Adapting to Recent Tax Changes in the Construction Industry
The construction industry faces several significant tax changes in 2025 that are already impacting business operations, financial planning, and overall profitability. While some regulations are already in effect, others may be subject to change under new legislation from the president. This article highlights some of the most pressing updates affecting construction firms and provides insights on how businesses can navigate these shifts effectively.
1. Bonus Depreciation: Current Phase-Out and Potential Reinstatement
What Has Changed?
The Tax Cuts and Jobs Act (TCJA) initially permitted businesses to fully deduct the cost of qualifying property, such as heavy equipment and machinery, in the year of purchase. However, this 100% bonus depreciation has been phasing out since 2023, decreasing by 20% annually. As of 2025, the deduction stands at 40%, with complete elimination scheduled by 2027.
President Trump has recently proposed reinstating the 100% bonus depreciation for new and used assets. If enacted, this policy would allow construction firms to immediately deduct the full cost of qualifying asset purchases, thereby enhancing cash flow and encouraging capital investments.
How It Affects Construction Businesses
The ongoing phase-out requires companies to depreciate equipment costs over several years, leading to higher taxable income and reduced short-term cash flow. Reinstating 100% bonus depreciation would reverse this trend, enabling immediate full expensing and improving liquidity for further investments.
Recommended Next Steps
Construction companies should monitor legislative developments regarding bonus depreciation. In the meantime, leveraging Section 179 expensing provisions can provide immediate deductions for qualifying assets, albeit with certain limitations. Additionally, aligning significant equipment purchases with potential policy changes could maximize tax benefits.
2. Qualified Business Income (QBI) Deduction Set to Expire
What Has Changed?
The Qualified Business Income (QBI) deduction, which allows pass-through entities such as sole proprietorships, partnerships, and S corporations to deduct up to 20% of their business income, expires at the end of 2025. Unless Congress extends it, construction business owners operating under these structures may see an increase in taxable income next year.
How It Affects Construction Businesses
Many construction firms structured as pass-through entities will face higher tax liabilities if the deduction is not renewed. Without this tax break, small- to mid-sized firms could see a jump in their effective tax rate, reducing their ability to reinvest profits into business growth.
Recommended Next Steps
Construction companies should evaluate whether restructuring their business entity, such as electing C-corporation status, could provide tax savings. Additionally, deferring income into 2025 while accelerating deductions in early 2025 may help minimize taxable income before the deduction disappears. Ongoing discussions in Congress may determine whether an extension is granted, so businesses should stay informed and be prepared to adjust their tax strategy accordingly.
3. Increased Tariffs on Construction Materials
What Has Changed?
The U.S. government has announced that effective March 12, 2025, a 25% tariff was imposed on all steel and aluminum imports. This measure aims to protect domestic industries but is expected to increase costs for projects relying on these imported materials. Furthermore, there is an ongoing investigation into potential tariffs on lumber imports, which could lead to additional cost increases for construction projects.
How It Affects Construction Businesses
Higher material costs are putting pressure on project budgets, particularly for contractors working on fixed-price contracts who may be unable to pass rising costs onto clients. Public infrastructure and large-scale residential projects are also experiencing cost increases and, in some cases, delays.
Recommended Next Steps
Construction companies should explore securing long-term contracts with domestic suppliers to reduce reliance on imports. Project estimates should be updated to reflect higher costs, and companies may benefit from considering alternative materials not subject to tariffs. Reviewing contract terms and adding provisions to address unexpected material cost fluctuations may help mitigate financial risk.
Staying Ahead of Tax Changes
The tax landscape for construction companies in 2025 is undergoing notable shifts, with some policies already in effect and others still subject to change. This article outlines recent updates, including the phase-out of bonus depreciation, the potential end of the QBI deduction, and new tariffs on construction materials, but other regulatory changes could also influence the industry.
Given the uncertainty surrounding certain tax policies, construction companies should stay informed and remain flexible in their financial planning. Monitoring policy developments, engaging with tax professionals, and strategically timing major investments can help businesses adapt to new regulations while maximizing available tax benefits. We are actively tracking these changes and will continue to provide updates as new developments arise.
