Tax Law Changed for Construction Firms: Here’s What Matters Now

By JANE MADDOX

The construction industry didn’t need more headwinds going into 2026.

By mid-2025, total U.S. construction spending had dropped nearly 3 percent year-over-year. Commercial was down 8.2 percent and manufacturing construction fell 7 percent. Loan rates were still sitting in the 7 to 9 percent range for most project types, and project abandonment activity in August ran nearly 90 percent higher than the year before as developers crunched the numbers and (smartly) walked away.

Then came the One Big Beautiful Bill Act (OBBB), signed on July 4, 2025. The coverage focused almost entirely on individual income tax rates.

However, there are some provisions that hit construction firms directly and significantly. Although there has been some discussion around this, it’s worthwhile to highlight them again, especially because one of the provisions expires in four months.

Bonus depreciation is back at 100 percent permanently

The Tax Cuts and Jobs Act (TCJA) of 2017 created 100 percent first-year bonus depreciation, then built in a phase-down schedule: 80 percent in 2023, 60 percent in 2024, 40 percent in 2025 and cadenced down to zero. The OBBB kills the phase-down entirely. For any qualifying asset – like equipment, machinery, vehicles or technology acquired and placed in service after Jan. 19, 2025 – the full purchase price comes off in year one, with no expiration date attached.

The acquisition date matters more than it might seem. Assets ordered before Jan. 20, 2025 or covered by binding contracts before that date stay under the old phase-down schedule, which is 40 percent for 2025 placements, 20 percent for 2026. If your firm had significant equipment on order late last year, document when those purchase contracts were executed. The IRS looks at contract dates, not delivery dates.

The new IRC Section 168(n) creates a category called qualified production property (QPP), covering commercial buildings used in manufacturing, production or refining. Standard commercial real estate depreciates over 39 years, but QPP gets written off in year one. Construction on these facilities must begin after Jan. 19, 2025, and before Jan. 1, 2029, with the property placed in service before Jan. 1, 2031. For contractors building food processing plants, fabrication facilities or purpose-built industrial structures, this changes the return math on those projects in a meaningful way.

Cost segregation studies also got more valuable overnight. When bonus depreciation was at 60 percent, reclassifying $2.5 million of a $10 million building into five-year or seven-year property generated $1.5 million in extra first-year deductions. At 100 percent, those same components come off entirely, equating to a $2.5 million first-year deduction from a study that typically runs $15,000 to $25,000. The study costs the same, but the payoff is substantially larger.

Section 179 more than doubled

The OBBB raised the Section 179 immediate expensing limit to $2.5 million, up from an inflation-adjusted $1.25 million. The phaseout threshold jumps to $4 million from $3.05 million, and both figures are indexed to inflation starting this year.

Section 179 and bonus depreciation are similar but behave differently. Section 179 can’t produce or deepen a net operating loss (NOL). Bonus depreciation can, and that generated NOL can carry forward. State conformity adds another layer, and many states have decoupled from federal bonus depreciation but still conform to Section 179. This means multi-state operators need to model both by jurisdiction before committing to one approach. In practice, the two often work together: Section 179 absorbs taxable income down to zero, then bonus depreciation pushes into loss territory.

The R&D fix: a hard deadline for smaller firms

Starting with tax year 2022, the TCJA required businesses to capitalize domestic R&D expenditures and amortize them over five years instead of deducting them immediately. Engineering companies, prefab specialists, firms developing proprietary estimating tools or project management systems or anyone investing in building out processes and technology since 2022 took a hit they probably weren’t expecting. What was a current-year deduction now becoming a five-year amortization schedule, inflating taxable income in the near term.

The OBBB reverses this, restoring full immediate deductibility of domestic R&D for tax years beginning after Dec. 31, 2024. For smaller businesses – those with average annual gross receipts under $31 million for 2022-2024 – there’s a chance to recover what was overpaid. Firms can amend their 2022, 2023, and 2024 returns to claim the full R&D deductions in the years the costs were incurred, pull all remaining unamortized costs into a single 2025 deduction or spread that catch-up across 2025 and 2026. Firms that amend can’t cherry-pick years as all affected returns must be amended together. The deadline is July 6, 2026.

Larger firms can’t amend prior returns, but they can accelerate remaining unamortized balances into 2025 or spread across 2025–2026. It’s worth noting that foreign R&D gets no relief and the 15-year amortization schedule stays in place.

Section 179D ends June 30, 2026, so act now

Section 179D has been in the code since 2006. It gives commercial building owners who make qualifying energy-efficient improvements and design professionals who design energy-efficient systems for government-owned or tax-exempt buildings a deduction for systems that cut total energy and power costs by at least 25 percent. The Inflation Reduction Act of 2022 further lowered the qualifying threshold and raised the per-square-foot deduction rates.

Under the prevailing wage and apprenticeship pathway, the deduction scales with energy performance: $2.50 per square foot at the 25 percent threshold, stepping up to $5 per square foot at 50 percent or greater savings. On a 200,000-square-foot building at the PWA maximum, that’s a $1 million deduction in a single year. One national engineering firm has reportedly claimed more than $4 million in 179D deductions for HVAC design work on K-12 school buildings alone.

The deduction also isn’t limited to the current year. It can be claimed for projects placed in service in the current year or the prior three years, as long as the statute of limitations remains open. Firms that did qualifying government or nonprofit work in 2022 or 2023 and never pursued it may still have a window. To claim the deduction, designers need an allocation letter from the building owner. For upcoming projects, it’s best to pursue this letter at kickoff before anyone has reason to dispute scope.

The OBBB terminates Section 179D for any project where construction begins after June 30, 2026. The IRS recognizes two methods to establish the start date: the physical work test, which requires significant, project-specific physical work before June 30 (site clearing doesn’t count) or the five-percent safe harbor, which requires incurring at least 5 percent of the project’s total expected cost before the deadline. On a $50 million development, that’s $2.5 million in costs.

Firms with qualifying institutional, governmental or tax-exempt owner projects that haven’t broken ground yet should calculate what the deduction is worth and decide whether accelerating the start date makes sense. For firms with a pipeline of this work, the aggregate value across multiple projects can be substantial. But remember, after June 30, it’s gone.

None of this happens automatically

The bonus depreciation and Section 179 changes are permanent. But the R&D retroactive fix is available now, but the amended return deadline for smaller businesses is July 6, 2026, and that’s closer than it looks. Section 179D is the outlier with a hard stop.

Tax law can’t fix a labor gap that the Associated General Contractors of America estimates at nearly 500,000 workers nationwide, and it can’t bring material costs down. What the OBBB does is make the tax environment meaningfully better for firms that are building and investing in the U.S., especially those looking make smarter environmentally-sound design decisions. Real tax savings are possible, but now is the time for firms to plan for it and seize the opportunity.

Jane Maddox, CPA, leads the Real Estate and Construction group at Anders.