What Tax Strategies Can Growing Contractors Use in 2026?

In Brief:

• 100% bonus depreciation is now permanent. For 2026, Section 179 also allows up to $2.56 million in equipment deductions, but the equipment must be placed in service by December 31.
• Timing income and expenses can shift taxable income between years. The options available depend on the company’s accounting method.
• Construction work that involves experimentation may qualify for the R&D tax credit. Section 174A now allows domestic research costs to be deducted in the year they are incurred.
• Entity structure, the QBI deduction, and PTET elections all affect how much owners pay. Growing contractors should review all three as the business changes.
• Year-round planning works better than a year-end scramble. That planning should be based on current financials, WIP schedules, and expected equipment purchases.

Growing construction companies can use several strategies to lower tax bills and keep more cash in the business. Recent changes to federal tax law made some of the most valuable deductions permanent, including 100% bonus depreciation and the qualified business income deduction. Other strategies depend on the timing of income and expenses, impact lease v. buy decisions, and how the company is structured. Most require proactive planning, with some needing attention before year-end for the greatest impact. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.

Key Tax Planning Strategies for Growing Contractors

Accelerated Depreciation — Contractors may be able to deduct the full cost of equipment in the year they place it in service. Under the One Big Beautiful Bill Act (OBBBA), 100% bonus depreciation is now permanent for qualifying property acquired and placed in service after January 19, 2025. Section 179 provides a second way to deduct equipment costs right away. For 2026, businesses can deduct up to $2.56 million under Section 179, with the deduction phasing out once qualifying purchases exceed $4.09 million. To claim either deduction for 2026, equipment must be placed in service by December 31. Contractors expecting higher income in future years can instead use regular depreciation under the Modified Accelerated Cost Recovery System (MACRS), which spreads deductions over several years.

Timing Income and Expenses — Contractors may be able to lower tax liability by choosing which year certain income and expenses fall into. For example, a contractor expecting lower profits next year may wait until January to bill for some completed work, moving that income into next year. The same contractor may decide to pay employee bonuses before December 31 so those costs are deducted this year. If next year looks more profitable, the reverse applies.

The company’s accounting method dictates which of these options are available. Cash-basis contractors report income when they receive payment, so the timing of billing and collections changes which year the income is taxed. Eligible contractors using the completed-contract method report a project’s income when the job is substantially complete, which can move income from a long project into a later year. Under the percentage-of-completion method, income is reported as work progresses. As growing contractors take on larger or longer projects, a review of the accounting method with a tax advisor can help manage taxable income and cash flow.

R&D Tax Incentives — Some construction work may qualify for the federal R&D tax credit, which reduces tax liability dollar for dollar. To qualify, the work must involve developing or improving a product, process, technique, or design through experimentation. For example, a specialty contractor that tests and refines a new installation method may qualify. Routine design changes and standard construction practices do not. Contractors who plan to claim the credit will want to keep records of testing and problem-solving as the work happens. Documentation created during the project is the strongest support for a claim.

Research costs also receive more favorable treatment under current law. Beginning in 2025, Section 174A allows businesses to deduct domestic research and experimental expenses in the year they incur them rather than amortizing the costs over several years.

Entity Structure Review — How a construction company is set up affects how its income is taxed and how the owners get paid. Many contractors picked an entity type when the business was just getting started. A company running several crews and bidding on larger projects may need something different now.

S corporations are common in construction. Owners take a reasonable salary and receive the rest of the profit as distributions, which are not subject to payroll taxes. Partnerships allow more flexibility in how ownership and profits are divided. C corporations pay a flat 21% federal rate, though profits paid out as dividends are taxed again at the owner level.

Qualified Business Income Deduction — Owners of eligible pass-through construction businesses may qualify for the Section 199A qualified business income (QBI) deduction of up to 20% of qualifying business income. For 2026, owners receive the full deduction when personal taxable income stays under $201,750 for single filers or $403,500 for married couples filing jointly. Owner salary and business structure both affect the calculation, so contractors near these thresholds should review the deduction as part of year-end planning.

Pass-Through Entity Tax Elections — PTET elections may offer additional tax-saving opportunities for eligible contractors when organized as S corporations or partnerships. In states that allow these elections, qualifying businesses may elect to pay certain state income taxes at the entity level rather than having the tax paid entirely by individual owners. Eligible entity-level payments can generally reduce federal taxable business income without being subject to the individual federal state and local tax deduction limitation. Contractors operating in multiple states may have additional considerations.

Retirement Plan Contributions — Retirement planning can provide tax advantages for construction business owners while supporting efforts to attract and retain employees. Smaller contractors often start with a SEP or SIMPLE IRA because both are inexpensive to set up and run. As the company adds employees, a 401(k) may be beneficial; for 2026, employees can defer up to $24,500 into a 401(k), and workers 50 and older can contribute more through catch-up contributions. Employer contributions are also generally deductible for the business.

Next Steps

Effective tax strategy starts with year-round planning and a clear understanding of the company’s financial position. Contractors should review current financial statements and work-in-progress (WIP) schedules to develop a reasonable projection of taxable income for the year. Anticipated equipment purchases and cash flow needs should also be part of the planning process.

A strategy that reduces taxes today may not provide the greatest long-term benefit, though. Working with a specialized construction tax advisor year-round can help contractors evaluate available tax strategies and stay focused on growth.

We’re Here to Help

Tax planning becomes increasingly important as construction companies grow. With more at stake, contractors will need to consider how tax decisions will affect the business both now and in the years ahead. If you have questions about the information outlined above or need assistance with another tax or accounting issue, JLK Rosenberger can help. For additional information, call 949-862-9902 or click here to contact us. We look forward to speaking with you soon.