Section 179D Energy Efficiency Deduction Calculator
Enter building data to estimate the Section 179D deduction and tax savings.
| Metric | Value |
|---|
What Section 179D Offers
Section 179D allows owners of commercial buildings and designers of government-owned facilities to deduct a portion of project costs when they reduce energy use. The Inflation Reduction Act turbocharged the benefit by raising the maximum deduction to $5.00 per square foot for projects that achieve at least 25% energy savings and meet prevailing wage and apprenticeship requirements. Designers of schools, hospitals, and municipal buildings can receive the deduction via allocation letters, turning energy modeling work into tangible revenue. This calculator helps owners and designers understand the scale of the deduction, tax savings, and whether compliance costs are justified.
The deduction applies to three major systems: lighting, HVAC and hot water, and the building envelope. Projects that improve one system can qualify for a partial deduction, while whole-building retrofits can capture the full amount. Because the deduction is performance-based, you must commission an energy model comparing the as-built design to the ASHRAE 90.1 baseline. The calculator assumes you already have a projected percentage savings from that model.
Inputs Explained
Building square footage is the gross floor area covered by the project. Energy savings is the percentage reduction in total annual energy cost relative to the reference building. The prevailing wage toggle determines which rate schedule applies: without compliance, deductions range from $0.50 to $1.00 per square foot; with compliance, the range jumps to $2.50 to $5.00. Select the systems included in your scope to estimate a partial deduction if you are not touching the whole building. Designers of tax-exempt buildings should adjust the allocation percentage if the owner plans to share the deduction among multiple design firms. Finally, modeling and certification costs capture the expense of hiring a qualified engineer to certify the savings.
How the Deduction Is Calculated
The deduction per square foot scales linearly between the base and maximum rates depending on energy savings. Savings must meet or exceed 25% to qualify. The MathML below expresses the calculation.
Here, Rbase is $0.50 without prevailing wage or $2.50 with prevailing wage, m is the incremental increase per percentage point (0.02 or 0.10), and S is the modeled savings percentage capped at 50 points above 25. The calculator multiplies the resulting rate by the fraction of systems upgraded and by the square footage to produce the total deduction. Tax savings equal the deduction multiplied by the marginal tax rate.
Worked Example: School Retrofit
A design firm upgrades lighting and HVAC systems in a 85,000-square-foot municipal school. The energy model shows 35% savings relative to ASHRAE 90.1-2007. Because the building is tax-exempt, the owner allocates the deduction to the designer, who meets prevailing wage requirements. The base rate is $2.50, and each percentage point over 25 adds $0.10. With 10 percentage points of additional savings, the rate becomes $3.50 per square foot. Because the envelope is not upgraded, only two-thirds of the full deduction is available, yielding an effective rate of $2.33. Multiplying by square footage produces a deduction of about $198,050. At a 28% marginal tax rate, the tax savings are roughly $55,454. After subtracting $12,000 for modeling and certification, the net benefit is about $43,000.
Developers can use the calculator to compare scenarios: adding envelope improvements that boost savings to 45% could push the rate to $4.50 per square foot, raising the deduction to $255,000. Designers can gauge whether the potential fee share justifies prevailing wage compliance and reporting.
Comparison Table: Deduction Scenarios
| Scenario | Savings % | Rate ($/ft²) | Deduction |
|---|---|---|---|
| Base compliance (no prevailing wage) | 25% | $0.50 | $42,500 |
| Prevailing wage at 35% savings | 35% | $3.50 | $255,000 |
| Prevailing wage at 45% savings | 45% | $4.50 | $328,500 |
| Partial systems (lighting only) | 35% | $1.17 | $99,450 |
These comparisons illustrate how energy savings and prevailing wage compliance dramatically alter the deduction. Modeling higher savings can unlock hundreds of thousands of dollars in tax deductions, making deeper retrofits more attractive.
Interpreting the Output
The results panel lists the deduction rate, total deduction, tax savings, net benefit after documentation costs, and value per square foot. It also estimates the break-even fee designers can charge for 179D allocation services and the average annualized benefit over the analysis horizon. Export the CSV to share with tax advisors or project owners considering 179D allocations.
Owners should remember that Section 179D deductions reduce the depreciable basis of the building by the same amount. Designers receiving allocations should confirm in writing that the owner will not claim the same deduction. Documentation must be signed by a qualified third party using DOE-approved software, so factor certification fees into your budget.
Limitations and Assumptions
The calculator uses simplified assumptions about partial system deductions. In practice, IRS guidance requires specific modeling of each subsystem. It also assumes the owner or designer can use the full deduction in the current tax year; carryforwards may apply otherwise. Prevailing wage compliance is treated as binary, but actual requirements include certified payroll and apprenticeship ratios. Energy savings must be measured against the correct ASHRAE standard year for the project, which varies with the permit date. Use this tool as a planning aid and consult tax professionals for compliance.