Key Takeaways
- Section 179D tax deductions will expire for energy-efficient building projects that begin construction after June 30, 2026.
- Architects and engineers working with tax-exempt clients should review current and upcoming projects to help identify eligibility for energy-efficiency tax benefits.
- Claiming the IRC 179D deduction requires a formal process including an allocation letter, third-party certification and IRS Form 7205.
Architects and engineers who design energy efficient buildings will soon lose an important tax deduction due to the recently passed One Big Beautiful Bill Act (OBBBA). These professionals had previously relied on Internal Revenue Code (IRC) Section 179D to claim a deduction on their tax return for buildings and renovations which they design that would qualify as energy efficient. Now, projects beginning construction after June 30, 2026, will no longer qualify for the IRC 179D deduction.
Since 2006, IRC 179D has been providing architect and engineering firms a tax deduction for ensuring their building designs achieve certain levels of energy efficiency. In the early years, the deduction was $1.80/sq foot, but as of recent, the laws have changed and pushed the deduction up to $5.81/sq ft.
Architects and engineers who design energy efficient buildings for governmental agencies, certain schools, nonprofits and other tax exempt clients should immediately review their projects to determine if the design services being provided would qualify for the deduction. Your firm could be eligible for the deduction if you are involved with the design of the interior lighting, HVAC, or the building envelope of a qualified building. The deduction would apply to not only new construction but also retrofits.
In order to claim the deduction, the architectural or engineering firm needs to include certain information on its tax return for the year in which the certificate of occupancy was received. An allocation letter will need to be obtained and signed by the building owner confirming that the firm provided the design services. The achievement of an energy efficient design would then need to be certified by an independent third party who would review the energy efficiency standards and perform the certification on IRS approved software. Once this is complete, the allocation letter and certified report can be given to your tax advisor and they will incorporate the deduction into your tax return.
Action Steps
With the provisions set to expire in 2026, we would recommend all A&E firms act now and review any active and upcoming projects for any government owned buildings, nonprofits and other tax exempt entities. If you have projects that you think may qualify, engage a third party to 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. Talk to the building owners, see if they have previously allocated the deduction or if it is available. If you have projects this year that qualify, it is possible you also missed some previous projects. Review prior year’s projects also as it is possible to go back and amend a tax return to take advantage of this deduction. You should discuss this with your tax advisor to review the statute of limitations and evaluate if there are deductions available. Please keep in mind that qualifying projects must 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 owner’s pockets in the form of reduced current year tax liabilities or refunds of previous year’s taxes paid. A number of factors should be considered before going into the process so it is important to reach out to your tax advisor to evaluate if 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