As summer draws to a close, it might seem a little early to
start thinking about filing your 2026 tax return. But the truth is, now's the
perfect time for contractors to kick off their year-end tax planning — while
there are still months ahead to actually execute strategies to reduce your tax
bill. Here are some ideas to consider.
Make deductible capital investments
Does your construction business need capital assets, such as
heavy vehicles, equipment, tools, and office or jobsite technology? If so,
buying and placing them in service before year end could significantly reduce
your 2026 tax liability.
The One Big Beautiful Bill Act (OBBBA), enacted in July 2025,
made permanent the 100% first-year bonus depreciation deduction for eligible
new and used assets acquired after January 19, 2025, and placed in service
in 2025 or later. That means, for example, you can buy an excavator or backhoe
— or perhaps off-the-shelf accounting software — and immediately deduct the
full purchase price. And there's no limit on how much first-year bonus
depreciation you may claim.
One important caveat, however, is that the IRS automatically
applies first-year bonus depreciation to eligible assets unless you elect out
of the treatment. And you can elect out only by asset class — not for
individual assets. In other words, you could elect out of first-year bonus
depreciation for all property otherwise subject to a five-year depreciation
period, but not for only one asset in that class.
Another way to deduct capital investments is the Section 179
expensing election. It also allows you to immediately deduct, rather than
depreciate over a number of years, the cost of eligible new and used assets
bought and placed in service this year. However, for 2026, you can deduct only
up to $2.56 million of qualifying asset purchases. And the tax break
begins to phase out dollar for dollar when the cost of qualifying property
placed in service during the year exceeds $4.09 million.
The good news is you don't have to choose one of these tax
breaks over the other. Many construction businesses first elect a Sec. 179
deduction on selected assets and then apply first-year bonus depreciation to
remaining qualifying property. But the right approach depends on your
situation's facts and circumstances. We can help you achieve the most favorable
tax result.
Maximize the QBI deduction
If your construction business isn't
taxed as a C corporation, make sure to get all you can from the Sec. 199A
qualified business income (QBI) deduction. It's available to sole proprietors
and owners of pass-through entities — such as partnerships,
S corporations, and limited liability companies (LLCs) that are treated as
sole proprietorships, partnerships or S corporations for tax purposes.
The deduction generally equals 20% of QBI, but it can't exceed
20% of your taxable income (after subtracting net capital gains). QBI is
generally defined as the net amount of qualified items of income, gain,
deduction and loss that are effectively connected with the conduct of a U.S.
business. It doesn't include:
- Certain investment items,
- Reasonable compensation paid to an owner for services
rendered to the business, or
- Any guaranteed payments to a partner or LLC member
treated as a partner for services rendered to the partnership or LLC.
Also, the QBI deduction isn't allowed in calculating your
adjusted gross income, but it reduces taxable income. In effect, it's treated
the same as an allowable itemized deduction, though you don't have to itemize
to claim it.
If your taxable income exceeds a threshold amount, a wage and
investment limit begins to phase in. For 2026, the phase-in range is $201,750
to $276,750 ($403,500 to $553,500 for married couples filing jointly). Once
your taxable income exceeds the top of the range, your QBI deduction is
generally limited to the greater of your share of:
- 50% of the amount of W-2 wages paid to employees during
the tax year, or
- The sum of 25% of W-2 wages plus 2.5% of the cost (not
reduced by depreciation taken) of qualified property.
Should your taxable income projections indicate you'll be near
this threshold, you may be able to take action to lower it. For instance, you
might maximize contributions to a retirement plan. Or, as feasible, you could
accelerate deductible business expenses into this year and push income into
next year. (Note: This approach works only for businesses that use cash-basis
accounting.)
If you're already planning to add employees before year end,
hiring workers instead of engaging independent contractors could increase the
W-2 wages used to calculate the deduction limit. However, the additional wage
expense may also reduce QBI. The same applies to taking substantial first-year
bonus depreciation and Sec. 179 deductions — they can reduce your QBI and,
in turn, your QBI deduction.
Identify eligible R&E costs
The OBBBA permanently restored the expensing treatment for
domestic research and experimental (R&E) costs that existed before the Tax
Cuts and Jobs Act of 2017. An immediate deduction is now allowed for qualifying
U.S.‑based R&E expenses paid or incurred, starting with the 2025 tax year.
That means you can once again deduct eligible domestic R&E
expenditures related to developing new construction-related processes or
software in the year the expenses are incurred or paid. (Foreign R&E costs
must still be amortized over 15 years.) If the expenses are related to a
specific project, you don't need to complete the job before year end to deduct
those amounts. (Note: Special accounting rules may apply to costs associated
with long-term contracts.)
Certain expenses might also qualify for a tax credit for
research activities — but you can't double dip. If you claim the federal
research credit, you generally must either reduce your R&E deduction by the
credit amount or elect a smaller credit to avoid reducing the deduction.
Account for interplay
As you can see, taking advantage of one tax break can often
impact the value of another. That's why it's critical to start tax planning now
— so you can carefully and methodically work through all your options. Plus, if
you are considering
buying assets, you'll want to allow plenty of time to shop carefully and get
those purchases into service. We can help you model various tax-saving
strategies and determine the best course of action for the rest of 2026.
