The window to qualify for the §179D Energy Efficient Commercial Buildings Deduction is soon approaching. To preserve eligibility, construction must begin before June 30, 2026. Once construction has begun, the project may be placed in service at a future date without jeopardizing eligibility.

Background
§179D provides a deduction for qualifying energy-efficient commercial building property placed in service in the United States. Beginning in 2023, the deduction applies not only to building owners, but also to designers of qualifying property installed in buildings owned by specified tax-exempt entities, including governmental bodies, certain tribal entities, Alaska Native Corporations, and other tax-exempt organizations. Qualifying property generally relates to the following building systems:

• Interior lighting
• HVAC/hot water systems
• Building envelope

Construction Start
The IRS provides two methods for establishing a qualifying construction start date:

1. Physical Work Test: Construction begins when physical work of a significant nature starts. Preliminary activities do not qualify. As a result, planning, design, financing, permitting, surveying, site clearing, and similar preparatory work generally do not establish a start date.
2. Five Percent Safe Harbor: Construction is considered started if, by the deadline, the taxpayer pays or incurs at least 5% of the total project cost and then continues efforts to advance the project. Costs include materials, equipment, or other components that become part of the project. Soft costs can also be included but should be reviewed carefully. Design, engineering, and similar fees may not count in every case, particularly if they are preliminary in nature or are not treated as costs of the eligible property for begin-construction purposes.

Under either method, the taxpayer must continue advancing the project after construction has begun. Because the analysis is highly fact specific, taxpayers should retain contracts, invoices, payment records, and other documentation supporting the timing and nature of the work performed and the treatment of project costs.

Why Act Now
Construction must begin before June 30, 2026 to qualify for the §179D Energy Efficient Commercial Building Deduction. The deduction amount is determined based on the year the property is placed in service. While 2027 values have not been published, the deduction may be modestly higher than the current 2026 maximum of $5.94 per square foot due to inflation adjustments.
If you would like assistance in evaluating whether your projects may qualify, we invite you to contact our team for a complimentary analysis.