Positioning Your Construction Company for Success Under OBBBA
As Congress introduces the latest wave of tax reform under the “One Big Beautiful Bill” (OBBBA), the construction industry stands to experience both significant benefits and new compliance considerations. While the legislation spans a wide array of economic areas, several provisions have a direct effect on how construction companies operate and plan their long-term tax strategies. These changes could lead to meaningful tax savings and improved cash flow for your business.
Accelerated Depreciation for Qualified Property
One of the signature features of the BBB is the revival and expansion of bonus depreciation. Prior to this BBB legislation, businesses in 2025 were only allowed to deduct 40% of the purchase price of qualifying assets in the year of acquisition. Under the BBB, 100% bonus depreciation is permanently reinstated for qualified property placed in service after January 19, 2025. For construction companies that utilize significant amounts of machinery, vehicles, and tools, this presents a good opportunity to reinvest in these assets and reduce taxable income.
Additionally, the Section 179 expensing limit, which is also used to deduct the full cost of qualifying business equipment, is increasing from $1.25 million to $2.5 million, with phase-outs beginning at $4 million for property placed in service in tax years beginning after December 31, 2024.
Permanent Section 199A Qualified Business Income (QBI) Deduction
The BBB makes the 20% QBI deduction permanent. This deduction, which was created with the 2017 Tax Cuts and Jobs Act (TCJA), was previously set to expire at the end of 2025. Many construction businesses organized as S-Corporations and Partnerships have been able to take advantage of this 20% deduction since 2018, so the permanent reinstatement removes the uncertainty that has surrounded this deduction the past few years. An earlier version of the House bill had initially proposed an increase in the QBI deduction to 23%, but the final bill as enacted remains at 20%.
Permanent Individual Tax Rates
The favorable individual income tax rates from the TCJA have now also become permanent. These rates were originally scheduled to revert back to their pre-TCJA increased amounts in 2026.
There is no change to the corporation tax rate, which remains at a fixed 21% rate.
Business Interest Deduction Limitation
Sec 163(j) generally limits the deduction for business interest to 30% of a taxpayer’s adjusted taxable income. Since 2022, adjusted taxable income did not include an adjustment to add back depreciation and amortization. For tax years beginning after December 31, 2024, the BBB allows the business interest limitation to permanently revert back to an EBITDA-based calculation, which will allow construction businesses the possibility of deducting additional interest expense.
Clean Energy Credits Terminated
While most BBB provisions are favorable to the construction industry, the BBB also includes some provisions that are not as friendly:
Sec 179D Deduction: This deduction was previously enacted to incentivize owners of commercial buildings to install energy-efficient upgrades to their buildings or include these components in their new projects. Often, construction/design firms were allowed to utilize this deduction in certain instances. Under the BBB, the 179D deduction will no longer be available for projects that begin construction after June 30, 2026.
Sec 45L Energy Efficient Home Credit: This credit previously allowed a tax credit for residential builders who construct certain energy-efficient homes. Under the BBB, this credit will no longer be available for dwelling units that are closed or initially leased after June 30, 2026. This is a monumental change for homebuilders, since this credit has been available since 2005.
Exception to Percentage-Of-Completion Method for Residential Construction
The BBB broadens the exception to the Percentage-Of-Completion Method (PCM) to cover residential construction contracts with more than four dwelling units, such as multi-family apartment buildings or condominiums. Previously, this exception was limited to buildings with four or fewer units. This change may allow certain larger contactors to utilize a more favorable method of accounting for these projects, such as the completed contract method.
Estate and Gift Tax Impact
Under the BBB, the individual estate tax and gift tax exemption is set at $15 million (effectively $30 million for married couples). This amount will be permanent, and will be further indexed for inflation after 2025. For owners of construction businesses who are in the midst of estate or succession planning, this change provides clarity going forward.
No Tax on Overtime
The BBB provides for a new individual deduction for qualified overtime pay for tax years 2025 through 2028. While this does not affect construction businesses directly, it will need to be properly reported on an employee’s W-2. This will create additional accounting work at the employer level to track and report qualified overtime. Qualified overtime wages will still be subject to the normal Social Security and Medicare tax.
Expanded Use of 529 Plan Accounts for Skilled Trades
Sec 529 accounts are tax-advantaged savings plans for education expenses. The BBB expands the allowable use of 529 accounts for certain apprenticeships and occupational or professional licenses. While this does not affect construction employers directly, it is a positive change for encouraging the next generation of construction professionals to enter the industry.
Final Thoughts
Other than the elimination of the Sec 179D deduction and the Sec 45L Energy Efficient Home Credit, the majority of the BBB provisions are favorable to businesses in the construction industry. Certain changes may have an effect on business and estate planning for construction business owners. Please reach out to the construction advisors at Wegner CPAs if you would like to discuss how the BBB changes will affect your business.
