Architects and engineers are often familiar with Section 179D from the building-owner side. What is sometimes overlooked is that the designer of a qualifying project may be able to claim the deduction instead of the building owner when the building is owned by an eligible tax-exempt entity.
And “designer” does not necessarily mean only the architect of record.
For Section 179D purposes, the IRS describes a designer as the person primarily responsible for designing the qualifying energy-efficient property and creating the technical specifications for its installation. Depending on the project, that could include an architect, engineer, contractor, environmental consultant, energy-service provider, or another party that performed qualifying design work. A company that merely installs, repairs, or maintains the equipment, however, does not qualify as the designer on that basis alone.
This creates a potentially significant opportunity for firms designing HVAC, hot-water, interior-lighting, and building-envelope systems for public and tax-exempt facilities.
Your Design Work Could Have Tax Value
Imagine your firm designed the HVAC system for a new school.
Or perhaps you developed the lighting specifications for a municipal building, designed the envelope improvements for a university facility, or provided mechanical specifications for a nonprofit hospital.
If the building and energy-efficient property meet the Section 179D requirements, the building owner may be able to allocate some or all of the available deduction to the qualifying designer.
Were you primarily responsible for creating the technical specifications for the qualifying energy-efficient property?
That is much more important than your company's job title.
Installation alone does not establish designer eligibility.
The IRS specifically recognizes architects, engineers, contractors, environmental consultants, and energy-service providers as examples of parties that may be designers when they create the technical specifications. Review IRS guidance
Step One
Who Owns the Building?
The building owner is one of the first eligibility checks.
For qualifying property placed in service before January 1, 2023, designer allocations generally applied to buildings owned by federal, state, or local governments or their political subdivisions.
For qualifying property placed in service after December 31, 2022, the Inflation Reduction Act expanded the allocation opportunity to property owned by a broader group of specified tax-exempt entities. These include governmental entities as well as Indian tribal governments, Alaska Native corporations, and organizations exempt from federal income tax under Chapter 1 of the Internal Revenue Code.
Before 2023
Government-owned buildings
Federal, state, or local governments and political subdivisions.
Eligibility depends on the specific owner and project circumstances.
Step Two
Establish That You Actually Designed the Property
Before calculating a deduction, the design role should be clearly supported.
Contracts, scopes of work, design agreements, drawings, specifications, submittals, change orders, and similar project records can help establish who was responsible for designing each qualifying system.
For example, if your firm developed the mechanical drawings and equipment specifications for a new HVAC system, those records can help establish your role.
If several firms participated in the project, that does not necessarily eliminate the opportunity. IRS guidance allows the eligible building owner, in appropriate circumstances, to allocate the deduction among multiple designers.
The goal is to create a clear connection between your firm and the property for which the deduction is being allocated.
Step Three
Understand What Was Actually Installed
Section 179D applies to qualifying energy-efficient commercial building property installed as part of the:
Interior Lighting
Heating, Cooling, Ventilation & Hot Water Systems
Building Envelope
The IRS requires qualifying property to be installed as part of a plan designed to reduce the building's total annual energy and power costs by at least the applicable threshold compared with a reference building meeting the applicable ASHRAE Reference Standard 90.1. For post-2022 qualifying energy-efficient commercial building property, the threshold begins at 25% savings.
This is also where project cost documentation becomes important.
NABiTax would typically look for records such as GC pay applications, subcontractor pay applications, invoices, schedules of values, change orders, equipment costs, and other construction-cost documentation that can help isolate the cost of the qualifying energy-efficient property.
The IRS Form 7205 instructions require the cost of the energy-efficient property rather than the total cost of the entire building or general renovation.
$20,000,000
Total Project
Qualifying Energy-Efficient Property Cost
Step Four
Secure the Allocation
A designer does not simply decide to take the building owner's deduction.
The eligible building owner must provide a written allocation of the Section 179D deduction to the designer. The IRS requires the allocation to satisfy the applicable allocation requirements, and Form 7205 requires designer-allocation information when a designer claims the deduction.
Think of the allocation as the bridge between the tax-exempt building owner and the designer.
NABiTax can assist with preparing the allocation documentation and coordinating the information needed so that the document can be submitted to the appropriate building-owner representative for execution.
The allocation should be handled carefully because it identifies the property, the designer, and the deduction being allocated.
Step Five
Measure the Building's Energy Performance
Once eligibility and design responsibility are established, the technical analysis begins.
A Section 179D energy analysis evaluates the qualifying building systems against a reference building constructed to the applicable ASHRAE Standard 90.1 requirements.
Proposed Building
Actual designed HVAC + Lighting + Envelope
ASHRAE Reference Building
Baseline systems under the applicable standard
The analysis is performed using qualified energy-modeling software and the applicable Performance Rating Method. The resulting certified percentage reduction in annual energy and power costs is used to determine the applicable deduction rate.
The greater the qualifying savings—up to the statutory maximum—the higher the potential deduction per square foot.
What Could the Deduction Look Like?
For tax years beginning in 2026, the base Section 179D rate starts at $0.59 per square foot at 25% energy savings and increases as savings improve, up to a maximum of $1.19 per square foot at 55% energy savings.
When the applicable prevailing-wage and apprenticeship requirements are satisfied—or another applicable exception permits the increased rate—the 2026 deduction can range from $2.97 to $5.94 per square foot.
Consider a simplified example: a 100,000 SF building with 58% certified energy savings. Because 58% is above the level required to reach the 2026 maximum rate:
100,000 SF | 58% Savings | 2026
Up to approximately 5× increase
The actual allowable deduction remains subject to the Section 179D rules, including applicable property cost limits, prior deductions associated with the building, the amount allocated to the designer, and other project-specific requirements.
The IRS states that meeting the applicable prevailing-wage and apprenticeship rules generally provides an increased deduction amount equal to five times the underlying statutory values before inflation adjustments.
Modeling Alone Isn't Enough
A Section 179D study does not end when the energy model shows sufficient savings.
The IRS certification process requires a qualified individual, independent from the taxpayer claiming the deduction, to complete the required certification. IRS guidance also requires field inspections after the qualifying property has been placed in service to verify that the installed building systems are consistent with the design and energy-saving targets.
Design Documents
Energy Modeling
Field Verification
Certification
The model establishes the calculated performance.
The inspection establishes that the qualifying property was actually installed.
Both matter.
From Design Documents to a Filing-Ready 179D Package
A properly developed Section 179D file should tell the complete story of the project.
- Who owned the building?
- Who designed the qualifying property?
- What systems were installed?
- What did those systems cost?
- When were they placed in service?
- How much energy did the building save?
- Was the installation verified?
- How much did the owner allocate?
NABiTax's role is to bring those pieces together into an organized technical package—from eligibility review and allocation support through energy analysis, field verification coordination, and final documentation.
For eligible claims, Form 7205 is used to calculate and claim the Section 179D deduction and includes information relating to the property.
The supporting 179D report can then maintain the technical calculations, project documentation, certification support, energy-modeling results, and related substantiation that may be important if the deduction is later reviewed.
Did You Design a Tax-Exempt Project?
If your company has designed energy-related systems for schools, universities, hospitals, government facilities, nonprofits, public buildings, or other tax-exempt organizations, it may be worth reviewing those projects before assuming the tax opportunity belongs somewhere else.
You do not necessarily need to be the building owner.
You do not necessarily need to be the architect of record.
And the name on your business card does not determine eligibility.
What matters is whether your organization was primarily responsible for creating the technical specifications for qualifying energy-efficient property, whether the building owner is an eligible allocating entity, and whether the remaining Section 179D requirements can be satisfied.