Construction businesses are navigating one of the more complex tax environments in recent memory. Tightening margins, rising equipment costs, subcontractor complexity, and a hard June 30, 2026 deadline on key energy incentives are converging with sweeping federal law changes and active IRS enforcement.
If you run a general contracting firm, a specialty trade business, or a development company in the Chicagoland area, we want to give you a clear picture of what's changed and what it means for your bottom line. Reach out to our team anytime to discuss how these changes apply to your specific situation.
Why 2025–2026 Tax Changes Matter for Construction Businesses
Construction has always been a tax-intensive industry. Capital expenditures, complex revenue recognition, subcontractor relationships, and significant payroll all create layers of tax exposure that most other industries don't face at the same scale. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, reshaped several provisions that directly affect how contractors buy equipment, recognize revenue, and plan capital investment. For construction businesses that haven't revisited their tax strategy recently, the cost of doing nothing is real.
Federal Tax Code Updates Affecting Construction Projects
The federal tax picture has shifted considerably for capital-intensive businesses. Construction companies that routinely invest in heavy equipment, vehicles, technology, and physical infrastructure feel these shifts more directly than most sectors.
Bonus Depreciation Restored to 100%
The OBBBA restored 100% bonus depreciation for qualifying property that is both acquired and placed in service after January 19, 2025, reversing the prior phase-down that had been stepping the deduction down each year. For property acquired on or before that date, the prior phase-out rules still apply, so tracking both dates is essential for any equipment purchased in early 2025.
Two points matter for contractors specifically. Property bought under a written binding contract entered into before January 20, 2025 generally falls under the old phase-down rules even if it is placed in service later. And for self-constructed property, the relevant test is when construction began, not the purchase date.
For contractors purchasing heavy equipment or specialty tools, this restoration matters. Assets placed in service after January 19, 2025 can again generate a full first-year deduction, making equipment timing a meaningful planning lever rather than an afterthought.
Section 179 Expensing Limits and Capital Investment Strategy
Section 179 was also enhanced under the OBBBA. The deduction limit increased to $2.5 million for 2025, with the phase-out threshold beginning at $4 million. Both amounts are indexed for inflation beginning in 2026, when they rise to roughly $2.56 million and $4.09 million respectively. For construction businesses making substantial capital investments, this expanded ceiling provides additional flexibility alongside restored bonus depreciation.
One area construction firms we've worked with throughout Illinois frequently overlook is how Section 179 and bonus depreciation interact. Section 179 must be elected and applied first, and it cannot create a loss, while bonus depreciation can. Getting the order right requires planning before the year closes, not just compliance work after.
R&D Cost Deductions Restored
The OBBBA also reversed the Section 174 capitalization requirement that had forced businesses to amortize domestic R&D costs over five years beginning in 2022. For tax years 2025 forward, domestic R&D expenses are again immediately deductible. Construction and engineering firms engaged in design innovation, proprietary construction methods, or building technology development benefit directly from this change.
Small businesses with average annual gross receipts of $31 million or less may apply the restored immediate deduction retroactively to tax years beginning after 2021 via amended returns, under Rev. Proc. 2025-28. For firms that capitalized and amortized R&D expenses during those years, this is a concrete recovery opportunity, but it is time-sensitive. The election deadline is July 6, 2026, so any firm considering retroactive amendments for 2022 through 2024 should start the review well before that date rather than at filing time.
Qualified Business Income Deduction Made Permanent
The Qualified Business Income (QBI) deduction, which allows eligible pass-through business owners to deduct 20% of qualified business income, has been made permanent under the OBBBA. For construction firms operating as S-corps, partnerships, or LLCs, this removes the uncertainty that had surrounded year-end planning in prior years. The 20% QBI deduction is now a durable part of the tax code.
Energy Incentive Deadline: June 30, 2026
Section 179D (commercial buildings) and Section 45L (residential homes) energy incentives are both ending in 2026, but they use different tests, and that distinction matters for planning. Section 179D expires for projects that begin construction after June 30, 2026.
Projects that break ground on or before that date may still qualify, and IRS guidance allows you to establish a construction start through the physical work test or by incurring at least 5% of total project costs. Section 45L works differently. The credit is no longer available for homes acquired, meaning sold or leased for use as a residence, after June 30, 2026.
For residential developers, the deadline is tied to closing or lease, not to when you broke ground. We encourage any firm with active or planned commercial or residential work to map their projects against the correct test now, because a 45L home that starts construction in time but closes after June 30, 2026 will not qualify.
ERC Documentation and Compliance
The Employee Retention Credit (ERC) was one of the most significant pandemic-era relief measures, and the construction industry claimed it heavily. The IRS has launched a major audit wave targeting ERC claims, making thorough documentation a proactive priority rather than a reactive one.
Construction businesses that claimed the ERC should work with a CPA to review the basis for those claims and ensure documentation is organized and complete. Firms that worked with third-party promoters to file amended returns have particular reason to conduct a thorough review now, before any IRS inquiry arrives.
Illinois-Specific Tax Changes Construction Businesses Must Track
Federal law is only part of the picture. Construction firms operating in Illinois face state-level rules that interact with federal changes in ways that require careful attention at the state return level.
Illinois Pass-Through Entity Tax Election
The Illinois Pass-Through Entity (PTE) Tax election is now permanent. It allows S-corps and partnerships to pay Illinois income tax at the entity level, bypassing the federal SALT deduction cap at the individual level. The OBBBA temporarily raised the SALT cap to $40,000 for 2025 through 2029, after which it reverts to $10,000 in 2030. The PTE election remains a valuable planning tool regardless, particularly for owners pulling significant income through the business.
The decision to elect PTE treatment requires modeling the benefit at both the entity and individual levels. Our partnership and corporate tax planning work covers exactly this type of analysis for construction firms structured as S-corps, partnerships, and LLCs across the North Shore and broader Chicagoland area.
Illinois Sales and Use Tax on Construction Materials
Illinois applies sales and use tax to construction materials, but the application depends on how a contract is structured and the nature of the project. Lump-sum, time-and-material, and cost-plus arrangements are all treated differently, which affects how contractors price jobs and structure agreements.
Understanding when sales tax is owed by the contractor versus the property owner, and how to handle projects involving tax-exempt entities like government bodies or nonprofits, is part of managing construction taxes at the state level. Errors here create audit exposure and cash flow miscalculations that can quietly erode project margins.
How Accounting Method Rules Impact Construction Revenue Recognition
The OBBBA expanded the exemption from the Percentage-of-Completion Method (PCM) for residential construction contracts entered into after July 4, 2025. This allows broader use of the Completed Contract Method for residential projects, including large multifamily and senior living developments that previously fell under PCM requirements. For residential contractors, this change offers meaningful flexibility in when income is recognized and how estimated tax obligations are structured.
For commercial contractors and mixed-use developers, PCM requirements generally remain in place. The distinction between residential and commercial treatment is now more significant than before, and entity structure and contract type both affect which method applies. For companies growing past key revenue thresholds, a change in required accounting method can create a significant one-time income adjustment. Planning for that transition well in advance reduces surprises.
Tax Planning Strategies for Contractors Heading Into the Rest of 2026
The back half of any tax year is when planning becomes most actionable. Knowing the rules matters, but applying them to your actual financial position is what produces results.
Structuring Your Entity to Maximize Tax Efficiency
Entity structure affects everything from self-employment tax to QBI deductions to state tax treatment. A construction firm operating as a sole proprietorship or single-member LLC may be leaving significant tax savings on the table compared to an S-corp, depending on profit level and owner compensation. With the QBI deduction now permanent at 20%, optimizing how income flows through the entity is a durable planning priority, not a one-time decision.
These decisions intersect with legal considerations around contract structures and liability, so we always recommend involving an attorney alongside your CPA when evaluating entity changes.
Cost Segregation Studies for Construction Projects
Cost segregation is one of the most powerful strategies available to construction businesses, both as property owners and as contractors advising clients. A cost segregation study breaks building components into shorter depreciation lives, accelerating deductions for items like electrical systems, plumbing, and flooring rather than depreciating the entire structure over 27.5 or 39 years. With 100% bonus depreciation restored, the value of properly classified short-life assets is amplified further.
For new construction, understanding how property is classified from the start is far more valuable than correcting it later. Construction firms that invest in real property benefit from building cost segregation analysis into project planning. It's one of the areas where our work with construction businesses throughout Illinois consistently produces meaningful results.
When to Work With a CPA Who Specializes in Construction Taxation
General tax compliance is a baseline, not a strategy. The rules governing long-term contracts, equipment depreciation, subcontractor payments, job cost accounting, and multi-state project work require a practitioner who understands how construction businesses actually operate. That means tracking legislative developments closely enough to advise you before problems develop, not after.
The stakes are particularly high for contractors scaling quickly, those with multi-state operations, and owners approaching succession or sale. In those situations, the difference between a generalist and a specialized CPA can be measured in six or seven figures over time.
Take the Next Step With Pasquesi Sheppard
The OBBBA changes, Illinois PTE election, energy incentive deadlines, and ERC audit environment all demand year-round attention, not just a conversation at filing time. Our work with construction businesses across the North Shore and broader Chicagoland area reflects more than 50 years of partner-led service. Every client works directly with a partner who knows your business and tracks the changes that affect it.
If you're ready to take a more strategic approach to your tax position heading into the rest of 2026, we'd welcome the conversation. Contact Pasquesi Sheppard for a consultation, and let's review what these changes mean for your firm specifically.
Disclaimer: This article is provided for general informational purposes only and does not constitute tax, legal, or accounting advice. Tax laws and regulations are subject to change, and their application varies based on your specific circumstances. Please contact Pasquesi Sheppard to discuss how these provisions apply to your business.