Death and Taxes: Exploring the Construction Industry Impacts of the One Big Beautiful Bill Act

Benjamin Franklin famously said that there is nothing certain in this world except for death and taxes. That sentiment continues to be true to this day, and the importance of interpreting the complexities of tax legislation cannot be overstated. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduces significant tax reforms that will impact construction companies in many ways. This article seeks to highlight some of the main takeaways and provide useful insights for how to take advantage of the benefits of the new tax legislation. Key points of interest include provisions related to property and equipment, revenue recognition, interest expense, state and local taxes and the Qualified Business Income deduction.

Construction firms invest significantly in property and equipment, which are fundamental aspects of operations regardless of the nature of the work performed. The OBBBA seeks to ease the burden of expanding or replacing construction equipment through the permanent reinstatement of 100% bonus depreciation and expansions to the Section 179 deduction. Both provisions allow contractors to fully expense the cost of equipment, vehicles and other qualifying property in the year the property is placed in service. The deductions will help improve cash flows and make it easier to replace aging equipment, which is likely to result in a safer and more efficient work environment. This is particularly significant for small and mid-sized firms, which rely heavily on cash flow in all aspects of business decisions.

Although bonus depreciation and section 179 are likely familiar to taxpayers, a new deduction introduced by the OBBBA impacts Qualified Production Property (“QPP”). QPP is defined as “newly constructed nonresidential real property that is used for manufacturing, production, or refining tangible personal property”. The deduction applies to property that began construction after January 19, 2025, and will be placed in service before January 31, 2031. Although this deduction may appear to only apply to manufacturing firms, companies that fabricate their own materials to be used on job sites can also benefit from this deduction because it provides the opportunity to upgrade production facilities.

IRC section 460 governs the revenue recognition method related to long-term construction-type contracts. While the majority of section 460 remains the same, the OBBBA expands the eligibility of revenue recognition based on a method other than the percentage of completion method for residential construction contracts.

Previously, contracts with 80% or more of the estimated total contract costs expected to be attributed to home construction were exempt from section 460, but the scope of the project could not include dwelling units containing more than four units. The new legislation expands this limitation to include larger dwelling units (e.g., apartment buildings, condominium developments, and student housing complexes). A broader range of residential projects will be able to defer income recognition until the project is substantially complete by using the completed contract or cash method under the OBBBA.

Several other items to note are particularly relevant to the construction industry, relating to interest, state and local taxes, succession planning and the Qualified Business Income (“QBI”) deduction.

IRC section 163(j) limits the deduction of net business interest expense to 30% of Adjusted Taxable Income (“ATI”), which was previously calculated in a manner similar to earnings before interest, taxes, depreciation and amortization (“EBITDA”). The OBBBA expanded the ATI definition to remove depreciation, amortization and depletion deductions. This will potentially increase a company’s ATI, which in turn will increase the cap on deductible interest expense. Construction companies could see tax relief from this increased threshold. That includes companies that rely on lines of credit for short-term working capital needs and those that have significant financing obligations related to capital investments, including construction equipment.

The OBBBA also preserves the Pass-Through Entity Tax (“PTET”), meaning the federal deductibility of state and local taxes (“SALT”) paid at the entity level. Under the OBBBA, the SALT cap is increased from $10,000 to $40,000. This expansion is particularly relevant to pass-through entities in high tax jurisdictions such as New York and New Jersey.

Succession planning is a major concern within the construction industry. The $13.99 million per individual ($27.98 million per married couple) estate, gift and generation-skipping transfer tax (“GST”) exemption was scheduled to sunset and revert to $7 million per person. The new legislation provides a permanent increase to the GST ($15 million for individuals and $30 million for married couples), which will be indexed annually for inflation.

The QBI deduction was a component of the Tax Cuts and Jobs Act (“TCJA”) of 2017 that was scheduled to sunset at the end of 2025. The sunsetting of this deduction would have had a significant impact on small and mid-sized businesses, as it allowed owners of pass-through entities such as S corporations, limited liability companies and partnerships, to deduct up to 20% of qualified business income from their individual tax returns. The OBBBA made the QBI deduction permanent for pass-through entities.

Provisions in the bill related to property and equipment, revenue recognition, interest expense, SALT, succession planning and the QBI deduction are designed to improve cash flows and encourage owners to invest in and even expand their business. Some in the industry have expressed concerns that the anticipated economic growth could put pressure on the already strained workforce and materials pipelines. With that in mind, it is important that construction firms put an increased emphasis on strategic planning in order to take advantage of the benefits, while also mitigating any potential risks.

In the construction industry, cash is king. Overall, the OBBBA intends to put more cash in the pockets of construction firms and provide opportunities for small and mid-sized businesses to more easily compete in a dynamic economic environment. Regardless of the potential impact of this legislation, the construction industry has always been resilient.

Author: Julie Christensen, CPA, CCIFP | [email protected]