the cost threshold, the project must proceed continuously toward completion.
- Supporting records like invoices, payment confirmations, and cost summaries are critical for substantiation.
- Because future cost overruns could reduce the proportion of any spending before June 30 to less than 5% of the total project budget, it is advisable to spend more than 5% prior to the deadline.
Phased or multi-year projects
Under either test, if Phase 1 of a phased or multi-year project meets the cutoff and the project continues with continuous activity under the same contractor, subsequent phases can be treated as one qualifying project for certification purposes. This is especially relevant to hospitals, education campuses, and public portfolios.
What are your next steps if you want to claim Section 179D?
If you are undertaking a commercial building project, you may have already done everything you need to do to meet the eligibility requirements for Section 179D. The deduction is sitting there, waiting for you to take it.
But you’ll need to take several specific steps here to qualify, including:
1. Act fast
Again, while you will remain able to claim Section 179D for many years to come, your window to meet eligibility requirements is almost shut. You have to satisfy either the physical work test or the 5% cost test by June 30, 2026, even if you don’t actually file for the deduction until 2030 or later.
2. Talk to your tax advisor
Don’t try to tackle 179D on your own. The specifics involved are complex and time is short. Work with your tax advisor to understand whether a current project (or one that’s about to start) is able to meet eligibility requirements.
3. Document everything
You can’t claim 179D without proper documentation. Most taxpayers opt for the 5% cost test (although some may get better results using the physical work test), but in either case, you have to be able to provide extensive proof that you have satisfied that test’s eligibility requirements. Your tax advisor will help you understand exactly what’s required and how to provide that proof.
4. Communicate with stakeholders like builders, architects and owners
Communication between stakeholders involved in the building project, like builders, architects and owners, is essential. If you’re the building owner, for example, you’ll need information from your contractor and designer in order to document your eligibility, and you should start having those conversations now rather than later.
5. Plan for a slow turnaround
You can’t claim the deduction until your building has been placed into service. Depending on the timeline of your building project, this means the tax benefits of 179D may not show up for 1-5 years (or more), so factor that into your budgeting and cost analyses.
Do you already qualify for an energy tax incentive?
How Wipfli can help
We advise businesses, organizations and individuals on tax strategy and energy tax incentives. Let’s talk about your goals and how to help you qualify for incentives like Section 179D. Start a conversation.
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