The One Big Beautiful Bill Act (OBBB) brings a host of changes that will impact all industries, but those in commercial real estate and construction are paying close attention to how the Section 179D deduction will be affected. Also known as Energy Efficient Commercial Building Property Deduction, Section 179D enables commercial building owners to enjoy substantial tax savings. Developers and builders should take quick, decisive action to secure their deduction before its sunset to take full advantage of this opportunity to reduce their potential tax burden.
What is the Section 179D Deduction?
The Energy Efficient Commercial Building Property Deduction, otherwise known as the Section 179D deduction, is available to developers and builders to use on new and used commercial buildings that feature energy efficient designs and fixtures to reduce total energy and power costs by 25% or more.
The deduction is based on a dollar rate and the building’s square footage. As the energy savings rise over 25%, the rate can increase. The base rate caps out at $1.07/sf for tax year 2023, $1.13/sf for the 2024 tax year and $1.16/sf for the 2025 tax year. It should be noted that if the property is sold or its use changes, the 179D deduction is subject to recapture under IRC Section 1245. Please note that this change, coupled with the OBBB’s changes to the R&D tax credit and the extension of 100% bonus depreciation, can lend itself to significant tax planning.
OBBB Creates a Sunset for the Section 179D Deduction
The OBBB created a major change for the 179D deduction: a 2026 sunset date. While many taxpayers have found the 179D deduction largely beneficial, it will soon go away. Construction projects that begin after June 30, 2026, will no longer qualify for the 179D deduction. A planning tip for those who qualify: if possible, accelerate any qualifying projects in order to secure your 179D deduction before it sunsets. Before you can qualify, please note that 5% of construction must take place.
Who Qualifies for Section 179D Deductions?
This deduction is available to qualified commercial building owners and designers who install energy-efficiency in buildings for “specified tax-exempt entities, Indian tribal governments, Alaska Native Corporations, and other tax-exempt organizations.” When used for a government-owned building, the deduction can be taken by the taxpayer designing the property, including an architect, engineer or contractor. Designers are required to obtain an allocation letter from the building owner in order to claim the deduction. It’s strongly recommended that this letter is obtained at the front end of the project as there may be multiple designers on the same project who are all requesting an allocation letter.
Anders Real Estate advisors work closely with clients to provide guidance on new and emerging legislation impacting the real estate development industry. Learn more about how our advisors can help guide you through the OBBB changes, and the associated costs, by requesting a meeting with an advisor below.