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 introduced One Big Beautiful Bill Act (OBBBA) presents significant tax planning opportunities for contractors and businesses. The legislation introduces new rules regarding income recognition, deductions, and depreciation, which can greatly impact how these entities manage their finances.
One of the most notable features of the OBBBA is its impact on income recognition for long-term contracts. Previously, home construction contracts were exempt from the requirement to use the percentage-of-completion method (PCM). This allowed home builders to choose from a variety of accounting methods, such as the completed contract method or the accrual method.
Under the new legislation, the OBBBA expands the PCM exemption to cover not only home construction contracts but also other residential construction projects, including apartment buildings. However, this expanded exemption will only apply to contracts entered into after the bill’s enactment date in 2026 for calendar year taxpayers.
Another critical aspect of the OBBBA involves the reinstatement of the ability to expense domestic research and experimental (R&E) expenditures, starting in tax years after December 31, 2024. This change is expected to provide much-needed benefits for businesses in the design-build sector that focus their investments on innovation.
For investments made between 2022 and 2024, companies will have the opportunity to deduct unamortized Section 174 expenditures in 2025 or to spread these deductions ratably over 2025 and 2026. Small businesses with average annual gross receipts below $31 million in 2025 can even file amended returns to take advantage of the R&E deductions from prior years.
The OBBBA reinstates the add-back of depreciation, amortization, and depletion when calculating adjusted taxable income, thereby raising the cap on deductible business interest for tax years beginning after December 31, 2024. A return to 100% bonus depreciation for property acquired after January 19, 2025, also marks a significant shift, albeit the current phase-out rules for earlier acquisitions will remain effective.
Additionally, a new provision allows for a duty deduction on overtime pay. This enables an above-the-line deduction of up to $12,500 ($25,000 for married couples filing jointly), with phase-out limits set at $150,000 for individuals and $300,000 for married couples. This deduction will apply retroactively to 2025, alongside a transition rule for the first year of reporting.
The legislation also stipulates the repeal of Section 179D deductions for energy-efficient commercial buildings after June 30, 2026. However, it preserves the ability for businesses to fully deduct qualifying equipment and property costs in the year they are purchased and put into service. This can significantly enhance cash flow and lower immediate financial burdens for businesses.
In terms of tax implications, the OBBBA modifies tax rates and calculations concerning global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII). Furthermore, startups benefit from expanded qualifying income under Section 1202 for sold small business stock, encouraging entrepreneurship and investment.
The bill also makes various changes permanent, including certain deductions for pass-through business owners, which effectively lower tax rates on portions of business income. While the OBBBA retains increases to the standard deduction established in the 2017 Tax Cuts and Jobs Act, it has temporary deductions for seniors and eliminates personal exemptions.
Amidst these extensive changes, careful tax planning and strategic implementation remain crucial for businesses navigating this evolving landscape. The complexity of the OBBBA also means that professional CPA assistance may be necessary for evaluating various accounting options and determining if IRS permission is required for any adjustments.
As the construction industry and associated businesses adapt to these substantial legislative updates, understanding the full scope of the OBBBA will be essential for effective tax management and securing a competitive edge in an increasingly dynamic marketplace.
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