End-of-Year Tax Planning for Construction Contractors
Key Takeaways:
- Permanent Tax Benefits: OBBBA made key tax provisions permanent, including QBI, bonus depreciation, and immediate R&D expensing.
- R&D Deductions: Review available R&D deductions and factor them into Q4 tax estimates.
- Residential Construction: Expanded PCM exceptions create new opportunities for tax savings.
- Pennsylvania Tax Changes: Lower corporate tax rates, higher NOL deduction limits, and differing R&D rules may impact state tax liabilities.
It’s almost the most wonderful time of year again… tax planning time!
2025 brought a lot of changes with the passage of the One Big Beautiful Bill (OBBBA), but 2026 has been mostly quiet as far as tax planning goes.
OBBBA Makes Changes Permanent
OBBBA made a lot of changes permanent – permanent meaning these are not set to sunset by any specific date. New legislation would have to be passed to change the following:
- 20% Qualified Business Income Deduction (QBI)
- Bonus depreciation is here to stay
- Immediate expensing of domestic R&D under IRC 174A
- Business interest limitation under 163j – EBITDA-based adjustment to adjusted taxable income restored
Immediate Expensing of Domestic R&D
Prior to 2022, all R&D costs were allowed to be expensed immediately. Starting in 2022, those costs had to be capitalized and amortized over 5 years. This was a large tax hit for many businesses over the last couple years, and it was finally corrected in OBBBA.
There were three options for immediate expensing of R&D under the OBBBA.
- Take the full deduction of unamortized costs in 2025,
- Split the deduction 50/50 between 2025 and 2026, or
- Continue capitalizing and amortizing R&D.
If option #2 was chosen, organizations should make sure this is factored into Q4 estimate calculations as they head towards the end of the year. There could be a sizable deduction sitting there!
Changes for Residential Construction Contracts
Another one of the bigger changes for residential construction contractors broadened the exceptions to the percentage of completion method (PCM). Previously, the exception from the PCM generally applied to home construction contracts where at least 80% of the estimated costs were for buildings with 4 or fewer units.
The OBBBA removed that 4-unit ceiling, thus expanding the exemption to all qualifying residential construction contracts regardless of building size. This opens up other methods like Completed Contract Method (CCM) or Hybrid PCM/capitalized-cost method, which could potentially yield significant tax savings.
State Tax Changes
Pennsylvania Changes
- PA Corporate Net Income tax rate drops to 7.49% for taxable years beginning in 2026; this will continue phasing down until it stops at 4.99% in 2031.
- PA cap on NOL deduction increased to 50% (up from 40%) for 2026.
Immediate Expensing of R&D Expenses
It’s the gift that keeps on giving! Some states decoupled (meaning they don’t follow federal rules), and other states now follow the new federal rules. Some states even decided to create their own calculation.
PA does not follow the new 174A rules of immediate expensing for C corporations but follows Federal rules for S corps/partnerships. Just something to keep in mind, as this can create an unexpected sizable tax liability at the state level.
Keep all this in mind when heading into the last quarter of 2026 and be sure to work closely with a tax professional to ensure there are no surprises at tax time.
For more information about McKonly & Asbury’s Architecture, Engineering, and Construction (AEC) experience, visit the AEC Industry Page and don’t hesitate to contact a member of the AEC team.
About the Author
Kelly Koman, CPA is a Director with the firm. She is a member of the firm’s Tax Segment, and services clients in a variety of industries, specifically architecture, engineering, and construction and manufacturing and distribution.… Read more
