What Should California Contractors Do After Filing Their Taxes?

In Brief:

• Review your business entity structure annually. New tax laws (QBI deduction, SALT cap changes, PTET extension) may make a different structure more tax-efficient.
• Take advantage of accelerated depreciation strategies like Section 179 and 100% bonus depreciation to improve cash flow and reinvest in equipment.
• Don’t overlook R&D tax credits. Many contractors qualify through process improvements, with credits and deductions available for domestic activities.
• Use net operating losses (NOLs) strategically to offset future income and reduce long-term tax liability.
• Identify eligibility for energy-related tax incentives (like Section 179D) and plan ahead for qualifying projects before deadlines.

For California contractors, filing a tax return is not just about wrapping up last year. It’s also a chance to look ahead. The return can show where income was higher than expected and where expenses or purchases affected the tax bill. It can also show where there may be room for better planning. Taking time to review the return early in the year can help uncover tax-saving opportunities, improve cash flow, and free up capital for equipment, growth, and other business needs. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.

Key Strategies and Opportunities 

Review Entity Selection — Many contractors choose an entity type early in the life of the business, but as the business grows, that structure may not be the most effective anymore. Common entity types include:

• Sole proprietorships and partnerships tax income at the individual level, with partnerships allowing flexibility in how income and ownership are allocated.
• S corporations also tax income at the individual level and may allow a portion to be taken as distributions rather than wages, which can affect payroll and Income taxes.
• C corporations are taxed at a flat 21% federal rate, and earnings may be taxed again when distributed to shareholders.

Recent legislation under OBBBA adds another reason to review entity selection. For pass-through entities, the 20% qualified business income (QBI) deduction is now permanent. The federal SALT cap increased from $10,000 to $40,000, subject to income-based phaseouts, and California extended its pass-through entity tax (PTET) through 2030, allowing state taxes to be deducted at the entity level. For C corporations, the 21% federal tax rate is now permanent. With more certainty around these rules, more contractors are revisiting business structure to see if its current form still fits the business.

Accelerate Depreciation — Many contractors regularly purchase machinery, equipment, vehicles, tools, and other fixed assets, which makes depreciation planning an important part of tax planning. Section 179 is often the first place to look because it allows businesses to expense qualifying property in the year it is placed in service. For 2026, the Section 179 deduction limit is $2.56 million, with a phaseout beginning at $4.09 million in qualifying purchases.

OBBBA also permanently restores 100% bonus depreciation for most qualified property with a recovery period of 20 years or less. This applies to property acquired and placed in service after January 19, 2025. For contractors, this can greatly improve cash flow and support reinvestment.

Cost segregation studies may be another opportunity to accelerate depreciation. A cost segregation study identifies components that can be depreciated over shorter recovery periods, rather than using the 39-year benchmark.

Research and Development — Contractors often overlook R&D opportunities, but many common business activities may qualify for tax savings. The most popular option is the R&D tax credit; it applies to any experimental work related to improving a product, process, or software, and it can generally be carried forward for up to 20 years if it’s not used right away. Another option is under the newly added Section 174A, which restores immediate expensing of qualifying R&D costs. Previously, business owners were required to amortize these costs over a five-year period. Both of these opportunities apply only to domestic activities, with foreign activities following different rules.

These provisions can often be used together. To be successful though, qualifying activity needs to be identified early, and the business needs to document any wages, supplies, and contract research under the specific projects involved. Contractors often work with an advisor to evaluate R&D activity and coordinate the credit and deduction on the return.

Net Operating Losses — A net operating loss (NOL) occurs when a business’s tax deductions exceed its taxable income for the year. For contractors, this can happen in a slower year, when costs are much higher than expected, or when large deductions such as depreciation reduce taxable income.

Under current rules, most NOLs can be carried forward indefinitely and used to offset future taxable income, although the deduction is generally limited to 80% of taxable income in a given year.

Energy-Related Incentives — Energy-related incentives can create tax savings for some contractors. Section 179D is one example, but projects must begin construction by June 30, 2026, to qualify under current rules. This deduction may apply to qualifying energy-efficient commercial building property, including projects involving lighting, HVAC, insulation, windows, and other building-envelope improvements; certification by a qualified professional is required. California contractors may also have state-level opportunities depending on the project.

Next Steps

After filing for tax season this year, contractors are encouraged to:

• Review entity type and business goals
• Map expected equipment and vehicle purchases
• Flag potential R&D activities and update the documentation process
• Make projections for NOL carryforward that may be used
• Identify any projects that could qualify for energy-related incentives
• Update estimated tax payments and cash flow forecasts
• Consult with advisors on tax planning opportunities

We’re Here to Help

For contractors, the strongest tax strategies are built throughout the year, not just at tax time. A post-filing review can help identify tax-saving opportunities, improve cash flow, and support better business decisions in the months 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 949-860-9902 or click here to contact us. We look forward to speaking with you soon.