Taxpayers and contractors in the real estate and construction industries have long relied on two powerful federal tax incentives to promote energy efficiency: the Section 179D deduction for commercial buildings and the Section 45L credit for new energy efficient homes. However, both of these incentives are now facing imminent expiration under recent legislative changes. If you are considering energy efficient construction or improvements, immediate action is required to ensure you do not miss out on these valuable benefits.

Section 179D: Energy Efficient Commercial Buildings Deduction

Section 179D provides a deduction for the cost of energy efficient improvements to commercial buildings and certain residential rental properties. Eligible improvements include upgrades to lighting, HVAC and building envelope systems that meet specific energy reduction standards. The deduction can be substantial, offering up to $5.00 per square foot for qualifying projects.

Expiration Alert: Under H.R. 1, also known as the One Big Beautiful Bill Act (OBBBA), Section 179D will expire for property where construction begins after June 30, 2026. This means that only projects that commence construction before July 1, 2026, will be eligible for the deduction. Projects that start after this date will not qualify, regardless of when they are completed.

Section 45L: New Energy Efficient Home Credit

Section 45L offers a tax credit to eligible contractors and developers for each qualified new energy efficient home acquired by a homeowner or leased as a residence. The credit can be as high as $5,000 per home, depending on the level of energy efficiency achieved and the type of home constructed.

Expiration Alert: The OBBBA also accelerates the sunset of Section 45L. The credit will no longer be available for homes acquired after June 30, 2026. This is a significant change from prior law, which had extended the credit through 2032. Contractors and developers must ensure that homes are acquired (purchased or leased for use as a residence) on or before June 30, 2026, to claim the credit.

Why Immediate Action Is Critical

The accelerated expiration of both Section 179D and 45L creates a narrow window of opportunity. Construction projects often require significant lead time for planning, permitting and execution. Delays in starting construction or closing on home sales could result in missing the eligibility deadlines, leaving substantial tax savings on the table.

Key Steps for Taxpayers and Contractors:

1. Review Current and Planned Projects:
   Assess all ongoing and upcoming projects to determine eligibility for Section 179D and 45L incentives.
2. Accelerate Timelines Where Possible:
   For commercial projects, ensure construction begins before July 1, 2026. For residential projects, ensure homes are acquired by buyers or lessees by June 30, 2026.
3. Coordinate with Tax Advisors and Project Teams:
   Engage with tax professionals and project managers to align construction schedules and closing dates with the statutory deadlines.
4. Document Compliance:
   Maintain thorough documentation to substantiate eligibility, including energy modeling reports, certifications, and records of construction start and acquisition dates.

Conclusion

The clock is ticking for taxpayers and contractors seeking to benefit from the Section 179D deduction and Section 45L credit. With both incentives set to expire for projects that do not meet the new deadlines, proactive planning and swift action are essential. Don’t let these valuable tax benefits slip away—review your projects now and take the necessary steps to secure your eligibility before time runs out.

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