The Construction Industry’s New Tax Landscape Explained

Labor shortages, shifting immigration policies and unpredictable material costs have been slowing the pace of projects and creating uncertainty across the construction industry.

And just as headwinds threaten to stall progress, a sweeping new tax law called the One Big Beautiful Bill Act (OBBBA) is also reshaping the landscape. What does this legislation mean for the industry, and where could it open doors in the months ahead?

These are the highlights that every contractor needs to know to navigate the tax changes ahead.

Qualified Production Property

The OBBBA introduced the Qualified Production Property (QPP) provision, which allows businesses to expense manufacturing facilities if they meet certain qualifications, including new construction (among other stipulations).

While the provision itself relates to manufacturing facilities, it will have an indirect, yet significant, impact on the contractors that will build these new facilities. Economists estimate a significant increase in industrial construction spending, but questions remain whether the industry has the resources to support such a large increase in demand.

To qualify for QPP expensing, construction on a manufacturing facility must begin after January 19, 2025, and before January 1, 2029. The QPP must ultimately be placed in service before January 1, 2031, creating urgency for these large industrial projects.

Contractors who haven’t worked in this sector may want to consider these projects due to expected demand.

The new law’s incentives for industrial construction may open doors for firms ready to pivot or expand into new sectors, so it’s important to take a close look at your backlog and capabilities. Understanding what projects you have in the pipeline (and whether your team is equipped to pursue new opportunities) should be part of your planning process this year.

New Exceptions from the Use of Percentage of Completion Method

Before the OBBBA was passed, contractors that exceeded the small business gross receipts threshold were generally required to use the percentage of completion method for their long term contracts. This meant they had to report taxable income as projects progressed, with little opportunity to defer taxable income.

Two exceptions to avoid percentage of completion were available: 1) contractors who were under the small business gross receipts threshold that performed work on contracts expected to be completed within a two-year timeframe, and 2) any “home construction contract.” Home construction contracts were contracts that at least 80% of the estimated contract costs were attributable to buildings with four or fewer dwelling units. Thus, contractors (regardless of size) were not required to recognize revenue on percentage of completion for these specific home construction jobs. Contractors building larger multifamily projects which had more than four dwelling units per building, didn’t fit the “home construction contract” definition and thus were not afforded the same exception. This meant many multi-family builders had less flexibility in deferring taxable income.

The new provision in the OBBBA expands the exception from percentage of completion to all residential construction projects (including buildings with more than four dwelling units), not just the previously defined “home construction” contracts. Contractors building large multifamily projects are no longer required to use the percentage of completion method to report income on those specific projects.

This means that contractors now have the potential to defer more taxable income on these residential contracts by using another exempt method such as the completed contract method. The change is especially beneficial for contractors working on multifamily, long-term care facilities, or student housing projects, as long as the dwelling units are not for transient use (such as a hotel). Subcontractors working under a general contractor on qualifying residential projects are also eligible for this treatment.

This provision applies only to contracts entered into in tax years starting after July 4, 2025. For most contractors who are calendar year taxpayers, the impact will be seen starting in 2026. It’s important for contractors to review their WIP (Work-In-Progress) schedules and assess, on a contract-by-contract basis, which projects qualify under the new rules.

Section 174 R&D Capitalization Rules

Many in the construction industry (including architects, engineers and design professionals) regularly take advantage of the Research & Development (R&D) tax credit. However, the rules around R&D capitalization have been a source of confusion and concern for many in the construction industry for several years.

The Tax Cuts and Jobs Act of 2017 required R&D costs to be capitalized and amortized, creating cash flow mismatches for contractors. The new bill restores the option to deduct domestic R&D costs in the year incurred. However, the bill also provides taxpayers flexibility in how they treat these expenses. For contractors who use the percentage of completion method, capitalizing job costs under the previous rules could actually be advantageous because it slows down revenue recognition.

The bill also provides several options for handling costs that were capitalized in prior years. Small taxpayers can amend prior returns to deduct those costs and potentially receive refunds. Other taxpayers can deduct the unamortized basis in tax years starting after 2024.

For fiscal year taxpayers, this may mean waiting another year, but most calendar year taxpayers can deduct these capitalized costs all in 2025 or choose to spread the deduction between 2025 and 2026.

If you’re using the percentage of completion method, tax treatment decisions should be made on a case-by-case basis. For example, contractors that perform jobs that start and finish within the same tax year, deducting R&D costs immediately may be preferable. For contractors that perform jobs across two tax years, the election to capitalize R&D costs may slow down revenue recognition and could be more beneficial.

With so many new options available, the best strategy will depend on your specific contracts, business goals and financial situation. There’s no one-size-fits-all answer.

Qualified Business Income Deduction

The qualified business income (QBI) deduction, which allows individual owners of pass-through entities (such as S corporations and partnerships) to take a 20% deduction on their share of business income, was at risk of expiring. This, coupled with the maximum ordinary tax rate potentially reverting back to 39.6%, meant an effective tax rate increase of up to 10%.

The bill’s passage means that the QBI deduction is now permanently extended, providing much-needed certainty for tax planning and allowing individual business owners to continue to deduct up to 20% of their qualified business income.

Bonus Depreciation

Without legislative action, bonus depreciation was set to decrease to 40% in 2025 and 20% in 2026. The OBBBA restores bonus depreciation to 100% for property under contract and in service after January 19, 2025, with no limits.

This change is particularly beneficial for contractors who invest heavily in machinery and equipment because it allows them to expense the full cost in the year of purchase, improving cash flow and reducing taxable income.

Charitable Contributions

The OBBBA makes two key changes to the tax benefit of charitable contributions, which is especially relevant for charitably minded contractors.

First, there’s a provision that reduces the charitable deduction by a half percent of the taxpayer’s “contribution base” which is a form of modified adjusted gross income. While this reduction may not seem huge, it does make charitable contributions slightly less valuable from a tax deduction standpoint.

In addition to this, the bill introduces an overall limit on itemized deductions for taxpayers in the top tax bracket. Specifically, those in the 37% bracket will no longer see a 37% tax rate benefit from their deductions; instead, the tax rate savings from itemized deductions will effectively be capped at 35%. This change applies to all itemized deductions, not just charitable contributions.

These changes will require planning before the changes go into effect on January 1, 2026, especially for those who regularly make significant charitable gifts. For contractors considering succession or estate planning, this is a critical window. Coordinating charitable giving with your broader succession plan can help you achieve both your philanthropic and financial goals.

Some contractors may benefit from accelerating (or “bunching”) contributions during 2025 in order to maximize the current deduction rates. Consult your advisor to ensure your charitable giving and succession planning strategies are aligned and optimized under the new law.

Green Incentives

Several green energy incentives are either being substantially reduced or eliminated. One that affects many contractors performing design-build work is the Energy Efficient Commercial Buildings Deduction (179D), which is being terminated for property beginning construction after June 30, 2026.

Many solar credits are being repealed too. If you’re a contractor who works on solar projects, this means those projects might not be as financially attractive as they were before, because the tax incentives that helped make them profitable are disappearing.

Overtime Pay Deduction

Qualifying employees who get overtime wages will be now able to deduct up to $25,000 (for joint filers) against those overtime wages.

Since this provision was implemented in the middle of the year, employers can use a reasonable method to determine and report overtime wages paid to your employees prior to January 1, 2026.

After December 31, 2025, new withholding tables will be established to guide how employers handle overtime pay.

The Importance of Tax Planning Under the New Law

With new options for contract accounting, deductions and incentives, there’s no single strategy that fits every contractor. The most successful firms will be those that dig into the details and start tax planning early. Make a strategy for reviewing each contract, modeling scenarios and planning ahead.

This year, proactive tax planning means looking at your business on a contract-by-contract, case-by-case basis. Before the year ends, take time to work with your advisor to analyze your projects, assess your options and build a plan tailored to your goals. The earlier you start, the more flexibility (and opportunity) you’ll have.

As the One Big Beautiful Bill Act creates new incentives for industrial construction and onshoring, it’s more important than ever for contractors to take a close look at their backlog and capabilities. The changing landscape may open doors for firms ready to pivot or expand into new sectors.

Even if your company hasn’t traditionally focused on industrial projects, now might be the right time to explore business development opportunities and position your team to bid on new contracts. Review your current pipeline and assess whether your resources align with emerging opportunities.

What Should Contractors Do Next?

Contractors should begin year-end planning earlier than usual to take advantage of new strategies and understand their tax liabilities in light of the new legislation. Each contractor’s situation is unique, requiring a case-by-case approach and careful modeling of new incentives.

To learn more about how the new tax law impacts your construction company, contact your Warren Averett advisor directly, or ask a member of our team to reach out to you.