A Guide for Construction Business Owners

As the expiration of several key provisions of the Tax Cuts and Jobs Act (TCJA) looms, construction business owners must brace for significant tax law changes. The TCJA, enacted in 2017, brought numerous benefits, but many of these are set to expire after 2025, potentially reverting to pre-TCJA levels. Here are the critical areas to watch:

1. Individual Tax Changes

Key individual provisions set to expire include:

• Top Individual Income Tax Rate: Increasing from 37% to 39.6%, which could affect construction business owners’ personal tax liabilities.
• Standard Deductions: The TCJA nearly doubled the standard deduction and eliminated personal exemptions. If the TCJA expires in 2025, the standard deduction for a married couple filing jointly in 2026 could substantially decrease from approximately $30,000 to $13,000 before being indexed for inflation. Meanwhile, the personal exemption is expected to increase to approximately $5,300 per individual. These changes could potentially increase taxable income, making itemizing deductions more advantageous.
• Gift and Estate Tax Exemptions: Reducing significantly, impacting estate planning strategies for family-owned construction businesses.

2. Impact on Pass-Through Entities

The Section 199A deduction, which allows a deduction of up to 20% of qualified business income for pass-through entities, is at risk of expiration. If this deduction sunsets, small businesses will lose the deduction and face higher taxable income, leading to increased tax liabilities for owners of pass-through entities. The increase in the tax liability would require larger tax distributions for owners and thereby reduce the amount of capital available for reinvestment in the business, such as purchasing new equipment, hiring additional staff, or expanding operations.

3. Accelerated Depreciation

Bonus depreciation, which permits immediate deduction of a percentage of qualifying asset purchases, is being phased out. In 2024, the deduction will reduce from 80% to 60%, affecting capital investment strategies. The deduction will drop to 40% in 2025 and sunset after 2026. For construction companies, this means higher upfront costs for purchasing new equipment and machinery, potentially impacting project budgets and timelines. Decisions to delay or reconsider purchasing new equipment due to the reduced immediate tax benefits could impact the overall productivity and efficiency of operations, as older equipment may require more maintenance and be less efficient.

Businesses might turn to alternative financing options, such as leasing, to mitigate the impact of reduced bonus depreciation. Leasing can spread the cost of equipment over time, potentially offering more manageable cash flow implications. However, this approach may also come with higher long-term costs compared to outright purchases.

The phase-out could affect the competitive landscape, particularly for smaller construction firms that rely heavily on bonus depreciation to manage their tax liabilities. Larger firms with more robust financial resources may be better positioned to absorb the impact, potentially widening the competitive gap.

Keep in mind that your construction company can potentially combine bonus depreciation with the Section 179 deduction within the same tax year. As bonus depreciation phases out as planned, contractors may still be eligible to claim Section 179 deductions.

4. Employer Credit for Paid Leave

The tax credit for employers providing paid family and medical leave is also set to expire unless extended by Congress. This credit has been a valuable incentive for construction companies to support their employees’ well-being, which is crucial in an industry known for its demanding work conditions.

Strategic Tax Planning

Given these impending changes, it is vital for construction business owners to proactively adjust their tax strategies. Consulting with tax professionals and financial advisors can help navigate these transitions and optimize tax positions.

By staying informed and planning ahead, construction businesses can mitigate the impact of these tax law changes and continue to thrive in a shifting economic landscape.