Contractors collaborating on tax planning strategies in light of the new legislation.
The One Big Beautiful Bill Act (OBBBA) unveils significant tax opportunities for contractors, including changes to income recognition, deductions, and depreciation rules. This legislation particularly benefits the construction industry, offering expanded exemptions for residential contracts, reinstating R&E expenditure deductions, and introducing new amortization rules. Furthermore, the act introduces a 100% bonus depreciation for select properties, alongside other tax benefits that promote immediate cash flow for businesses. Careful planning and professional guidance are advised to fully leverage these new provisions.
The recently enacted One Big Beautiful Bill Act (OBBBA) offers an array of significant tax planning opportunities for contractors and businesses. This new act brings notable changes that affect how income is recognized, as well as the rules surrounding deductions and depreciation. The implications of this bill are expected to be particularly advantageous for contractors operating in the construction sector and businesses engaged in innovative projects.
A major update under the OBBBA is the expansion of the percentage-of-completion method (PCM) exception for home construction contracts, which will now include residential construction contracts. Previously, home builders had the flexibility to use accounting methods such as the completed contract method or accrual method, and residential contracts could apply two different approaches: 70% required PCM while 30% could use any permissible method. This change applies to contracts entered into after the enactment date of 2026 for calendar year taxpayers, creating a new playing field for builders.
For businesses heavily invested in research and innovation, the OBBBA reinstates the ability to expense any domestic research and experimental (R&E) expenditures for tax years beginning after December 31, 2024. Small businesses with average annual gross receipts of less than $31 million in 2025 can also amend their returns to deduct R&E expenditures from prior years. Additionally, the unamortized Section 174 expenditures from 2022 to 2024 can be deducted in 2025 or spread across 2025 and 2026, significantly benefiting firms in the design-build space.
The OBBBA introduces changes to the treatment of depreciation. It restores the ability to add back depreciation, amortization, and depletion when calculating adjusted taxable income, effectively increasing the cap on deductible business interest for tax years starting after December 31, 2024. Furthermore, property acquired after January 19, 2025, will qualify for 100% bonus depreciation, although existing phase-out rules will still apply to earlier acquisitions.
In a bid to further aid businesses, the OBBBA provides a new deduction for overtime pay. Eligible individuals can enjoy an above-the-line deduction of up to $12,500, or $25,000 for married couples filing jointly, with a phase-out starting at $150,000 for individuals and $300,000 for couples. This deduction, effective retroactively to 2025, promotes fair compensation practices while simultaneously providing tax relief.
One noteworthy adjustment is the repeal of Section 179D deductions for energy-efficient commercial buildings starting after June 30, 2026. However, the OBBBA maintains the ability for businesses to fully deduct qualifying equipment and property costs in the year they are purchased and placed in service. This move is aimed at enhancing cash flow and reducing financial constraints for many entities.
The act also makes important changes to the tax treatment of global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII), as well as modifications to the tax rates and calculations for these categories. Startups stand to benefit from expanded qualifying income under Section 1202 for sold small business stock, enabling more growth opportunities.
The comprehensive changes introduced by the OBBBA underscore the importance of detailed tax planning. With provisions reinstated, amended, or repealed, business owners and contractors need to carefully evaluate their tax strategies to leverage the benefits and navigate the complexities posed by the new regulations. Consulting with a professional CPA can provide the necessary insights into the different accounting options and help determine if IRS permission is required for any changes.
As businesses adapt to these significant tax reforms, understanding the intricacies of the OBBBA will be crucial for optimizing their financial strategies moving forward.
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