Contractors collaborating on tax planning strategies in light of the new legislation.
The One Big Beautiful Bill Act (OBBBA) unveils significant tax opportunities for contractors, including changes to income recognition, deductions, and depreciation rules. This legislation particularly benefits the construction industry, offering expanded exemptions for residential contracts, reinstating R&E expenditure deductions, and introducing new amortization rules. Furthermore, the act introduces a 100% bonus depreciation for select properties, alongside other tax benefits that promote immediate cash flow for businesses. Careful planning and professional guidance are advised to fully leverage these new provisions.
The recently enacted One Big Beautiful Bill Act (OBBBA) presents significant tax planning opportunities for contractors and businesses, especially in the construction industry. This new legislation introduces important changes to how income can be recognized, how deductions can be applied, and sets new regulations for depreciation. These updates offer a chance for businesses to optimize their tax strategies ahead of the 2026 deadlines.
One of the major shifts under the OBBBA is related to the recognition of income from long-term contracts. Under prior laws, home construction contracts were exempt from the requirement to use the percentage-of-completion method (PCM). This gave home builders the flexibility to choose accounting methods such as the completed contract method or the accrual method.
However, the OBBBA expands the PCM exemption to include residential construction contracts. This means that for residential contracts entered after the enactment date in 2026, builders will now have more options available when it comes to accounting methods. This change is significant, especially considering the current split where 70% of residential contracts required PCM, while 30% could utilize any permissible method.
In addition to the changes surrounding home construction contracts, the OBBBA also reinstates the ability to expense domestic research and experimental (R&E) expenditures for tax years starting after December 31, 2024. Companies that invest heavily in innovation, particularly those in the design-build sector, are set to gain from this reinstatement.
Any unamortized Section 174 expenditures made during 2022–2024 can be deducted in 2025 or ratably in 2025 and 2026. Moreover, small businesses with average annual gross receipts below $31 million for 2025 will have the opportunity to file amended returns to recover R&E expenditures from prior years.
The OBBBA maintains the 15-year amortization period for foreign R&E expenditures but now allows domestic expenditures to be amortized over a minimum of 60 months, starting once the benefits are realized. Additionally, the act restores the add-back of depreciation, amortization, and depletion to calculate adjusted taxable income. This change could lead to a higher cap on deductible business interest for tax years starting after 2024.
Furthermore, 100% bonus depreciation is reinstated for property acquired after January 19, 2025, though existing phase-out rules will continue for properties purchased before this date. For contractors, this could provide substantial tax relief, enabling them to reclaim significant amounts tied to their investments in property and equipment.
A new deduction introduced through the OBBBA allows for an above-the-line deduction of up to $12,500 for overtime pay ($25,000 for married couples filing jointly), giving additional financial assistance to businesses managing payroll. This deduction will have a phase-out limit starting at $150,000 for singles and $300,000 for married couples.
Investment incentives were also made permanent, particularly for Qualified Opportunity Zones (QOZs). This includes various exclusions for gains when selling qualified small business stocks, aiming to boost local economies and encourage entrepreneurship.
As the OBBBA unfolds, it will introduce a range of changes that will require careful tax planning and strategic implementation on the part of businesses. The ongoing complexity surrounding these new provisions means that contractors and business owners should consider consulting with a professional CPA to navigate their new options effectively. They may need guidance on necessary IRS permissions for changes and how to maximize deductions and credits in their specific circumstances.
With these significant updates, the OBBBA stands to dramatically reshape tax planning for contractors and businesses, particularly those involved in residential construction and innovative sectors.
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