Claiming the 179D Deduction: What Design-Build Contractors Must Know

The 179D Deduction is a federal incentive rewarding sustainable construction and design. It is often claimed by the property owner/developer. However, if the property owner is a tax-exempt entity — such as a nonprofit organization or a government entity — they may allocate the deduction to the energy-efficient system’s designer.

Contractors who participate in the design phase of a project – in a design-assist situation, a delegated design scenario, or a traditional design-build arrangement – may be allocated this lucrative Deduction.

Here are 5 things design contractors must understand about the 179D Deduction:

Eligible Facilities

Design contractors may claim the Deduction when working on certain types of projects:

• Government buildings
• Properties owned by tax-exempt entities
  • K-12 Schools and Universities
  • Non-Profits
  • Hospitals
  • Religious Institutions
  • Military Bases
  • Tribal-Owned Properties

The project may be ground-up new construction or an energy-efficient retrofit.

Making the Grade

In order to qualify for the Deduction, the property in question must demonstrate a reduction in energy consumption vs. a benchmark facility.

The energy savings can come from improvements to any or all of the following:

• HVAC
• Interior Lighting
• Building Envelope

A qualified third party must perform an energy analysis, inspect the property, and provide certification.

Potential Benefit

The 179D Deduction can be quite significant, and the benefit grows with the size of your property.

Benefit is determined by:

• Building size
• The extent to which energy consumption was reduced
• The satisfaction of Prevailing Wage and Apprenticeship Requirements (PWA)
  • Mechanics and laborers must be paid no less than the prevailing wages required for federal work
  • Qualified apprentices must be used for a certain minimum percentage of hours

All government projects meet PWA Requirements, and so do many projects undertaken by tax-exempt entities.

Meeting Requirements makes a big difference:

• If PWA Requirements are met, the maximum benefit is $5.00/SF (adjusted for inflation, for example $5.81/SF in 2025).
• If PWA Requirements are not met, the maximum benefit drops to $1.00/SF (adjusted for inflation, for example $1.16/SF in 2025).

Consider a recently constructed state university building. The building is five stories high, and its total area is around 100,000SF. The building demonstrated maximal energy savings as compared to a baseline.

• If PWA Requirements were met, the Deduction would be $500,000
• If PWA Requirements were not satisfied, the Deduction would drop to $100,000

The Allocation Process

Design contractors can’t claim the Deduction directly. Instead, it must be “allocated” to them by the building’s owner.

Form 7205 is used to claim the 179D Tax Deduction. When the deduction is being allocated, the contractor must complete the form’s final section, providing the building owner’s name, the allocation date, and the name and address of the owner’s representative authorized to complete the allocation.

Don’t Go It Alone

Understanding who qualifies as a “design professional” under Sec. 179D of the tax code is somewhat nuanced.

A qualified design professional’s activities include:

• Designing the property (or the energy-efficient system)
• Creation of the technical specifications for installation

A contractor who only installs, repairs, or maintains a system is not considered a “design professional” under the tax code, and is not eligible for the 179D Deduction.

Recent case law testifies to the complexity of the claims process. It’s crucial to be certain that your activities qualify and that your documentation is order.

The good news is that you don’t have to do it alone.

Working with an experienced 179D Deduction professional can make the difference between a successful claim and one that is disallowed. The team at Boyer and Ritter are here to help you navigate the process and fully leverage this valuable incentive.

Key Contacts

Paul Fisher, CPA - Principal, Chair Construction and Real Estate Services Group

Wesley Veigle, CPA - Director, Construction and Real Estate Services Group