By: Nina Desai | 09/15/25
Energy-efficient tax incentives play a vital role in encouraging property owners, developers, and builders to invest in sustainable construction and retrofits. By reducing the upfront cost of energy-saving improvements, these incentives help lower long-term operating expenses, reduce environmental impact, and support national energy policy goals. The federal government, through the Internal Revenue Code, has established Section 179D and Section 45L as key tools to drive the adoption of high-performance building standards in both commercial and residential sectors.
Section 179D applies to commercial buildings and certain residential buildings at least four stories above grade, covering new construction, major renovations, and retrofits that improve energy efficiency in systems such as lighting, HVAC, hot water, or the building envelope. Eligible claimants include building owners, tenants making capital improvements, and designers of government- or tax-exempt–owned buildings (e.g., architects, engineers) who are allocated the deduction by the property owner.
The deduction is calculated based on building square footage and energy savings achieved: the base rate is $0.50 per square foot, increasing by $0.02 for each percentage point above a 25% energy savings threshold, up to $1.00; meeting prevailing wage and apprenticeship requirements raises this range to $2.50–$5.00. Improvements must be certified to meet ASHRAE 90.1 standards, and an alternative retrofit deduction under §179D(f) allows claims for older buildings with qualified plans targeting at least a 25% energy use intensity reduction. Recent changes made Section 179D permanent, expanded eligibility to include retrofits of older buildings and tax-exempt entities, introduced prevailing wage and apprenticeship rules for maximum deductions, indexed amounts for inflation, and replaced prior partial-deduction rules with updated savings thresholds [1].
Section 45L, the New Energy Efficient Home Credit, applies to developers and builders of qualifying new homes, including single-family, multifamily, and manufactured homes, located in the United States and substantially completed after enactment. Eligible homes must meet specified efficiency criteria, such as ENERGY STAR or DOE Zero Energy Ready Home (ZERH) certification. The credit reduces federal tax liability dollar for dollar and is claimed by the eligible contractor, typically the builder or developer, in the year the home is acquired by the buyer for residential use.
For homes acquired before July 1, 2026, the credit is $2,500 for single-family or manufactured homes meeting ENERGY STAR standards and $5,000 for ZERH certification. For multifamily units, the credit is $500 (ENERGY STAR) or $1,000 (ZERH) per unit without prevailing wage compliance, and $2,500 or $5,000 per unit with prevailing wage. Recent legislative changes extended and enhanced Section 45L, increasing credit amounts, recognizing stricter standards like ZERH, and introducing prevailing wage requirements for higher multifamily credits. The program is currently set to expire for homes acquired after June 30, 2026, unless further extended by Congress [2].
The choice between Section 179D and Section 45L depends on the type of property and the nature of the project:
Beginning in 2023, the Inflation Reduction Act removed the height restriction for Section 45L, allowing residential buildings of four or more stories to qualify, which makes it possible to claim both the 45L tax credit and the 179D tax credit on the same property.
This change enables developers to leverage 45L and 179D credits together for greater tax savings on qualifying multifamily projects.
To claim Section 179D, the taxpayer must obtain a certification from a qualified individual (licensed engineer or contractor) verifying the energy savings and file the deduction on their tax return. For government or tax-exempt buildings, the deduction must be allocated in writing to the designer. For Section 45L, the builder must obtain certification that the home meets the required energy standards and claim the credit on their tax return for the year the home is acquired by the buyer.
Section 179D can provide a deduction of $0.50 to $5.00 per square foot, depending on energy savings and compliance with prevailing wage and apprenticeship requirements. Section 45L offers a credit of $2,500 to $5,000 per home, or $500 to $1,000 per multifamily unit, with higher amounts for projects meeting prevailing wage standards [1].
Section 179D claims require IRS Form 7205, certification from a qualified professional such as a licensed engineer or contractor verifying energy savings using approved software, and supporting documents like energy modeling reports or allocation letters. Section 45L claims need IRS Form 8908 and certification proving compliance with ENERGY STAR or Zero Energy Ready Homes, typically from third-party verifiers.
Qualified professionals such as licensed engineers, architects, and specialized energy consultants can assess your project’s eligibility for 179D or IRC section 45l. Tax advisors with experience in energy-efficient building incentives can also provide guidance on compliance, documentation, and maximizing your tax benefits.
By understanding the distinctions and requirements of Section 179D and Section 45L, property owners, developers, and builders can make informed decisions to leverage these valuable incentives for energy-efficient construction and retrofits.
For additional insights, explore:
Cited sources
[1]179D Energy Efficient Commercial Buildings Tax Deduction
[2]Section 45L Tax Credits for Zero Energy Ready Homes
Nina Desai
Bennett Thrasher LLP
Phone: (770) 396-2200
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