Written by Brady Lausch, CPA, and Jason Herr, CPA, CCIFP
The 179D tax deduction has historically provided a valuable opportunity for architecture and engineering firms that design energy-efficient systems for qualifying tax-exempt buildings. Although Section 179D has been terminated for property whose construction begins after June 30, 2026, firms may still be able to claim deductions related to qualifying projects that began construction on or before the deadline.
For architecture and engineering (A&E) firms, now is an important time to review current and prior qualifying projects, determine whether your firm qualifies as a designer, and make sure potentially valuable deductions are not overlooked.
Quick answer
The Section 179D tax deduction is no longer available for property whose construction begins after June 30, 2026. However, architecture and engineering firms may still qualify for deductions allocated from certain tax-exempt building owners for eligible projects that began construction on or before the deadline.
What Is the 179D Tax Deduction?
Section 179D, the Energy Efficient Commercial Buildings Deduction, provides a federal tax deduction for qualifying energy-efficient commercial building property.
Qualifying improvements can involve building systems such as:
- Interior lighting
- Heating, cooling, ventilation, and hot-water systems
- The building envelope
Although commercial building owners can qualify for the deduction, Section 179D also has an important provision for A&E firms: when qualifying energy-efficient property is installed in a building owned by a specified tax-exempt entity, the building owner may allocate the deduction to the person primarily responsible for designing that property.
This provision can make the 179D deduction particularly relevant to architecture and engineering firms that work on public and tax-exempt projects.
Can Architecture and Engineering Firms Still Claim 179D After June 30, 2026?
Yes, potentially.
The 2025 tax law terminated Section 179D for property whose construction begins after June 30, 2026. The IRS has published FAQs addressing the June 30, 2026 Section 179D termination rule. However, the law did not eliminate all Section 179D deductions beginning July 1.
That distinction is important.
An A&E firm may still have a Section 179D opportunity after June 30 if the underlying property meets the applicable requirements and construction began on or before the June 30, 2026, deadline.
For example, an engineering firm may be working on a qualifying public building project that began construction in early 2026 but will not be completed and placed in service until a later date. The June 30 termination date does not necessarily prevent that project from qualifying merely because the deduction is ultimately claimed after June 30.
Conversely, qualifying property whose construction begins after June 30, 2026, is not eligible for the Section 179D deduction under current law.
For A&E firm leaders, this makes identifying the construction-start dates of potentially eligible projects particularly important.
Which A&E Firms May Qualify as a Designer?
Not every company involved with a qualifying building is entitled to the deduction.
For Section 179D purposes, a designer generally must be the person primarily responsible for designing the energy-efficient property and must have created the technical specifications for its installation.
The IRS specifically distinguishes designers from parties that simply install, repair, or maintain qualifying property.
Depending on the project and scope of work, an eligible designer could potentially include an architecture or engineering firm responsible for designing:
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HVAC and mechanical systems
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Interior lighting or electrical systems
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Building-envelope components
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Other qualifying energy-efficient building systems
A single project can involve multiple design disciplines, making it important to understand which firm or firms were responsible for the qualifying design work.
What Types of Building Owners Can Allocate the Deduction?
Since changes made by the Inflation Reduction Act, designer allocations are not limited strictly to traditional government buildings.
For qualifying property placed in service after December 31, 2022, specified tax-exempt entities can include:
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Federal, state, and local government entities
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Indian tribal governments
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Alaska Native Corporations
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Organizations exempt from federal income tax under Chapter 1 of the Internal Revenue Code
That means A&E firms should consider more than just government contracts when reviewing their project portfolio. Projects involving certain nonprofit and other tax-exempt organizations may also warrant evaluation.
How Much Could the 179D Deduction Be Worth?
The potential deduction varies based on factors including the building's square footage, qualifying energy savings, and whether applicable prevailing wage and apprenticeship requirements are satisfied.
For tax years beginning in 2026, the base deduction starts at $0.59 per square foot at 25% energy savings and increases by $0.02 per square foot for each additional percentage point of energy savings, up to $1.19 per square foot at 55% energy savings.
For qualifying projects, the otherwise applicable Section 179D deduction amounts may be multiplied by five if the prevailing wage and apprenticeship requirements are satisfied. The inflation-adjusted prevailing wage and apprenticeship amount for 2026 is $2.97 to $5.94 per square foot, compared with the regular $0.59 to $1.19 per square foot. In general, laborers and mechanics performing construction, alteration, or repair work must be paid at least the applicable prevailing wage rates, and qualified apprentices from registered apprenticeship programs must be employed for the required number of labor hours, subject to limited exceptions and correction procedures. A taxpayer claiming the increased deduction on Form 7205 generally must attach Form 7220, Prevailing Wage and Apprenticeship (PWA) Verification and Corrections, to its tax return and provide the required project and compliance information. If applicable, a separate Form 7220 must be filed for each facility or project for which the increased deduction is claimed. Form 7220 is not required when the increased deduction is claimed under an applicable beginning-of-construction exception.
Because the deduction is calculated on a square-foot basis, the opportunity can become significant for A&E firms involved with large facilities.
A Simple 179D Example
Consider an engineering firm that designed qualifying energy-efficient systems for a large tax-exempt facility.
If the project meets Section 179D requirements and the building owner allocates an eligible portion of the deduction to the engineering firm, the firm may be able to claim that allocated amount on its tax return.
The actual deduction would depend on the project's specific facts, including qualifying square footage, energy-efficiency requirements, applicable deduction rate, wage and apprenticeship requirements, and the amount properly allocated to the designer.
Because every project is different, firms should have potentially eligible projects evaluated individually rather than estimating a deduction solely from project size.
What Does an A&E Firm Need to Claim the 179D Deduction?
Identifying an eligible project is only part of the process.
The IRS requires supporting information and documentation to claim Section 179D. A designer generally needs a written allocation from the specified tax-exempt building owner, and the allocation must be made before the designer files the return claiming the deduction. The qualifying property also must be certified by a qualified individual who is not related to the person claiming the deduction, and the certification should be completed before the deduction is claimed.
Form 7205, Energy Efficient Commercial Buildings Deduction, is used to calculate and claim Section 179D. Designers use the form to report information about the property, certification, building owner, and allocation.
A&E firms evaluating potential opportunities should therefore consider gathering:
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Project and building information
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Construction-start and placed-in-service dates
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The firm's scope of design responsibilities
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Energy-efficiency certifications
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Applicable prevailing wage and apprenticeship documentation
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Written allocation documentation from the building owner
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Information about any previous Section 179D deductions associated with the building
What Should Architecture and Engineering Firms Do Now?
With the June 30, 2026, deadline behind us, A&E firms should shift their attention from future projects to identifying remaining eligible projects.
Owners, CFOs, and tax leaders should consider reviewing:
- Projects that began construction on or before June 30, 2026.
- Government and tax-exempt projects from recent years that may not previously have been evaluated for Section 179D.
- The firm's specific design responsibilities to determine whether it may meet the IRS definition of a designer.
- Existing or potential allocations from qualifying building owners.
- Supporting documentation necessary to substantiate the deduction.
Waiting until tax-return preparation to start this process can make obtaining project documentation, certifications, and owner allocations more difficult. Incorporating a Section 179D review into project closeout and year-end tax planning may help firms identify eligible opportunities more systematically.
Section 179D should also be considered as part of a broader year-round tax strategy. For additional tax planning opportunities and considerations, see our article on Mid-Year Tax Planning for Construction and Real Estate Businesses.
Frequently Asked Questions About Section 179D
Is Section 179D a tax credit or tax deduction?
Section 179D is a tax deduction, not a tax credit. Its official name is the Energy Efficient Commercial Buildings Deduction.
Did Section 179D expire on June 30, 2026?
Not exactly. Section 179D was terminated for property whose construction begins after June 30, 2026. Qualifying property whose construction began on or before that date may still potentially generate a deduction if the other requirements are satisfied.
Can an engineering firm claim Section 179D?
Potentially. An engineering firm may qualify when it is primarily responsible for designing eligible energy-efficient property installed in a building owned by a specified tax-exempt entity and receives a proper allocation of the deduction from the building owner.
Can an architecture firm claim Section 179D?
Potentially. An architecture firm that meets the IRS definition of a designer for qualifying energy-efficient property may receive an allocation from an eligible tax-exempt building owner. Eligibility depends on the firm's actual design responsibilities and the facts of the project.
Can a firm claim 179D for a project completed after June 30, 2026?
Potentially. The termination rule focuses on when construction of the property begins, rather than simply whether the property is completed after June 30. Projects beginning construction on or before June 30, 2026, should be evaluated to determine whether they meet the remaining Section 179D requirements.
Is 179D expected to be reinstated?
As of the date of this article, there is no explicit guidance outlining the return of the 179D deduction. However, many people closely connected to taxpayer advocacy and lawmakers believe there is a high likelihood that the 179D deduction will be reinstated eventually.
Review Your Remaining Section 179D Opportunities
Section 179D may be ending for new projects, but the opportunity has not necessarily disappeared for architecture and engineering firms.
Firms with government, nonprofit, and other qualifying tax-exempt projects that began construction on or before June 30, 2026, should consider reviewing those projects now to determine whether Section 179D deductions may still be available.
Trout CPA's Architecture, Engineering & Construction professionals can help A&E firms evaluate potential Section 179D opportunities, understand the tax requirements, and incorporate available deductions into their broader tax-planning strategy. Contact our Architecture & Engineering CPAs.
