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Under the 2025 Final Budget Reconciliation Bill, this deduction has been repealed for projects that begin construction after June 30, 2026.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
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