Tax Tips for Construction Businesses

Construction taxes punish sloppiness like no other industry's. Your revenue arrives over months on jobs that outlive quarters, your biggest deductions ride on equipment-purchase timing, your crews rack up overtime that new federal rules now track on the W-2, and your sub-versus-employee calls are a favorite audit target. The upside: 2026 is genuinely one of the friendliest tax environments contractors have seen in years — if you plan instead of react. Here's what deserves your attention between now and December.

How should you plan equipment purchases now that 100% bonus depreciation is permanent?

The 2025 tax law made 100% bonus depreciation permanent for qualified property acquired and placed in service after January 19, 2025 — no more phase-down countdowns. Stacked on top: Section 179 expensing up to $2,560,000 for 2026 (phase-out starting at $4,090,000 of purchases).

The strategy change is subtle but real. When bonus was phasing down, the game was "buy before the percentage drops." Now the question flips to which year actually needs the deduction. A $400,000 excavator placed in service in tax year 2026 can generally be written off 100% in 2026 — but if 2026 is a thin-margin year and 2027 looks strong, electing slower depreciation (or timing the purchase into January) may put the deduction where it's worth more. Permanent bonus means you finally get to choose. Two cautions, hedged as always: the write-off requires the asset to be placed in service — delivered and ready — by December 31, not just ordered; and financed equipment generally still qualifies in full, which can make the first-year deduction bigger than your actual cash outlay.

One door is closing, though: the §179D energy-efficient commercial building deduction ends for projects that begin construction after June 30, 2026, and the §45L new energy-efficient home credit ended for homes acquired after that same date. If you had qualifying work in motion before the cutoff, document eligibility now.

Which accounting method should your jobs be on — and did the 2025 law change yours?

For many contractors, yes. The long-term-contract rules got their biggest rewrite in decades:

• Small contractors (average annual gross receipts under roughly $31 million, indexed) remain generally exempt from percentage-of-completion for contracts expected to finish within the window — and that window grew from 2 years to 3 years for contracts entered into after July 4, 2025.
• The old "home construction contract" exception (limited to buildings with 4 or fewer units) became a "residential construction contract" exception — apartment and multifamily projects now qualify. Even large contractors can generally use completed-contract-style methods for qualifying residential work under the new rules.

Translation: builders who were forced onto percentage-of-completion — recognizing (and paying tax on) profit as work progresses — may now be able to defer that profit until jobs complete. On multifamily work, that's a genuine cash-flow event. Method changes require IRS consent via a change-in-accounting-method filing, and new contracts versus old contracts are treated differently — this is a "run it with your CPA before year-end" item, not a DIY toggle.

Why is WIP hygiene a tax issue, not just a bookkeeping one?

Because every tax method above depends on numbers your work-in-progress schedule produces. If job costing is mush, your tax return is a guess with a signature on it. The monthly discipline that keeps you honest:

• Every cost coded to a job — labor with burden, materials, subs, equipment time, permits — so percent-complete calculations mean something.
• Over/underbillings reconciled monthly. Overbillings are deferred revenue you've already been paid for; underbillings are work you've funded but not billed. Both distort taxable income if they're stale.
• Watch profit fade. A job that books at 22% margin and finishes at 9% didn't lose the margin in the last month — the WIP was wrong all along, and so were your estimates and your tax projections.

Clean WIP also decides real money at year-end: retainage, for example, generally isn't taxable to accrual-method contractors until you have the right to receive it — but only books that track it separately can claim that deferral.

What do the new overtime rules mean for OT-heavy crews?

Two things, one for your people and one for your payroll department (which may be the same person):

For your workers: federal law now lets employees deduct the premium portion of FLSA overtime — up to $12,500 (single) / $25,000 (joint) per year for tax years 2025–2028, with income phaseouts. For crews running 50-hour summers, that's a real refund-season number.

For you: the deduction only works if employers report qualified overtime — the redesigned 2026 W-2 carries a new Box 12 code (TT) for the overtime premium plus new occupation-code reporting, which means your payroll system must be capturing this data all year. Contractors who wait until January 2027 to think about it will be reconstructing a year of time records by hand. Setup steps are in our tips & overtime payroll guide.

While you're in payroll: worker classification deserves an annual gut-check. Construction is a perennial misclassification target, and a sub who works only for you, on your schedule, with your tools looks like an employee to auditors regardless of the 1099. Related 2026 note: the 1099-NEC threshold rose to $2,000 for payments made in 2026 — fewer forms for small sub payments, same substantiation standards.

Which credits and traps round out the 2026 picture?

A hedged example (tax year 2026): a GC with $6 million of revenue buys $500,000 of equipment (fully expensed under bonus in 2026), moves two multifamily contracts signed in late 2025 onto the expanded residential exception (deferring roughly $300,000 of not-yet-earned profit recognition, results vary by contract), and gets W-2 overtime tracking live by Q3 so a 20-person field crew's OT premiums are cleanly reported in January 2027. None of those three moves shows up if the first conversation happens in March 2027.

That's really the theme: every lever above is a before-December lever. Problems come here to get solved. Ideally that happens in July, when there's still a calendar to work with. For everything else that changed this year, the 2026 tax changes hub is the map.

FAQ

Should I take §179 or bonus depreciation?

Often both, on different assets. §179 lets you pick asset-by-asset (with limits and income caps); bonus generally applies class-wide. The mix depends on state conformity too — several states don't follow federal bonus rules, so the state answer can differ from the federal one.

Is WOTC really gone?

It lapsed December 31, 2025, and is in hiatus as of July 2026. Congress has retroactively renewed it repeatedly in the past — which is why continuing to screen eligible hires and file the paperwork on time is cheap insurance, not wasted effort.

Do I owe percentage-of-completion on every job now that we've grown?

Not necessarily. The test looks at average gross receipts (roughly $31 million, indexed) and contract length (3 years for newer contracts) — and residential work has its own broader exception now. Many growing contractors qualify for exempt methods on more work than they think.

Are my crew's tools and safety gear deductible?

Gear the business buys — PPE, small tools, uniforms — is generally deductible as supplies or depreciated if substantial. If employees buy their own, reimburse through an accountable plan so it's deductible to you and tax-free to them.

We work in three states. Where do we pay tax?

Generally everywhere you have jobs — payroll, income/franchise tax, and sales/use tax obligations can each trigger separately by state. Multi-state contractors should map registrations annually; the cleanup costs more than the setup.

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Reviewed by the WAYG tax team · Updated July 2026