The timing of your project can determine whether you’re eligible for the Section 179D deduction, especially in light of recent legislative changes. As mentioned earlier, the OBBBA of 2025 imposed a deadline: projects must begin construction by June 30, 2026 to qualify for 179D. In this article, we’ll explain what “begin construction” means for 179D purposes, how it’s defined, and what you should do to document it properly. We’ll also recap the urgency of acting before the incentive potentially expires.

The 2026 Deadline

Prior to OBBBA, Section 179D was essentially available indefinitely (thanks to IRA 2022 making it permanent). Now there’s a hard stop: any property for which construction begins after June 30, 2026 is not eligible for 179D. If your project is on the bubble, starting even a day late (July 1, 2026) would disqualify it under current law. This has injected urgency into the plans of developers, contractors, and designers aiming to use 179D. Practically, if you have a project in 2025 or early 2026 that could qualify, it’s wise to accelerate the schedule if possible so that you officially break ground by the end of June 2026. It’s worth noting Congress could extend the incentive (and many expect an extension given the popularity of energy tax provisions), but one can’t bank on that – so for now the safest course is to abide by the existing cutoff.

Defining “Start of Construction”

It might sound straightforward, but legally defining when a project begins is important for tax deadlines. The IRS uses concepts borrowed from the renewable energy tax credit world: either the Physical Work Test or the 5% Safe Harbor can establish the start of construction.

• Physical Work Test: This means that meaningful physical work has commenced on the site (or off-site for project-specific components). It’s not defined by a dollar threshold but by the nature of the work. Examples of activities that count as beginning construction include excavation for the foundation (starting to dig footings), setting anchor bolts, pouring significant concrete structural elements, installation of main support structures, etc.. Essentially, if crews are doing construction of integral parts of the project (beyond site prep), you likely meet this test. Conversely, activities that do not count include preliminary steps like obtaining permits, doing design and engineering, environmental studies, clearing the land, or mere excavation of soil that is not part of foundation work. Ordering equipment or materials alone typically doesn’t count either (unless it’s a specially made piece of equipment for your project that’s in actual fabrication). The IRS wants to see actual “dirt moving” or equivalent.
  
  

• 5% Safe Harbor Test: This is a financial threshold. If by the cutoff date you have incurred at least 5% of the total project cost, then the project is considered started in time. “Incurred” generally means you’ve paid or legally committed (via non-refundable obligation) that amount. In practice, this often means having executed substantial equipment purchase orders or construction contracts and made payment on them. For example, if you have a $10 million building project and by June 2026 you’ve spent $500,000 or more on it (or are contractually obligated for costs at that level), you meet the safe harbor – even if bulldozers aren’t on site yet. This safe harbor is useful for projects that might have long lead equipment or design costs early on.
  
  

You only need to meet one of these tests to fix your start-of-construction date. They’re alternate methods. Most construction projects will naturally satisfy the Physical Work test as soon as actual building begins. The 5% safe harbor is like a backup for those doing significant prepurchases.

Documentation and Proof

If you intend to rely on beginning construction before the deadline, keep thorough documentation. The IRS will look for evidence if ever questioned. For the physical work test, maintain construction logs, dated photos of site work commencement, contractor agreements indicating start dates, etc.. For the 5% safe harbor, keep invoices, payment records, and contracts that show the costs incurred by that date. Also be mindful of continuous construction – generally after starting, you should not pause indefinitely. The rules typically expect continuous progress (allowing some reasonable delays). Given 179D’s language, it’s not as stringent as, say, renewable energy credits where continuous construction is heavily monitored, but it’s wise to avoid long gaps. Essentially, don’t game the system by doing a token amount of work or deposit by June 2026 and then stopping for years.

Implications for Different Players

For building owners, missing the start date means missing the deduction opportunity entirely (unless extended). For designers (architects, engineers) who work on government or non-profit projects, it’s a bit tricky – if the project they design doesn’t start by the deadline, the owner (government) can’t allocate a deduction to them because none exists. So designers are also pushing to get those projects going. In some cases, a designer might accelerate delivering plans or persuade the owner to break ground sooner to ensure 179D eligibility – after all, the designer stands to benefit via the allocation letter. There’s also a nuance: the “placed in service” date (when the building is completed and operational) can be after 6/30/2026. It’s only the start that matters for the cutoff. So a project could start in June 2026 and finish in mid-2027, for example, and still qualify under current rules. However, the applicable ASHRAE standard might change if the placed-in-service year is beyond 2026 (potentially making the baseline tougher as mentioned). It’s unclear if IRS will allow using the older baseline if started before 2027; historically, the rule ties the standard to the placed-in-service date. But OBBBA’s language might lock in the benefit – further IRS guidance would clarify that. Regardless, being in before the deadline is crucial.

Beyond 2026 – Uncertainty

If you’re reading this and it’s already past mid-2026, what happens? As of now, projects starting after that date wouldn’t have 179D available. Congress could retroactively extend or revive it (they’ve done that with other incentives). In the broader context, many energy tax incentives (like certain renewable credits) were also scheduled to sunset around 2025–2026 per OBBBA. Often, these become negotiating points in future energy or budget bills. So stay tuned to legislative updates. But the prudent approach is not to assume an extension – take action while you can. Some advisors are recommending pulling forward energy retrofit plans into 2024–2025 to ensure they qualify.

Summary of Action Items

If you want to leverage 179D before it sunsets, plan now. Ensure your project’s construction starts by the deadline – coordinate with contractors to maybe start foundation work a bit earlier if needed. Use the safe harbor if construction is delayed: perhaps pre-order major equipment (chillers, generators, etc.) and pay a deposit to meet 5% of costs. Keep records of everything. And of course, make sure the project is designed to meet the energy-saving requirements so that all this effort results in a valid 179D deduction. With proper timing and documentation, you can lock in the deduction and potentially save a substantial sum. Missing the date, on the other hand, could mean leaving those savings on the table.

In conclusion, “start of construction” for Section 179D is a critical concept now tied to a looming deadline. By understanding the IRS tests and planning accordingly, you can position your projects to qualify under the wire. This wraps up our deep-dive series on Section 179D. From the basics and history, through technical details of depreciation, certification, and modeling, and finally to the timing and strategic considerations – we hope this helps you navigate the 179D landscape confidently. Here’s to building a more energy-efficient (and tax-efficient) future!