IRC Section 179D(f): The Alternative Deduction for Building Retrofits
(This article is from Aug 19, 2026 LinkedIn post; https://www.linkedin.com/pulse/irc-section-179df-alternative-deduction-building-james-peacock-pmrwc/)
With the termination of IRC Section 179D for property where construction begins after June 30, 2026, much of the recent attention has understandably focused on this deadline. Now that we have passed that date, projects currently underway or recently completed may continue to have Section 179D implications for several months or even years.
One area that deserves more attention is IRC Section 179D(f), the alternative deduction for energy efficient building retrofit property.
Section 179D(f) was added by the Inflation Reduction Act (IRA 2022) and applies to qualifying retrofit property placed in service after December 31, 2022, pursuant to a qualified retrofit plan established after that date.
The IRS Section 179D Practice Unit (February 27, 2025), recognizes the alternative deduction, but the detailed application of Section 179D(f) was not developed in the Practice Unit to the extent I believe was needed. This was an area I was working on before I retired from the IRS in September 2025, and I had hoped additional guidance would eventually be released.
Circumstances obviously changed.
But Section 179D(f) did not simply disappear. For renovations already underway that meet the applicable construction-start requirements, the alternative deduction can remain relevant. Building owners and the qualified professionals involved with these projects should understand the requirements before the final measurements and certifications are made.
How Section 179D(f) is Different
The traditional Section 179D calculation generally relies on computer energy modeling to compare the proposed building with a reference building under the applicable ASHRAE Standard 90.1.
Section 179D(f) takes a different approach.
For qualifying existing-building retrofits, the alternative deduction is based on the reduction in the building's measured Energy Use Intensity (EUI).
In simple terms, this creates a before-and-after comparison that goes like this:
Baseline EUI → Retrofit → Placed in Service → Final EUI → Final Certification
The qualified retrofit plan must specify modifications that, in the aggregate, are expected to reduce the building's EUI by at least 25 percent compared with its baseline EUI.
Energy Use Intensity (EUI)
The Code defines EUI as annualized, measured site energy use intensity. For those who are not in the building design industry, Energy Use Intensity (EUI) is a measure of a building's annual energy consumption relative to its size, generally calculated as total annual building energy use divided by gross floor area and expressed as kBtu (thousand British thermal units, a measure of heat energy) per square foot per year. Expressed as: kBtu/ft²/year.
For purposes of the EUI calculation, the building’s energy use is measured over a full year, both before and after the renovation. The statutory certification dates are separate timing requirements discussed below.
Also note that the Internal Revenue Code specifically states to measure “site energy use intensity” in §179D(f)(7)(A). Site energy, as stated by ENERGY STAR, is the energy actually consumed at the building, essentially what is reflected through its energy bills/meters. So, for those in the industry, it is not “source energy” which additionally accounts for generation, transmission, and distribution losses.
Qualified Building
Section 179D(f) applies to a "qualified building." The building must:
Be located in the United States; and
Have originally been placed in service at least five years before the qualified retrofit plan is established.
Building Retrofit Property Defined
Energy efficient building retrofit property (EEBRP) must be depreciable property installed on or in the qualified building as part of one or more of the following:
Interior lighting systems;
Heating, cooling, ventilation and hot water systems; or
The building envelope.
The property must be installed pursuant to the qualified retrofit plan and certified by the qualified professional as meeting the applicable requirements.
For current projects, another date is now particularly important.
Section 179D does not apply to property for which construction begins after June 30, 2026. Therefore, projects intended to qualify must satisfy the applicable beginning-of-construction requirements on or before that date.
Qualified Retrofit Plan and Qualified Professional
The qualified retrofit plan must be a written plan established after December 31, 2022, and prepared by a qualified professional. It must specify modifications to the building that, in the aggregate, are expected to reduce the building's EUI by 25 percent or more compared with its baseline EUI.
For purposes of Section 179D(f), a qualified professional is a licensed architect or licensed engineer who meets any additional requirements prescribed by the Secretary. The Form 7205 instructions provide some additional language regarding the required credentials, but detailed requirements for qualified professionals have not been provided.
The retrofit plan identifies the proposed modifications and must anticipate an EUI reduction of at least 25 percent.
Required Certifications
Section 179D(f)(2) places several responsibilities on the qualified professional throughout the retrofit process. For purposes of this article, I will refer to the required certifications as follows. These are also shown on the attached timeline graphic for reference:
Baseline EUI Certification – The qualified professional certifies the EUI of the building as of a date during the one-year period ending on the date the EEBRP is placed in service. This establishes the baseline EUI used for comparison with the building's post-retrofit performance.
EEBRP Status Certification – The qualified professional certifies that the retrofit property was installed in the building and is part of the lighting, HVAC/hot water systems, or building envelope.
Post-Installation EUI Certification – As of a date more than one year after the EEBRP is placed in service, the qualified professional certifies the EUI of the building after the retrofit.
If the EUI established by this post-installation certification is not more than 75 percent of the building's baseline EUI, it becomes the Qualifying Final Certification under §179D(f)(5). In other words, the measured results must demonstrate at least a 25 percent reduction in EUI.
As you can see, the qualified professional's role under §179D(f) is not limited to coming in after the project is completed to perform an energy calculation. The qualified professional prepares the written qualified retrofit plan, establishes and certifies the baseline EUI, certifies the status of the installed EEBRP, and certifies the building's EUI more than one year after the property is placed in service.
In my opinion, this is an important distinction from the legacy §179D process. Section 179D(f) places the qualified professional into the process beginning with the planning of the energy-efficient retrofit and continuing through the measurement of the completed project's actual energy performance. The qualified professional therefore understands the intended energy-efficiency goals before the work is performed and later determines whether those goals were actually achieved.
Under the legacy §179D method, the Qualified Individual performing the energy modeling, inspection and certification did not necessarily have to be the person primarily responsible for designing the energy-efficient property. A Qualified Individual could become involved after the project was completed, perform the required Standard 90.1 modeling and inspection, and certify the property without having participated in its original design.
That distinction became particularly important for deductions allocated by government building owners. (The deduction was expanded by the IRS 2022 for designers of virtually all tax-exempt entity owned commercial buildings). An allocation of the deduction did not, in itself, establish that the recipient was actually the person primarily responsible for designing the property.
The cases decided to date illustrate why that distinction matters. In Johnson v. Commissioner, the Tax Court found that the taxpayer performed sufficient design work involving the HVAC control system to qualify as the designer. In contrast, United States v. Oehler involved an electrical contractor that followed technical specifications developed by others and was found not to be the designer. More recently, in Harris v. Commissioner, the Tax Court found that the taxpayer failed to establish that he performed the qualifying design work necessary to support his claimed §179D deduction.
While §179D(f) does not eliminate every potential designer issue, I believe its structure provides a much clearer connection between the qualified professional, the planned energy-efficient improvements, and the actual measured results of the completed retrofit.
Establishing the baseline EUI
The order and timing of the EUI measurements are important.
Current Form 7205 instructions describe EUI reduction as energy per square foot per year and calculate EUI by dividing the building's total energy consumed in one year, measured in kBtu, by the building square footage. The baseline EUI must also be adjusted for weather.
The qualified retrofit plan must provide for a qualified professional to certify the building's baseline EUI as of a date during the one-year period ending on the date the retrofit property is placed in service.
From a practical standpoint, the quality of the baseline measurement matters. A period materially affected by construction activity, temporary shutdowns, changes in occupancy or other unusual operating conditions due to an active building renovation may not provide the same meaningful comparison as a representative pre-renovation period of normal building operation.
That is one reason I believe the baseline should receive careful attention before the renovation is too far along.
EEBRP Status Certification
The qualified professional must certify the status of the EEBRP installed as part of the Qualified Retrofit Plan. This includes confirming that the retrofit property was installed in the qualified building and is part of the HVAC and service hot water systems, interior lighting systems, or building envelope.
Depending on the retrofit, this could include HVAC equipment, service hot water equipment and piping, interior lighting fixtures and electrical components, building envelope improvements, associated controls, and other materials installed as part of those systems.
The qualified professional performing this certification should be very familiar with the Qualified Retrofit Plan and the intended energy-efficiency goals of the project. This is not simply a certification of the building's energy use after the work is completed. It requires an understanding of what energy-efficient property was actually installed as part of the retrofit.
Placed In Service Date – The “Center” of the Required 179D(f) Tasks
For Section 179D(f), I think it helps to view the placed-in-service date as the center of the process.
There are a baseline measurement and certification, and the EEBRP status certification on one side of the PIS date, and the post-retrofit EUI certification and Final Certification on the other.
Once the retrofit property is placed in service, the process is not finished.
The qualified professional must subsequently certify the building's EUI as of a date more than one year after the retrofit property was placed in service.
This allows actual post-retrofit building performance to be measured for an entire year of operation rather than relying solely on predicted energy savings.
The Post-Retrofit or Final Certification
The final certification is ultimately what determines whether the required energy reduction was actually achieved.
To constitute a "qualifying final certification," the final (after retrofit) certified EUI cannot be more than 75 percent of the building's baseline EUI. Stated another way, the building must demonstrate at least a 25 percent reduction in EUI.
That final certification is also important for tax timing. The Section 179D(f) deduction is allowed for the taxable year that includes the date of the qualifying final certification. This will be at least one full tax year after the EEBRP itself was placed in service.
For example, assume the EEBRP is placed in service on March 15, 2027. A full year of post-retrofit building operation would not be completed until after March 14, 2028, and the final EUI certification must be made as of a date more than one year after the placed-in-service date. Per the Internal Revenue Code, the Section 179D(f) deduction would therefore be claimed in the tax year that includes the qualifying final certification, sometime after March 14, 2028.
There is another practical consideration. EEBRP may be placed in service before the building reaches its intended level of energy-efficient operation. Controls may require adjustment, equipment may need additional balancing or commissioning, or other post-retrofit adjustments may be necessary before the systems are operating as intended.
In those situations, it may make sense for the final EUI measurement period to begin after the EEBRP is operating properly and the building has reached reasonably stable operation. That could push the final EUI measurement and final certification considerably beyond one year after the property was placed in service.
The deduction would then be taken in the tax year that includes the qualifying final certification.
Form 7205 ties these requirements back to the tax return. For EEBRP, the form identifies that the property was installed under a qualified retrofit plan, reports the EUI reduction, and requires information in Part III for the qualified professional who completed the qualifying final certification. This makes the final certification part of the documentation supporting the deduction, not simply an engineering record kept outside the return.
Calculating the Alternative Deduction of §179D(f)
The deduction is generally the lesser of:
The applicable Section 179D maximum deduction determined using the EUI reduction percentage rather than the traditional reduction in annual energy and power costs; or
The aggregate adjusted basis of the EEBRP placed in service pursuant to the qualified retrofit plan.
The normal Section 179D limitations for deductions previously taken with respect to the building must also be considered.
This is another reason the alternative deduction should not be treated simply as a certification exercise. The building owner, tax professional and qualified professional may each have information necessary to properly determine and support the deduction.
Conclusion – §179D Still Matters
The June 30, 2026, termination date does not mean Section 179D work ended on June 30.
A qualifying retrofit may have begun construction before the deadline, be placed in service later, and then require more than another year before the final EUI can be measured and the qualifying final certification completed.
That means Section 179D(f) projects could remain active well beyond the termination date.
For qualified professionals working on these projects, I would not wait until the final certification to start thinking about these requirements. The qualified retrofit plan, baseline EUI certification, construction-start date, placed-in-service date, post-retrofit EUI measurements and final certification are all parts of the same process.
For building owners, maintaining the supporting energy records and documentation throughout that process may become particularly important.
Section 179D(f) is a relatively small part of the statute, but for an existing building undergoing a substantial energy retrofit, it can be an important one.
The time to understand these requirements is while the retrofit is underway, not a year or more later when someone is ready to claim the deduction.
Selected Authorities and References:
IRC §179D(f), Alternative deduction for energy efficient building retrofit property.
Instructions for Form 7205, Energy Efficient Commercial Buildings Deduction (Rev. Dec. 2025), including the definitions of EEBRP and qualified professional and Parts I and III.
IRS Practice Unit, IRC §179D Energy Efficient Commercial Buildings Deduction (Feb. 27, 2025).
ENERGY STAR, Energy Use Intensity (EUI) and site-versus-source energy guidance.
Johnson v. Commissioner, 160 T.C. 18 (2023);
United States v. Oehler (N.D. Ill. 2024);
Harris v. Commissioner, T.C. Memo. 2025-113.
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