The OBBBA offers new tax planning opportunities for contractors, including income recognition, deductions, and depreciation rules.
With the enactment of the One Big Beautiful Bill Act (OBBBA) comes several valuable tax planning opportunities.
With contractors being top of mind, we’ve identified a few more notable provisions impacting recognition of income from long-term contracts and related deductions:
Expansion of exempt method for residential construction contracts
Under prior law, home construction contracts were exempt from the requirement to use the percentage-of-completion method (PCM). Thus, a home builder could use any permissible method, such as the completed contract method or accrual method, rather than PCM.
Residential contracts, such as a contract to build an apartment, could have two different accounting methods apply: 70% of the contract was required to be accounted for using PCM, but 30% could be accounted for using any permissible method.
The OBBBA expands the exemption from PCM for home construction contracts to include residential construction contracts, opening the options available to contractors to account for their residential jobs. This exemption is available for contracts entered into after the effective date of the bill’s enactment – which is 2026 for calendar year taxpayers.
This is a significant shift from the previous rule. A professional CPA can help you evaluate different options for accounting for your residential jobs under the new rules and determine whether IRS permission must be requested to change your approach.
Section 174: Expensing domestic research and experimental expenditures
OBBBA reinstates the ability to expense domestic research and experimental (R&E) expenditures for tax years beginning after December 31, 2024. This is a welcome development for businesses that invest heavily in innovation, such as those in the design-build space.
Unamortized 2022-2024 Section 174 expenditures can be deducted in 2025 or ratably in 2025 and 2026. Small business taxpayers (those with average annual gross receipts of <$31M for 2025), can choose to file amended returns and deduct 2022 through 2024 domestic R&E expenditures.
The bill retains the required 15-year (180-month) amortization period for foreign research and experimental expenditures. It adds the option to amortize domestic research and experimental expenditures over a period of not less than 60 months, beginning with the month in which the taxpayer first realizes benefits from the expenditures.
More favorable calculation for business interest limitation
The deduction for business interest is generally limited to 30% of adjusted taxable income. Beginning in 2022, depreciation, amortization, and depletion were not added back in calculating adjusted taxable income, reducing the amount of business interest that could be deducted. The calculation change had a particularly meaningful impact on capital-intensive businesses, including many construction contractors.
The OBBB restores the add-back of depreciation, amortization, and depletion in calculating adjusted taxable income, effectively increasing the cap on deductible interest for tax years beginning after December 31, 2024.
100% bonus depreciation made permanent
For property acquired after January 19, 2025, 100% bonus depreciation has been reinstated. The current phase out remains in place for property acquired before January 20, 2025.
No tax on overtime
An above-the-line deduction was enacted for overtime pay during a given taxable year of up to $12,500 ($25,000 if married filing jointly) but phases out at $150,000 or $300,000 if married filing jointly. To deduct overtime, married individuals must file a joint return, and the taxpayer must include their social security number (SSN) on their return.
Although the overtime provisions appear to have limited impact on employers because they are individual deductions, employers will be required to report the total amount of qualified overtime compensation on information reporting. Because this provision is retroactive to the beginning of 2025, first year reporting may be difficult; however, there is a transition rule that allows some leeway in year one.
This bill does not impact FICA taxation of overtime and thus does not provide payroll tax savings. It expires on December 31, 2028.
Repeal of energy efficient commercial buildings deduction
Section 179D is currently available to owners who design energy-efficient commercial buildings. Certain tax-exempt owners can allocate these deductions to qualifying designers involved in the project. The bill repeals this deduction with respect to property the construction of which begins after June 30, 2026.
How CLA can help
These changes offer meaningful tax planning opportunities — but also require careful implementation. CLA can help you review current methods and evaluate potential opportunities.
Please be sure to review our article for additional tax law changes not covered here.
Additionally, check out our livestream on LinkedIn to learn more about what you can do to plan ahead.