IRC Section 179D – Taking Advantage While We Still Can

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Architects and engineers designing energy-efficient buildings will soon lose an important tax deduction due to the recent tax law changes. These professionals previously relied on Internal Revenue Code (IRC) Section 179D to claim a deduction on their tax return for buildings and renovations that would qualify as energy-efficient. Now, projects beginning construction after June 30, 2026, will no longer qualify for the IRC 179D deduction.

Backdrop

Since 2006, IRC 179D has afforded architects and engineers deductions for ensuring their buildings reach certain levels of energy efficiency. In the early years, the deduction was $1.88 per square foot, but as of recently, the deduction was up to $5 per square foot.  

Architects and engineers working on energy-efficient buildings for governmental agencies, schools, nonprofits and other tax-exempt clients should immediately review their projects and determine which ones would qualify for the deduction. If the following design processes meet the energy-efficient standards, they could be eligible for the deduction:

• Interior lighting (exterior doesn’t qualify)
• Heating, ventilation and air conditioning (HVAC)
• Hot water systems
• Structural elements of the building such as cladding, windows and roofing

The deduction would apply to not only new construction, but also to retrofits. 

Existing Claim Requirements

The architects and engineers would need to follow a strict process in order to claim the deduction on their tax return:

1. Prepare an Allocation Letter – This is to be issued by the building owner. It should be signed by an authorized representative and include certain building-specific information.
2. Obtain Third Party Certification – An independent firm would need to run the information through their IRS-approved modeling software to verify the deduction.
3. Check for Prior Claims – Since only one deduction is allowed per building, if another professional has already claimed it, the deduction is no longer available. It may be shared among multiple contributing design firms.
4. File Form 7205 – This form is typically included with the annual tax return. (It should be filed in the year the certificate of occupancy is issued.

Action Steps

With the provisions set to expire in 2026, we recommend all A&E firms take the following steps:

• Review active and upcoming projects for any schools, municipalities, nonprofits and any other tax-exempt entities.
• Talk to the building owners; see if they have previously allocated the deduction or if it is available.
• Review prior projects to ascertain if it is possible to go back and amend a tax return to take advantage of this deduction. You should discuss with your tax advisor to see if this is a benefit your firm can take advantage of on past returns.
• Start construction by June 30, 2026, before the provision sunsets.

The Section 179D deduction is a benefit that helps to put cash back in business owners’ pockets in the way of refunds on their income tax returns. A number of factors should be considered before going into the process so it is important to reach out to your tax advisor to see if they think pursuing the deduction could be advantageous. 

Contact Us

For more information or to answer your questions, please reach out to your PKF O’Connor Davies client service team or either of the following:

Catherine Doe, CPA, MST
Partner
cdoe@pkfod.com | 781.937.5331

Jaron Lariviere, CPA, MST
Partner
jlariviere@pkfod.com | 781.937.5706