June 30 Deadline: Construction Projects Risk Losing Up to $5.81 per Sq Ft in Energy Efficiency Tax Deductions

As of midnight tonight, any commercial construction project that has not officially begun will be ineligible for the Section 179D energy-efficient commercial buildings deduction. The cutoff, enacted through the One Big Beautiful Bill Act (OBBBA) signed July 4, 2025, eliminates the tax break for property where construction begins after June 30, 2026 — a change that could cost contractors, designers, and building owners hundreds of thousands or even millions in forgone deductions.

For a 200,000-square-foot project, the maximum deduction of $5.81 per square foot represents more than $1.16 million in potential tax savings. With the deadline now here, teams that delayed energy modeling, prevailing wage compliance, or site mobilization are effectively locked out of one of the construction sector’s most impactful tax provisions.

The deduction, originally expanded under the Inflation Reduction Act and later modified by OBBBA, targets interior lighting, HVAC systems, building envelopes, and service water heating in commercial buildings — both new construction and substantial retrofits. Qualifying projects must achieve at least 25% energy savings relative to a baseline, verified through modeling or performance measurement.

Deduction tiers are significant. Without meeting prevailing wage and apprenticeship (PWA) requirements, the credit ranges from roughly $0.58 to $1.16 per square foot in 2025-adjusted rates. Meeting PWA standards — which require paying Department of Labor-determined prevailing wages and employing registered apprentices at required ratios — multiplies the benefit fivefold, reaching the $5.81 ceiling at higher efficiency levels. The deduction is capped at the cost of the qualifying property and can be claimed over three to four years in some cases.

"179D shall not apply to property the construction of which begins after June 30, 2026."

This language from the OBBBA creates an unambiguous hard stop. According to the Department of Energy, the termination applies to both taxable and tax-exempt owned buildings. For government, nonprofit, or tribal projects — common in the construction industry — the owner can allocate the deduction to the primary designer, which frequently means the architectural firm, engineering consultant, or design-build contractor responsible for the energy-efficient systems.

Defining "Beginning Construction" Before Midnight

IRS guidance aligns the test with standards used in other energy credits. To establish the start date before the cutoff, contractors must either:

• Begin physical work of a significant nature on the site (beyond preliminary clearing or planning), or
• Incur more than 5% of the total project cost in qualifying expenditures.

Documentation is critical. Detailed logs, photographic evidence, contracts with mobilization dates, and third-party energy consultant reports will be essential during IRS reviews. Firms that have been waiting on permits or final approvals may find themselves unable to claim the benefit if substantial work does not commence by close of business today.

Tax professionals strongly recommend engaging a 179D specialist immediately to complete energy modeling and prepare allocation documentation. For tax-exempt projects, formal allocation letters must be executed and filed correctly.

Payroll and Compliance Ties That Affect the Bottom Line

Maximizing the fivefold multiplier requires strict adherence to prevailing wage and apprenticeship rules across the qualifying energy-related work. This directly intersects with construction payroll systems already tracking Davis-Bacon or state prevailing wage requirements. Errors in certified payroll records, insufficient apprentice hours, or misclassified labor can disqualify the enhanced deduction entirely.

Bookkeeping teams will also feel the impact. The large first-year deduction alters depreciation schedules, reduces current-year taxable income, and changes quarterly estimated tax payments. Project-level job costing must accurately segregate qualifying energy-efficient expenditures from standard construction costs to support the claim during audit.

For contractors using percentage-of-completion or completed-contract methods, the tax savings from 179D can materially affect earnings recognition and financial covenant compliance with lenders who scrutinize WIP schedules and cash flow forecasts.

Why This Matters for Construction Financial Teams

The sunset arrives at a time when many contractors are already reassessing accounting methods due to larger contract values and post-pandemic revenue growth. The permanent restoration of 100% bonus depreciation under OBBBA (for qualifying property placed in service after January 19, 2025) offers some offset, but it does not replace the per-square-foot power of 179D on energy-focused commercial work.

Owners and contractors who qualify stand to improve project margins substantially. Those who miss the window will face higher effective tax rates on 2026 and future operations, potentially affecting bidding strategies on energy-efficient projects going forward.

The clock has run out. Construction firms that positioned energy modeling, PWA-compliant crews, and site work to meet today’s deadline will capture meaningful tax savings that sharpen their competitive edge. Those starting tomorrow will operate under a new tax reality without this tool.

Teams still able to mobilize should contact their CPA and 179D consultant immediately to lock in eligibility and properly document the start. The difference could easily reach seven figures on larger commercial and institutional projects.