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The One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, marks a pivotal change in federal tax policy, introducing a broad range of reforms that directly affect construction companies, specialty subcontractors, and developers. From expanded exemptions to accelerated deductions, the bill offers new opportunities for tax deferral, cash flow optimization, and strategic planning.
This article explores key provisions of the bill and their implications for construction businesses, including updates to accounting methods available for residential contracts, Section 174 R&E expensing, interest deductibility under Section 163(j), and more.
Under prior law, home construction contracts were exempt from the required use of the percentage-of-completion method (PCM). Homebuilders could use any permissible method, whereas residential construction contracts, such as those for multifamily buildings, were required to use either the PCM or the percentage-of-completion capitalized cost method (PCCM), which is a hybrid approach.
OBBBA changes that. The exemption now applies to residential construction contracts entered into during tax years beginning after the bill’s enactment (i.e., 2026 for calendar year taxpayers). This includes:
Considerations should be given to how to account for the change in accounting method. Additionally, Alternative Minimum Tax still requires long-term contracts to be accounted for under PCM, which should be considered for any pass-through entities.
Consider a construction firm that signs a $100 million contract to build an apartment complex. Under prior tax rules, the contractor used the PCCM method where 70% of the contract followed PCM and 30% was accounted for under completed contract. The contractor’s estimated margin was 5%. With half the project done, they would report $1,750,000 in taxable income, triggering a $367,500 tax bill at a 21% rate.
Thanks to OBBBA, this firm now qualifies for the expanded exemption. Since the project meets the new definition of residential construction, they can use the completed contract method, deferring all income and the $367,500 tax bill until the project is finished, freeing up cash during construction.
The benefits don’t stop there. Subcontractors like the plumbing and electrical firms working on the project may also qualify for the exemption, improving cash flow across the board.
While traditionally associated with tech and manufacturing, Research and Experimentation (R&E) expenditures are increasingly relevant to construction firms investing in:
Under OBBBA, firms engaged in these activities may qualify for immediate expensing of domestic R&E costs for tax years beginning after December 31, 2024. This change improves cash flow and encourages innovation in construction for companies who were previously required to capitalize these costs.
OBBBA expands opportunities for faster write-offs on capital investments, helping construction firms improve cash flow and reduce taxable income.
Cost segregation studies can help identify and separate qualifying assets for accelerated depreciation.
Construction firms, particularly those with heavy equipment investments, stand to benefit from revised interest deduction rules under Section 163(j).
The new bill introduces a provision for full expensing of qualified production property, which is expected to stimulate demand throughout the construction supply chain. This provision allows businesses to immediately deduct the full cost of eligible assets, such as machinery, equipment, and newly constructed nonresidential buildings used in qualified production activities, instead of depreciating them over 39 years. This change improves tax flow and makes capital investments more financially attractive.
While eligibility depends on the nature of the activity, we anticipate that this will translate into higher demand for construction projects, especially those tied to domestic manufacturing and infrastructure expansion.
Section 179D is set to be repealed in June 2026, so current rules remain in place until then. Under existing law, property owners can claim a tax deduction for installing energy-efficient systems like lighting, HVAC, or building envelopes. If the owner can’t use the deduction (e.g., a nonprofit), they may assign it to the contractor who performed the work.
Once repealed, this assignment option disappears, making the change unfavorable for contractors who rely on this benefit when working with tax-exempt clients. The repeal could reduce incentives for energy-efficient upgrades and may impact project pricing and contractor margins.
The bill rolls back most clean energy tax credits, likely slowing construction demand, especially in solar. Residential solar credits phase out sooner than commercial ones, and some commercial components lose eligibility earlier than expected. Still, commercial solar projects, including large-scale fields, can benefit for now. Leasing property may also qualify, extending some residential incentives.
However, qualifying for credits is now harder. New prohibited foreign entity rules preclude credit claims from entities with connections to covered nations like China or Russia. Moreover, the domestic content adder is maintained; however, what was previously merely a bonus has been made into a requirement to access full credits as well as the 10% bonus. In this shift from incentive to enforcement, if these requirements aren’t met, businesses risk losing the base credit altogether.
Changes to overtime payroll reporting are pending IRS guidance (expected by October), which may increase the administrative burden, especially for subcontractors. In the meantime, businesses may need to adjust their reporting systems and prepare payroll teams to adapt quickly once the guidance is released.
The One Big Beautiful Bill requires construction leaders to respond with industry insight and strategic planning. At Elliott Davis, we’re working closely with contractors, developers, and specialty trades adjust to these changes. Our construction tax advisors are ready to help you make the most of the new law.
Contact us today to start the conversation.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
