When construction companies position themselves as green builders, they gain a competitive advantage among environmentally conscious clients. But with federal and state tax incentives added in, the benefits from green projects can be both reputational and financial.
CURRENT TAX CODES: SECTION 179D
Section 179D of the Internal Revenue Code provides federal tax deductions for installing energy-efficient systems in commercial buildings, including interior lighting, HVAC, hot water and the building envelope. The tax incentives are available to building owners and apply to both new construction and retrofits, according to the U.S. Department of Energy.
To qualify, improvements to buildings must reduce their measured or modeled energy consumption by at least 25%. For every percentage point above that threshold, the tax deduction per square foot increases by 2 cents, up to a maximum of $1.16.
The tax deduction also increases fivefold if the project meets certain requirements regarding prevailing wages and registered apprenticeships. In those cases, for each percentage point of energy savings above 25%, the tax break increases by 12 cents per square foot, up to a maximum of $5.81. On a 100,000-square-foot project, that’s a whopping $581,000.
Ben Evans, federal legislative director for the U.S. Green Building Council, said qualifying for a Section 179D tax deduction generally is straightforward, whether it’s new construction or a retrofit.
“If you’re doing a retrofit of an existing building, the bar is really quite low to get this tax incentive,” he said. “If you’re doing a gut rehab of a building, you’re probably achieving the requirements that would trigger this tax deduction. I think there are a lot of people in the market who do projects that should get this deduction, and they don’t realize it.”
Architects, engineers and contractors typically are able to claim the Section 179D tax break when they build energy-efficient projects for federal or state entities or tax-exempt organizations. Since those clients don’t pay federal taxes, they can assign that tax deduction to a green project’s designers, enabling them to claim it on their own tax returns.
ONE BIG BEAUTIFUL BILL ACT POTENTIAL CHANGES
That practice encourages the construction of greener buildings in the public and nonprofit sectors. Significantly for construction firms, the One Big Beautiful Bill Act, the centerpiece of the new administration’s legislative agenda, doesn’t eliminate Section 179D tax deductions. That bill passed the House of Representatives in May, advancing to the Senate, where it faced an uncertain future.
The House version of the bill would eliminate one tax incentive that’s especially important to homebuilders: Section 45L of the Internal Revenue Code. That tax credit currently runs through 2032 but would be eliminated at the end of 2025 under the proposed legislation. Section 45L provides a $2,500 tax credit for contractors that build or substantially reconstruct homes that obtain Energy Star certification.
I think there are a lot of people in the market who do projects that should get this deduction, and they don’t realize it.
Ben Evans
Federal Legislative Director, U.S. Green Building Council
The tax credit increases to $5,000 for homes that qualify for the Department of Energy’s Zero Energy Ready Home program. ZERH homes are so energy efficient that a renewable energy system could offset most or all of their energy use. They have to meet rigorous efficiency and performance criteria and undergo third-party verification to be certified.
Under the One Big Beautiful Bill Act, contractors still could claim the Section 45L tax break on homes that were started before May 12, 2025, so long as they’re sold by Dec. 31, 2026. According to the U.S. Green Building Council, the Section 45L tax incentive contributed to the construction of almost 350,000 efficient new homes in 2024, and those homes will save residents an average of $450 in energy costs each year.
The bill that passed the House also would eliminate the Section 25D Residential Clean Energy Credit and the Section 48E Clean Electricity Investment Credit. The Residential Clean Energy Credit rebates homeowners for 30% of the costs of new clean-energy systems installed through 2032. The tax incentive decreases to 26% for improvements made in 2033 and 22% for upgrades completed in 2034.
SUPPORT FOR INCENTIVES
The Clean Electricity Investment Credit incentivizes the construction of zero-emission electricity-generating and energy-storage facilities. The tax break is equal to 6% of investment costs but can increase substantially if projects meet certain requirements around prevailing wages, apprenticeship opportunities, domestically sourced building materials and the project’s location.
The U.S. Green Building Council said it’s “mobilizing the green-building community and the broader buildings industry to speak out in support of these tax incentives.” The group spearheaded an effort to get more than 350 companies and organizations to sign a letter urging Congress to preserve the tax breaks.
“Our team is also holding meetings with congressional offices to discuss the positive impacts that the buildings tax incentives are having in legislators’ backyards,” the USGBC said.
In addition to federal tax incentives, contractors and their clients may be eligible for state or local green-building programs. The Database of State Incentives for Renewables & Efficiency can help construction teams identify available incentives in their state.
Some state and local programs offer reduced property taxes for LEED-certified buildings or renewable-energy systems such as solar panels, making those projects more appealing to clients. Likewise, some states and municipalities may waive sales taxes on green building materials, lowering overall project costs.
Federal and state tax incentives for green construction projects may not offset rising costs for materials and labor, but by identifying every tax credit and deduction they qualify for, construction companies can preserve their margins and help clients reduce their costs.
Maximize your benefits from green projects by staying informed about the latest tax incentives. Continue reading our articles for more insights and updates. Share this article with your team and start the conversation about the financial and reputational advantages of green construction.
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