July 4, 2025, Update:
Under the 2025 Final Budget Reconciliation Bill, this deduction has been repealed for projects that begin construction after June 30, 2026. Projects that commence construction before the deadline will still be eligible to claim the deduction under current rules, making timing a key factor in project feasibility and tax strategy.
Initially created to incentivize the adoption of clean solutions in for-profit commercial buildings, recent updates to the Section 179D Energy Efficient Commercial Buildings Deduction (Section 179D) have opened the door for nonprofit organizations to take advantage of this notable tax deduction by investing in energy-efficient improvements.
This is the second episode of Cherry Bekaert’s Not-for-Profit podcast mini-series on energy tax credits and incentives, which covers:
- Section 179D Background
- Eligibility for Section 179D
- Enhanced Deduction Requirements
- Section 179D Benefits
- Additional Section 179D Opportunities
- Frequently Asked Questions (FAQs) for Nonprofits
Energy Efficient Commercial Buildings Deduction (Section 179D): Overview
Section 179D, established under the Energy Policy Act of 2005, offers a tax deduction for energy-efficient upgrades to owners and designers of commercial buildings. Originally limited to taxable entities, the Inflation Reduction Act (IRA) of 2022 expanded eligibility to include nonprofits, schools, religious institutions and other non-taxpaying organizations by allowing them to allocate the deduction to qualified designers.
This incentive applies to property placed in service as part of a new construction or building upgrade project and supports the installation of systems that enhance energy efficiency while reducing the building’s tax basis.
Updates to the 2022 IRA have significantly increased the accessibility and value of the deduction, especially for nonprofits. The energy reduction threshold has been lowered, requiring only a 25% improvement compared to American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) 2007 standards to qualify, making it easier for more projects to meet the criteria.
Additionally, the deduction can now be claimed every three to four years for qualifying renovations or additions, allowing organizations to benefit from recurring improvements. Most notably, the maximum deduction amount has nearly tripled, rising from $1.88 per square foot in 2022 to $5.65 per square foot in 2024, greatly enhancing the financial incentive for energy-efficient investments.
How Can Nonprofits Use the Section 179D Deduction?
Since nonprofits are tax-exempt, they can allocate the energy tax incentive to a taxpaying entity or qualified designer, including architects, engineers, contractors and consultants working on the structural renovations.
Notice 2018-40 provides the framework for this allocation process, stating that the allocating party (the nonprofit) has full discretion over which designer receives the allocation and how much of the deduction is assigned.
Before applying for the Section 179D tax credit, nonprofits should engage advisors early in the planning stages of a renovation or new construction project to understand and identify the most suitable solutions for their building and evaluate the potential deduction allocations they may be eligible to receive.
Section 179D Nonprofit Energy Efficient Eligibility Requirements
Nonprofits pursuing energy-efficient upgrades to buildings, such as schools, hospitals and community centers, may be eligible for the Section 179D deduction if their projects involve improvements to HVAC and hot water systems, interior lighting or the building envelope (such as insulation, windows or roofing).
Since the ASHRAE 2007 standards are the baseline, many modern systems already meet the energy deduction threshold. Upgrades don’t necessarily need to be labeled as “green” to qualify.
Bonus Deduction for Prevailing Wage and Apprenticeships
To unlock the Section 179D bonus deduction, which is worth up to five times the base amount, projects must meet specific labor standards, including paying prevailing wages and using qualified apprentices for a portion of total labor hours.
These requirements, introduced by the IRA, encourage fair labor practices and workforce development. In this sense, nonprofits and their design teams should plan early, verifying wage rates through the Department of Labor and coordinating with registered apprenticeship programs.
A Good Faith Effort Exception may apply if apprentices are unavailable, but proper documentation and clear contract language are essential to secure and maximize the deduction.
Nonprofit Energy Savings and Benefits for Section 179D
By allocating the Section 179D deduction to designers, they may, in return, offer reduced construction costs, extend warranties or donate back to the nonprofit. This enables nonprofits to stretch their budgets further and reinvest in their organization, enhancing their missions.
Energy-Efficient Section 179D FAQs for Nonprofits
The base amount starts at $0.58 per square foot for the Section 179D deduction. Using the enhanced deduction, taxpayers can qualify for up to $5.81 per square foot.
Both building owners and designers can claim the Section 179D deduction. Builders can include both property owners and tenants, while designers consist of architects, engineers, contractors, energy service providers and environmental consultants. However, designers must be responsible for creating the specifications for the energy-efficient systems used in the building.
Based on IRS guidelines, a commercial building placed in service within five years before the beginning of the retrofit plan and located in the U.S. could qualify. The most common types of buildings claimed include office buildings, hotels, retail properties, warehouses, multi-family residential buildings, schools, airports, courthouses, libraries, hospitals and tribal or Native American-owned buildings.
Building owners who are part of a government organization or nonprofit can allocate the deduction to a qualifying designer. However, the designer will need an allocation letter from the building owner to claim the deduction.
Your Guide Forward
Cherry Bekaert’s Energy Tax Credits & Incentives team evaluates your organization’s eligibility to receive business energy tax credits and incentives, helping you receive the maximum monetary benefit allotted. If you invest in clean energy advancements, you may qualify for federal, state, and local energy tax credits and incentives. If you have any questions specific to your needs, Cherry Bekaert’s Not-for-Profit group is available to discuss your situation with you.
Related Insights
- Podcast: Direct Pay for Not-for-Profits
- Article: Factors to Consider When Seeking Cost Segregation and Section 179D Study Service Providers
View All Not-for-Profit Podcasts
MATTHEW SOCHA: Welcome, and thanks for listening to Cherry Bekaert's Not-for-Profit Podcast Series. In each episode, we hear from the best in the business on the latest challenges, trends, and opportunities affecting not-for-profit organizations and educational institutions. I'm Matthew Socha, leader of Cherry Bekaert's Not-for-Profit Industry Practice.
AMY DOSICK: I'm Amy Dosick, and I lead Cherry Bekaert's Not-for-Profit Tax Practice. I'm here today to talk about Section 179D, the Energy-Efficient Commercial Building Deduction for not-for-profits. I'm delighted to be here with members of our Tax Credits and Incentives Advisory Group, who are going to tell you a little bit more about how your organization can benefit.
MARTY KARAMON: Amy, we're delighted to be with you today as well. I am Marty Karamon. I'm the head of our Tax Credits and Incentives Advisory Group. We're a group within Cherry Bekaert that focuses on bringing both cash benefits and tax deductions and incentives to organizations for a variety of activities.
MARTY KARAMON: I'm joined today by Ed Vittel and Andre Cohn, two of the experts in my group who are specifically working around Section 179D and the methods to monetize Section 179D for not-for-profits. I'll hand it over now to Andre and Ed to talk a bit about Section 179D and their backgrounds. Amy, feel free to ask us questions.
ANDRE COHN: Thank you. My name is Andre Cohn. I've been working on Section 179D for close to a decade, securing and delivering just over a billion dollars in incentives over the years. It's been rewarding to see how this works out for our clients.
ED VITTEL: Thanks, Andre. I'm Ed Vittel. I've worked with Section 179D for almost a decade. Before that, I was involved in construction administration and project management for large construction projects, and earlier in my career I worked in electrical engineering. I'm excited to be here and appreciate the opportunity to discuss this topic.
AMY DOSICK: Andre, could you walk us through some of the changes to Section 179D that came from the Inflation Reduction Act and how nonprofits and schools can benefit in an enhanced way now?
ANDRE COHN: Sure. Section 179D was originally enacted by the Energy Policy Act of 2005. It is the Energy-Efficient Commercial Building Deduction and rewards commercial building owners and designers who construct energy-efficient commercial buildings.
ANDRE COHN: Through 2022, the deduction was worth up to $1.88 per square foot if the cost savings exceeded 50 percent over an ASHRAE 2007 baseline standard. In 2023, the Inflation Reduction Act made significant changes.
ANDRE COHN: Key changes include a 25 percent energy reduction over the ASHRAE 2007 standard as the baseline qualification and a triennial reset of the deduction so it can be taken again every three to four years after a renovation or addition. Private schools, charity hospitals, nonprofit organizations, religious institutions, and other non-tax-paying entities can now allocate the deduction to a qualified designer.
ANDRE COHN: There are new prevailing wage and apprenticeship requirements, which Ed will discuss, and the deduction amount increased sharply from $1.88 per square foot in 2022 to $5.65 per square foot in 2024. For example, a 100,000-square-foot building that yielded $188,000 in deductions in 2022 could be worth a little over $565,000 now.
AMY DOSICK: Ed, could you tell us how nonprofits or schools can determine if they're eligible for the Section 179D deduction?
ED VITTEL: Section 179D is a deduction that taxpayers can receive. Nonprofit entities can allocate this deduction to a designer of the facility upgrades.
ED VITTEL: Nonprofit owners should consider any project that is new construction or a renovation to their facilities that includes one or more of three components: HVAC and hot water systems, interior lighting, or the building envelope or shell. Projects involving mechanical upgrades or interior lighting should be evaluated, because almost any such upgrade today will be significantly more efficient than the ASHRAE 2007 standard.
ED VITTEL: If your project involves these components or new construction, you should talk to us about it, since it may qualify under the ASHRAE 2007 baseline.
AMY DOSICK: Andre, can you describe the benefits of the Section 179D deduction and how allocations work?
ANDRE COHN: Notice 2008-40 provides the framework for the allocation process. It states that the allocating party, in this case the nonprofit organization, is sovereign in choosing which qualified designer they allocate the deduction to and how much to allocate.
ANDRE COHN: With the expansions from the Inflation Reduction Act, our nonprofit clients have worked with design teams to negotiate construction cost reductions, extended warranty periods to offset future costs, and additional funding for campus programs via donations back to the nonprofit.
ANDRE COHN: Because nonprofits can now allocate the Section 179D deduction to qualified designers, it's important to involve our team at Cherry Bekaert as early as possible so we can assess potential deduction amounts and guide you through the process during renovation or new construction planning.
AMY DOSICK: I understand there are enhanced deductions if certain prevailing wage and apprenticeship requirements are met. Can you walk us through the process for ensuring a project meets these requirements?
ED VITTEL: The Inflation Reduction Act introduced a bonus deduction tied to meeting prevailing wage and apprenticeship criteria. To qualify for the bonus deduction, all laborers on the project must be paid prevailing wages for the region, and a certain percentage of labor hours must be performed by qualified apprentices.
ED VITTEL: Ensuring these requirements are met involves reaching out to the Department of Labor to confirm prevailing wages if rates aren't already posted, and contacting a qualified apprenticeship program to request apprentices for your project. There is a good-faith exemption if you make an effort to secure apprentices and they are not available, so documentation of that outreach is important.
ED VITTEL: This bonus deduction can act as a multiplier, up to five times the base deduction, so it's valuable to consider. We can help identify these requirements, communicate them to contractors, include contract language about meeting the requirements, and document compliance.
AMY DOSICK: It sounds like these requirements require front-end planning. How is Cherry Bekaert working with clients to maximize their Section 179D deduction opportunities?
MARTY KARAMON: One part of our approach is to make the process easy for clients. We do the upfront work to scope out benefits, discuss projects with clients, identify the designers they're working with and their locations, and assess what benefits may be available.
MARTY KARAMON: We then provide ideas about how clients can monetize these deductions through available mechanisms. The most important thing we do is our homework so clients feel comfortable getting involved and have the time to work with us to identify all eligible projects.
AMY DOSICK: For our listeners, if there's one thing you hope they'll remember, what would it be?
MARTY KARAMON: Contact us even if you have an inkling that you may qualify. Consider not only what you're doing now but what you plan to do going forward. If you have a capital plan, talk to us so we can assess potential eligibility for Section 179D and other incentives.
ANDRE COHN: Don't assume it has to be an ultra-energy-efficient project to qualify. If it involves construction on a commercial building, have us take a look. Over the years, clients have used these funds to hire additional staff, expand offices, and upgrade technology. With the increased deduction amounts under the Inflation Reduction Act, nonprofit organizations can use these funds to strengthen and expand programs and building projects.
AMY DOSICK: Marty, Andre, Ed, thank you for joining me today to discuss the new opportunities around Section 179D, the Energy-Efficient Commercial Building Deduction. I'm Amy Dosick. If you want more information or want to contact our team to help with a project, you can reach me at amy.dosick at cbh.com. That's A-M-Y dot D-O-S-I-C-K at cbh.com.
AMY DOSICK: Thank you for listening today.
MARTY KARAMON: Thank you, Amy, for hosting us. We appreciate it.
ANDRE COHN: Thank you.
ED VITTEL: Thank you.
MATTHEW SOCHA: This is Matthew again. I hope you enjoyed this episode and look forward to our next one. Don't forget to subscribe. We'll see you next time.
