IRS Instruction 7205 – IRS Forms, Instructions, Pubs 2026 – Business owners, architects, engineers, and contractors investing in energy-efficient upgrades for commercial properties can claim significant tax benefits through the Energy Efficient Commercial Buildings Deduction under IRC Section 179D. IRS Form 7205 and its instructions (Instruction 7205) help taxpayers calculate and claim this deduction properly.
This comprehensive guide covers eligibility, deduction amounts (updated for 2025–2026), certification requirements, how to complete the form, and critical deadlines—including the upcoming termination of the deduction.
What Is the Energy Efficient Commercial Buildings Deduction?
The Section 179D deduction rewards the installation of energy efficient commercial building property (EECBP) or energy efficient building retrofit property (EEBRP) in U.S. commercial buildings. It applies to systems such as:
- Interior lighting
- Heating, cooling, ventilation, and hot water systems
- Building envelope components (insulation, windows, roofs, etc.)
The deduction reduces taxable income based on the building’s energy savings performance and square footage. The Inflation Reduction Act of 2022 significantly expanded the program by lowering the energy savings threshold to 25%, increasing maximum deduction amounts (especially when meeting prevailing wage and apprenticeship requirements), and broadening eligibility to include more designers.
Use IRS Form 7205 to calculate the deduction and attach it to your federal tax return for the year the qualifying property is placed in service.
Who Can Claim the Deduction Using Form 7205?
Eligible claimants include:
- Building owners — Owners of commercial buildings who install qualifying energy-efficient property.
- Designers (architects, engineers, contractors) — Those who design energy-efficient systems for buildings owned by specified tax-exempt entities, such as government buildings, Indian tribal government properties, Alaska Native Corporations, or other tax-exempt organizations. They must receive a written allocation of the deduction from the building owner.
The deduction is available for both new installations (EECBP) and retrofits of existing buildings (EEBRP, subject to additional timing rules for certification).
Eligibility and Key Requirements
To qualify:
- The property must be depreciable and installed in a qualified U.S. commercial building.
- It must achieve at least 25% energy cost savings compared to a reference building under the applicable ASHRAE Standard 90.1 (the more recent standard affirmed by the Treasury, typically 90.1-2007 or later versions depending on timing).
- A qualified individual (licensed professional engineer or contractor, independent of the claimant) must certify the energy savings using approved modeling methods (e.g., Performance Rating Method).
- For retrofits (EEBRP), a qualified retrofit plan and post-installation energy use intensity (EUI) certification are required (final certification must occur more than one year after placement in service).
- Prevailing wage and apprenticeship (PWA) requirements greatly increase the deduction if met. Laborers and mechanics must be paid prevailing wages, and a required percentage of hours must be performed by qualified apprentices.
Note: The deduction cannot exceed the cost of the installed qualifying systems (excluding certain items like elevators, manufacturing equipment, or exterior lighting). Prior deductions on the same building (over the last 3 or 4 years) reduce the available amount.
How Much Can You Deduct? 2025–2026 Amounts
Deduction amounts are inflation-adjusted annually and calculated per square foot of the building. The final amount is the lesser of the cost of the qualifying property or the maximum allowable based on energy savings and PWA compliance.
Here are the maximum per-square-foot amounts (for tax years beginning on or after the listed dates):
| Tax Year Beginning On or After | Maximum with PWA Requirements | Maximum without PWA Requirements |
|---|---|---|
| January 1, 2025 | $5.81 | $1.16 |
| January 1, 2026 | $5.94 | $1.19 |
Calculation basics (simplified):
- Without PWA: Starts at $0.58/sf (2025) or $0.59/sf (2026) for 25% savings, plus $0.02 per additional percentage point of savings (capped around 50–55% savings).
- With PWA: Starts much higher (e.g., $2.90/sf base in 2025) and increases by $0.10+ per additional percentage point, reaching the higher caps shown above.
Use the worksheet in IRS Instruction 7205 to compute the exact amount for your project, factoring in energy savings percentage and prior-year deductions.
Major Updates and the 2026 Termination Deadline
The Inflation Reduction Act (2022) made the deduction more generous and accessible. Key improvements included the 25% savings threshold (down from 50%), higher dollar caps, partial deductions, and expanded designer eligibility.
However, the One Big Beautiful Bill Act (P.L. 119-21, enacted July 2025) terminates the Section 179D deduction for property where construction begins after June 30, 2026. Projects that begin construction by that date may still qualify even if placed in service later. This creates urgency for owners and designers planning energy efficiency upgrades.
How to Complete IRS Form 7205: Step-by-Step?
- Identify your role — Check “Building owner” or “Designer of energy efficient property.”
- Part I: Building and Property Information — List building details, placement-in-service date, energy savings percentage (or EUI reduction), whether PWA requirements are met, square footage, and potential deduction per square foot.
- Part II: Computation — Calculate the allowable deduction, subtracting prior claims and applying limits.
- Part III: Certification — Provide details of the qualified individual or professional who certified the project.
- Part IV: Allocation (for designers only) — Include information about the tax-exempt building owner and the allocation agreement.
Download the latest Form 7205 and Instructions for Form 7205 (Rev. December 2025) directly from IRS.gov. Attach the completed form to your business tax return (e.g., Form 1120, 1065, or 1040 Schedule C/E).
Certification Requirements
Certification is mandatory and must come from a qualified individual (or qualified professional for retrofits) who is licensed in the relevant jurisdiction, independent of the claimant, and follows IRS Notice 2006-52 guidelines. The certification confirms the energy savings through modeling and inspection.
Keep all documentation, including energy models, allocation letters (if applicable), and certifications, for your records—potentially for several years in case of audit.
Important Considerations
- Basis reduction — The deduction reduces the depreciable basis of the property.
- No double-dipping — You cannot claim the deduction on costs already expensed or credited elsewhere.
- Partial ownership — Allocate the deduction according to ownership percentages.
- Deadlines — File with the tax return for the year the property is placed in service. The overall program sunsets for new construction starts after June 30, 2026.
Frequently Asked Questions (FAQs)
- Can designers claim the deduction for private buildings?
No—designers can only claim via allocation from specified tax-exempt entity owners. - Is there a maximum building size?
No, but the deduction is capped per square foot and by the cost of qualifying systems. - What software is approved for energy modeling?
IRS-approved software following the Performance Rating Method or other specified methods (see Notice 2006-52 and updates). - Do I need to meet prevailing wage requirements?
Not required, but meeting them multiplies the potential deduction by approximately five times.
Act Now: Maximize Your Energy Efficiency Tax Savings
The Section 179D deduction via IRS Form 7205 offers one of the most powerful incentives for commercial building energy upgrades. With enhanced rates through 2026 and the impending termination for projects starting construction after June 30, 2026, now is the ideal time to evaluate qualifying improvements.
Always consult a qualified tax professional, energy consultant, or CPA familiar with Section 179D to ensure compliance and maximize your benefit. Download the official Instructions for Form 7205 (PDF) and the form itself from the IRS website for the most current details.
For official guidance:
This article is for informational purposes only and is not tax or legal advice. Tax laws and amounts are subject to change; verify with the latest IRS publications and a professional advisor.