New Tax Bill Holds Significant Benefits for Construction Contractors

The new tax bill signed into law on July 4, 2025, holds significant benefits for construction contractors.

In general, the “One Big Beautiful Bill” (OB3) makes permanent certain provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that were scheduled to expire at the end of this year or phase out over several years. Additionally, it contains numerous new provisions that benefit businesses and individuals.

The following is a summary of the legislation’s major provisions that will benefit contractors and subcontractors. In the coming months, as we further analyze the new law, we will continue to inform you of provisions that may impact your business and personal tax positions.

Bonus Depreciation

This is one of the most significant tax benefits of OB3. The law restores 100% bonus depreciation retroactive to January 19, 2025. This allows businesses to immediately deduct the full cost of qualifying capital investments — such as machinery, equipment, and certain software — in the year the asset is placed in service.

The TCJA provided 100% bonus depreciation, with a step-down of 20% per year starting in 2023 until expiration in 2027. With restoration of 100% bonus depreciation retroactive to January 19, 2025, as provided by the Act, businesses that have already made capital expenditures in 2025 with the expectation of 40% bonus depreciation will reap an additional benefit.

Increased Sec. 179 Deduction Limits

Sec. 179 of the Internal Revenue Code allows businesses to deduct the cost of certain equipment immediately, rather than over time. Qualifying purchases include machinery, equipment, and certain software.

Under the previous law, taxpayers were limited to claiming a maximum $1.25 million deduction under Sec. 179 and a phaseout threshold of $3.13 million in a single tax year.

The OB3 law raises those limits to $2.5 million and $4 million.

For contractors and subcontractors who make expensive equipment purchases, the higher Sec. 179 limits and the return of 100% bonus depreciation present some interesting possibilities. With bonus depreciation, you can deduct the full amount of a purchase even if it takes your company into a deficit to get the tax deduction. With Sec. 179, you can only deduct until the net income and expenses break even, and the rest carries forward. Under certain circumstances, you may want to carry forward a tax asset in order to stockpile deductions against future taxable earnings. Contractors and subs may find themselves in a unique position of having to make strategic tax planning decisions when weighing bonus depreciation against a Sec. 179 deduction. Section 179 deductions can be elected on an asset-by-asset basis, whereas bonus depreciation is elected on an asset class basis. Therefore, if you elect Section 179, there will not be an opportunity to claim bonus depreciation.

At the state level, California does not have bonus depreciation but does have a state version of Sec. 179. The state limits remain the same at $25,000 for a single item and a $250,000 phaseout.

Increase in state and local tax (SALT) deduction

When the TCJA was enacted in 2017, howls of protest came from high-tax states, particularly those with high real estate costs. That’s because TCJA capped the state and local tax deduction at $10,000. In response, 36 states (and New York City) enacted “SALT workaround” laws that enabled owners of pass-through businesses to claim their SALT deductions as a business expense, which avoided the cap.

The new OB3 law raises the SALT deduction cap to $40,000, indexed to a 1% annual increase. However, the new cap is temporary and comes with limits. The $40,000 cap begins to phase out for taxpayers with adjusted gross income of more than $500,000, and the cap will revert to $10,000 in 2030.

But for the next five years, the $40,000 cap will significantly benefit higher earners in California, in part because the new cap gives taxpayers more flexibility in whether to make the pass-through entity election. If their total SALT deduction is going to be less than $40,000, there’s no reason to make the election.

However, for those with SALT taxes over $40,000, some strategic tax planning may enable taxpayers to maximize tax benefits under the new cap.

Under the pass-through election, the deduction for state income taxes is 30% of state taxes paid, so, for example, your effective benefit for $100,000 paid in state taxes would be $30,000. If there were no SALT limit and you were paying taxes as an individual, and you were in the highest tax bracket of 37%, you would get a 37% benefit for that deduction of state taxes paid. That concept will now work up to $40,000 of state taxes paid.

Consequently, it may be beneficial now to max out your federal benefits by hitting your $40,000 cap on your personal income tax return, then covering the rest of your state tax liability under your pass-through entity election.

So, from a planning standpoint, I would choose to deduct up to $40,000 in state taxes on my personal tax return, where I will get a 37% benefit if I’m in the highest tax bracket, then deduct the rest on the business side through my pass-through entity, where I’d get the 30% Federal benefit.

Expensing of Research and Development (R&D) costs

Another feature of the TCJA was a requirement starting in 2022 that businesses capitalize and amortize over five years expenses related to domestic R&D activities. International R&D costs had to be amortized over 15 years. Previously, R&D costs were immediately deductible.

The OB3 law restores immediate deductibility for R&D costs and makes it permanent. This will particularly benefit design-build contractors, who frequently qualify for R&D tax credits, as well as contractors who do prefabricated work.

If you are currently amortizing R&D expenses, you are likely in the fourth year of amortization of costs incurred in 2022. If your company’s 3-year average annual gross receipts (AAGR) are under $31 million, you have the option of amending the last three years’ tax returns and expensing those deductions.

The payoff will include not only the tax benefits of immediate expensing, but interest on your tax refund.

If you choose not to amend your previous tax returns, or you don’t qualify because your company’s revenues are over $31 million, you still have the option to catch up your unclaimed expenses for the 2025 tax year, or spread those deductions over 2025 and 2026.

Qualified Business Income (QBI) deduction now permanent

The TCJA created a new 20% deduction off business income for pass-through entities called the Qualified Business Income deduction, known by shorthand as “199a” for its code section. The QBI deduction was one of many TCJA provisions scheduled to expire at the end of 2025, which would have resulted in significantly higher taxes for the majority of U.S. businesses.

The QBI effectively takes a 37% tax rate down to 30%, a huge tax benefit. Moreover, it has broad application, such as to a piece of rental property that an owner leases back to their company, which is very common in the contractor space.

Changes to Sec. 163(j)

Sec. 163(j) governs the limitation on the deductibility of business interest expense. The OB3 introduces significant changes that will broaden the application of the deduction and enable more businesses to benefit from it. These changes are retroactive to January 1, 2025.

Originally enacted under the TCJA, Sec. 163(j) limits the amount of business interest that can be deducted to 30% of a taxpayer’s Adjusted Taxable Income (ATI). The OB3 makes three major changes aimed at easing restrictions for capital-intensive businesses while tightening compliance in other areas:

• It restores the EBITDA-based calculation used in determining the deduction. Under TCJA, initially calculated as earnings before interest, income taxes, depreciation and amortization (EBITDA), which allowed for a more generous interest deduction. But in 2022, the calculation shifted to EBIT, excluding depreciation and amortization. This reduced the deductible interest for asset-heavy businesses. The OB3 Act reverses this change, allowing depreciation and amortization to be added back to the ATI calculation.
• The OB3 also excludes certain international tax items from the ATI calculation. These items previously allowed multinational corporations to claim higher interest deductions. By removing them from the ATI base, the OB3 narrows the scope of deductible interest for companies with significant foreign operations, aligning the deduction more closely with domestic economic activity.
• Starting in 2026, the OB3 introduces a new interest capitalization ordering rule. Under this rule, the Section 163(j) limitation must be applied before any elective capitalization of interest under Sections 263(a) or 263(g). This change is designed to prevent businesses from circumventing the interest cap by shifting interest expense into capitalized assets. It ensures that the limitation applies to all interest expense, regardless of whether it is immediately deductible or capitalized for tax purposes.

Permanent Increase of Estate Tax Exemption

This was another TCJA fix that will affect millions of Americans, particularly high earners and business owners. Under TCJA, the federal estate tax exemption had climbed to $13.9 million per individual ($27.9 million for married couples filing jointly). But that exemption was due to be cut roughly in half when certain TCJA provisions were scheduled to expire at the end of 2025.

The OB3 permanently increases the estate tax exemption to $15 million per individual ($30 million for married joint filers), and indexes it for inflation.

For business owners including contractors and subcontractors, this change brings consistency and predictability to the estate planning process, and enables taxpayers to plan their estates with confidence.

Charitable Deductions

The OB3 introduces three changes to charitable deductions that will influence decisions taxpayers make about their charitable giving:

• A new charitable deduction — Beginning in 2026, a new deduction allows non-itemizers to deduct charitable gifts up to $1,000 for single filers or $2,000 for married couples filing jointly. This provision is not indexed for future inflation.
• A cap on charitable deductions — The new legislation caps the tax benefits of itemized charitable deductions at 35%, even for those in the 37% marginal tax bracket. In other words, these high-income filers donating $1,000 would receive a $350 deduction instead of the current $370. This change goes into effect in the 2026 tax year. Donors who are considering a significant charitable gift may want to consider accelerating it to 2025 to maximize their deduction under the current marginal rate.
• A floor on charitable deductions — The OB3 Act sets a new floor for deductions by itemizers and corporations. Effective in 2026, itemizers who make charitable contributions will only be able to claim a tax deduction to the extent that their qualified contributions exceed 0.5% of their adjusted gross income (AGI). For example, a couple with an AGI of $300,000 could only deduct charitable donations of more than $1,500. Similarly, corporations will only be able to deduct qualified charitable contributions that exceed 1% of their taxable income. High earners who itemize deductions and make charitable gifts may want to consider the timing and amounts of their giving, as well as strategies to maximize their deductions. Corporations with charitable giving programs should consider analyzing their historic giving patterns to see if they exceed 1% of taxable income.

As a reminder, these changes do not impact donations made as part of required minimum distributions directly from individual retirement account.

We’re here to help

On balance, the OB3 Act appears to provide more advantages than disadvantages for businesses, including contractors and subcontractors. We will continue to analyze the legislation and keep you informed about provisions that will affect you and your business.

In the meantime, if you have questions or concerns, contact your JLK Rosenberger team member or click here to contact us. We look forward to speaking with you.