Retroactively claim the Section 179D deduction for energy-efficient buildings with IRS Form 3115, potentially saving significant tax dollars.
If you are a real estate developer or property owner who completed a cost segregation study in recent years, you may be sitting on an untapped tax opportunity.
You may be able to claim the Section 179D energy-efficient commercial building deduction retroactively, even if it wasn’t originally taken when the building was placed in service.
How the Section 179D opportunity works
Suppose you completed a 100,000 sq. ft. commercial office building in 2019 and conducted a cost segregation study to accelerate depreciation. At that time, the Section 179D energy-efficient commercial building deduction was not claimed.
As of 2023, your CPA advises that the property may have qualified for a deduction of up to $1.80 per square foot. Since no prior Section 179D deduction was taken, you may be eligible to file IRS Form 3115 to retroactively claim the benefit, without the need to amend prior tax returns.
This opportunity is not available to designers who were allocated the credit by a federal, state, or local government or political subdivision thereof. Additionally, the basis of the energy efficient commercial building property needs to be reduced by the amount of the Section 179D deduction.
Claiming the deduction via a Form 3115
Perform an energy study
A qualified individual conducts a Section 179D study using IRS-approved software to confirm the building meets the energy-efficiency standards in effect at the time of construction.
Confirm eligibility to deduct missed Section 179D deductions via a method change
Confirm you are not a designer and you are eligible to make an accounting method change for the missed deductions. If you were allocated the deduction, you are not eligible to make the change.
Eligibility can be confirmed by reviewing IRS Rev. Proc. 2025-23. For those not eligible to make the change, you may be able to claim missed deductions via an amended tax return.
File a Form 3115
You file IRS Form 3115 with your current-year return, using Designated Change Number #152. This allows you to “catch up” the missed deduction via a Section 481(a) adjustment.
Claim deduction
If the building qualifies, you could claim a $180,000 deduction in the current year (based on $1.80 × 100,000 sq. ft.), directly reducing taxable income. Note the basis of the building will need to be reduced by the Section 179D deduction.
Note: Deduction can range from $0.54 to $5.81 p/sq. ft. depending on variables such as efficiency, construction start date, and placed-in-service date.
Key considerations
- Ownership and eligibility — You must be the party that paid for the construction and retained ownership. Those allocated the credit by federal, state, or local government are not eligible.
- Documentation — A certified third-party energy analysis and properly prepared IRS Form 3115 are required.
- Coordination with cost segregation — The Section 179D deduction complements, not replaces, cost segregation. Proper coordination helps avoid overlap or missed benefits.
How CLA can help
If you have already invested in a cost segregation study, you are well-positioned to take the next step. Retroactively claiming the Section 179D deduction through IRS Form 3115 could unlock additional tax savings, without the need to amend prior tax returns.
CLA’s real estate and federal tax strategy professionals can help you evaluate eligibility and navigate the technical requirements of both Section 179D and IRS Form 3115. This proactive strategy could potentially deliver meaningful value today.