On July 4, 2025, President Donald Trump signed into law the 887-page, One Big Beautiful Bill (OBBBA), budget and tax bill. While the legislation mainly extends provisions from the Tax Cuts and Jobs Act (TCJA), there are several new items and changes that construction company executives and owners should be aware of to take advantage of tax planning opportunities.
Exempt methods of accounting for residential construction contracts
Under prior law, residential construction contracts, defined as a residential building with more than four dwelling units (i.e. apartment buildings, prisons, nursing homes, etc.), could be accounted for under the Percentage of Completion-Capitalized Cost Method (PCCM). Under this method, 70% of the contract was required to be accounted for using PCM, and the remaining 30% of the contract could be accounted typically under the completed contract method. Alternatively, home construction contracts, those with four or fewer dwelling units, are exempt from PCM and typically use the completed contract method.
For contracts beginning in 2026, the OBBBA has altered the exemption from PCM to include residential construction contracts, providing significant tax deferrals and planning opportunities.
Capitalized research & development expenditures (§174)
Many design build contractors, engineers, and architects claim Research and Development credits. Included in the OBBBA is the revival of immediate deduction of domestic research and development expenses. Any unamortized R&D expenditures can be deducted in the 2025 tax year, or an election can be made to deduct half of the unamortized amount in 2025 and the other half in 2026. Additionally, certain small taxpayers may choose to file amended tax returns to deduct those costs in the year incurred.
100% bonus depreciation
100% bonus depreciation has been reinstated and made permanent for qualifying property acquired and placed-in-service after January 19, 2025. The legislation does provide that the acquisition date of property is determined based on when a written binding contract is entered into to purchase the property.
In addition to 100% bonus depreciation, OBBBA has included a carve-out for Qualified Production Property (QPP). This provision allows taxpayers to elect a 100% deduction of QPP in the year it is placed in service. QPP is nonresidential real property that is used in a qualifying production activity including manufacturing, production (agricultural and chemical only), or refining of tangible personal property.
To be eligible, QPP construction must start between January 20, 2025 and December 31, 2029 and the property must be placed-in-service in the U.S. before January 1, 2031.
Updated calculation for interest expense limitation (§ 163j)
Interest expense deductions are typically limited to 30% of adjusted taxable income (ATI). Under the TCJA, ATI was originally calculated based on tax-basis EBITDA, however, in 2022, the limitation was further shrunk so that ATI was based on tax-basis EBIT. The change had a significant impact leveraged businesses, including some construction contractors, especially as interest rates have increased.
OBBBA includes a change to the calculation of ATI, again allowing for the add-back of depreciation and amortization, increasing the maximum amount of interest that can be deducted for tax years beginning after December 31, 2024.
Qualified Business Income Deduction (§ 199A) Updates
The qualified business income deduction (QBID), commonly referred to as the pass-through deduction was created under the TCJA, allows for a deduction of up to 20% of qualifying income from partnerships, s-corporations, and sole proprietorships. Under the TCJA, QBID was set to sunset for tax years beginning after December 31, 2025.
OBBBA has made this deduction permanent for tax years beginning after December 31, 2025.
Energy Efficient and Green Incentives
Section 179D previously provided a federal tax deduction for eligible energy efficient property in commercial buildings. Section 45L provides a tax credit for building energy efficient homes. Both provisions have been terminated under OBBBA for construction that begins after June 30, 2026.
Other OBBBA Updates
Tax Deduction for Qualified Overtime Pay
OBBBA includes a provision allowing for an above-the-line deduction for overtime pay with set limits and phase-outs. Employers will be required to report the total amount of qualified overtime compensation on payroll information reporting. This provision is effective beginning January 1, 2025 and expires for taxable years beginning after December 31, 2028. Due to potential difficulties in the first reporting year, there is a transition rule allowing reporting entities to use “reasonable methods” to estimate and report qualifying amounts.
As qualified overtime pay is still considered income, with a deduction on the individual return, regular withholding rules apply until the IRS issues additional guidance and procedures. Additionally, qualified overtime pay is still subject to FICA.
Estate Tax Exemption
The estate tax exemption was made permanent and increased to $15 million, effective the 2026 tax year. The exemption will be adjusted for inflation.
Information Reporting for Certain Payees
Under prior law, information returns (generally form 1099-MISC or 1099-NEC) were required for certain payments totaling $600 or more during a calendar year. OBBBA increased the general reporting threshold to $2,000, and, beginning in 2027, the reporting threshold is adjusted annually for inflation. The new information reporting rules are effective for payments made after December 31, 2025.
For any questions regarding the One Big Beautiful Bill Act or tax planning opportunities, please contact your RubinBrown Construction professional.
Published: 07/22/2025
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