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Tax Provisions for Contractors Under H.R. 1: What the One Big Beautiful Bill Act Means for Construction

Tax Provisions for Contractors Under H.R. 1: What the One Big Beautiful Bill Act Means for Construction

Summary:

  • The One Big Beautiful Bill Act (H.R. 1) introduces major tax reforms with significant impacts for construction companies.
  • Section 199A (QBI) and 100% bonus depreciation are now permanent.
  • Residential contractors can now use the completed contract method, regardless of company size.
  • The state and local tax deduction cap has been increased to $40,000, though it phases down for those with an adjusted gross income (AGI) above $500,000.
  • Domestic research and development (R&D) expenses can now be immediately expensed rather than amortized over five years.

Tax Provisions For Contractors Under H.R. 1

In July 2025, Congress passed the One Big Beautiful Bill Act (H.R. 1), marking one of the most sweeping tax and spending reform packages in recent history. While its impacts stretch across many industries, the construction industry faces a particularly complex set of changes. These changes affect how projects are financed, how benefits can be structured and how compliance must be managed.

For contractors and subcontractors, H.R. 1 alters how income and deductions are treated, both for individuals and pass-through entities. By understanding these provisions now, construction businesses can position themselves to maximize tax benefits, stay compliant and better manage workforce and project costs.

Major Tax Provisions Affecting Construction

100% Depreciation for Qualifying Assets

H.R. 1 introduces 100% bonus depreciation for qualifying assets placed in service after January 19, 2025. This provision accelerates cost recovery for construction companies purchasing equipment, vehicles or machinery used in active business.

The ability to fully expense qualifying assets in the year of purchase offers a major cash flow advantage. Contractors can recover costs immediately, rather than spreading depreciation over several years. This may encourage earlier capital investments in equipment and technology, improving operational capacity and potentially lowering taxable income.

Expanded Section 179 Expensing

In addition to the ability to take 100% bonus depreciation of qualifying assets, Section 179 expensing limits have also been significantly expanded, allowing construction businesses to deduct a greater amount of capital expenditures in the year the assets are placed in service. This is particularly helpful for companies investing in tools, equipment or vehicles used in their operations. Eligible businesses can now write off up to $2.5 million per year for these assets.

Unlike bonus depreciation, Section 179 is often used strategically to match deductions with income and manage taxable profit levels. For contractors, expanded limits increase flexibility in how capital spending is structured.

These provisions give construction companies greater opportunity to modernize fleets, adopt new digital platforms or scale operational infrastructure while minimizing short-term tax liabilities.

Section 174A R&D Expense Treatment

This legislation also modifies Section 174A rules, providing more flexible treatment of research and development expenditures. While many associate R&D with tech or biotech, construction companies increasingly engage in R&D initiatives through innovation in materials, energy efficiency, design-build methods and digital project delivery.

H.R. 1 eliminates the need for businesses to capitalize and amortize R&D expenses, which restores the ability for businesses to immediately expense U.S. based R&D costs. The Bill also allows businesses with under $31M in revenue to retroactively expense R&D costs incurred from 2022 to 2024 by filing a change in accounting method.

Qualified Business Income (QBI) Deductions

The QBI deduction was previously set to expire on December 31, 2025. However, H.R. 1 removes the sunset provision and maintains the top effective tax rate on pass-through business income at 29.6%. The Bill also expands the phase-in by raising the thresholds to $75,000 for non-joint filers and $150,000 for joint filers. In addition, a $400 minimum deduction is included for taxpayers with an aggregated QBI of at least $1,000 if they materially participated in business activity.

Qualified Production Property Depreciation

H.R. 1 includes enhanced depreciation provisions for qualified production property, allowing for an immediate 100% deduction for the cost of “qualified production property,” which is defined as nonresidential real property used as an integral part of manufacturing, production or refining tangible personal property that is placed in service before January 1, 2033.

While this provision does not directly apply to construction companies, it can be a valuable business development tool when engaging with prospective clients planning to use a facility for manufacturing or production. By helping clients understand that qualifying production property may be eligible for immediate expensing, construction companies can position themselves as strategic partners that support tax planning and capital investment decisions from the start of  a project.

Contractor and Corporate Tax Deductions and Credits

SALT Deduction Adjustments

H.R. 1 raises the State and Local Tax (SALT) deduction cap for pass-through entities and individuals from $10,000 to $40,000 with a phase down threshold for taxpayers with an adjusted gross income (AGI) above $500,000 or $250,000 for single filers. The benefit does not phase out entirely, instead reverting to the $10,000 cap for AGI above $600,000. Many contractors organized in this way may now claim a larger deduction for state and local taxes paid, reducing overall federal taxable income.

This change is particularly beneficial for companies and contractors in higher tax states, where SALT caps previously eroded the value of local tax payments.

Revenue Recognition Flexibility

The legislation broadens revenue recognition options for construction businesses. Most were required to use the percentage of completion method, recognizing revenue gradually as work progressed. However, under H.R. 1, residential construction contracts, including those for condos, subdivisions and multifamily projects, are now eligible to use the completed contract method, regardless of the $31 million gross receipts threshold that existed.

Utilizing the completed contract method allows construction companies to defer all income recognition until a project is 100% completed, which provides a significant cash-flow advantage by delaying tax payments.

Overtime Income Deduction

A new overtime income deduction allows qualifying taxpayers to deduct a portion of their overtime income, up to $12,500 for individuals and $25,000 for married couples filing jointly. For an industry where extended work hours and overtime pay are common, this change benefits both employees and certain contractors.

Potential Risk and Challenges

Timing of IRS Guidance

While H.R. 1 is now law, the implementation of these rules will likely take some time to be phased in, particularly those around revenue recognition and overtime deductions. Businesses should monitor guidance carefully to ensure ongoing compliance with these changes.

State-Level Interactions

SALT deductions and revenue recognition flexibility may interact differently with state tax laws. Contractors operating in multiple jurisdictions should work with tax advisors to manage potential mismatches in tax law.

Resource Allocation Decisions

The availability of generous deductions and depreciation incentives can create short term tax advantages, but must be weighed against possible long term operational needs. Poorly-timed capital spending can put a strain on cash flow, rather than strengthening it, so these changes should be assessed in light of long term financial goals.

Prepare Your Construction Company for Tax Changes Today

H.R. 1 represents one of the most significant legislative shifts for the construction industry in recent years, creating meaningful opportunities for businesses to optimize tax outcomes. At the same time, tightened reporting requirements mean that careful consideration must be taken before action is taken on potential short term tax advantages.

At Brown Plus, our team works with construction companies to optimize tax strategy, ensure compliance and align financial planning with your operational goals.

Contact us today to learn how these new rules may impact your construction business and how you can position yourself for ongoing success.

Posted In: Tax | Construction | Insights

About the Author - Matthew Fox, CPA

Matthew is a Tax Principal and Shareholder with Brown Plus and a key member of the Firm’s Tax Department.

Matthew has over 20 years of public accounting experience. He provides tax consulting and planning services to clients in a variety of industries, including construction, real estate, manufacturing and financial services.

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