6 Ways the 2025 Tax Reform Impacts the Construction Industry

Article

August 7, 2025

On July 4, 2025, President Trump signed P.L. 119-21, the “One Big Beautiful Bill Act,” into law, marking the most comprehensive overhaul of the U.S. tax code since the Tax Cuts and Jobs Act (TCJA). While the legislation covers a wide range of tax and economic provisions, several updates are particularly impactful for the construction industry. From expanded cost recovery and accounting method changes to the repeal of key energy efficiency incentives, these reforms reshape how construction firms, builders and engineering firms plan, invest and manage cash flow.

The summary below highlights the most relevant provisions for construction businesses and how they may influence operations, project planning and long-term tax strategy.

To explore the full scope of changes introduced in the 2025 Final Budget Reconciliation Bill, refer to our in-depth article.

1. Expanded Flexibility in Percentage-of-Completion (PCM) Accounting

Effective for contracts entered into in taxable years beginning after July 4, 2025, the 2025 tax reform expands the exception to the percentage-of-completion method (PCM) by replacing the term “home construction contracts” with the broader “residential construction contracts.” This change allows a wider range of residential projects, including multifamily developments like apartments, condominiums and mixed-use buildings, to qualify for more favorable accounting treatment.

In addition, the legislation extends the small business contract threshold from two years to three years. This gives construction firms working on longer-duration residential projects greater flexibility in managing revenue recognition and deferring taxable income.

As a result, many construction firms, particularly those building multi-family or phased residential developments, can now opt out of PCM and instead use the completed-contract method. This simplifies revenue recognition and may allow firms to defer income until project completion, which is especially beneficial for smaller construction firms or those operating on tight margins. The extended three-year threshold also accommodates longer build cycles without triggering more complex accounting requirements, easing administrative burdens and improving cash flow planning.

To understand how the updated PCM rules could impact revenue recognition and cash flow planning for construction contracts, explore our full analysis.

2. 100% Bonus Depreciation Made Permanent

The 2025 tax reform permanently reinstates 100% bonus depreciation for qualifying property placed in service on or after January 20, 2025. This change eliminates the phasedown schedule previously set under the TCJA, which would have reduced bonus depreciation to 40% in 2025, to 20% in 2026 and 0% thereafter. However, taxpayers may still elect to apply the 40% rate.

For construction firms, this means the ability to immediately deduct the full cost of qualifying assets, such as heavy equipment, vehicles and tools, placed in service on or after the effective date. This accelerates cost recovery, improves cash flow and reduces taxable income, particularly for companies investing in fleet upgrades or expanding operations. It also simplifies long-term tax planning and enhances the value of cost segregation studies when applied to owned facilities or construction-related assets.

For insights into how full expensing and cost segregation strategies can enhance cash flow and tax efficiency on construction-related assets, explore our in-depth overview.

3. Section 179 Expensing Expanded

The 2025 tax reform increases the maximum Section 179 deduction to $2.5 million, with a phaseout beginning at $4 million. Starting in 2026, these thresholds will be indexed for inflation, helping ensure the deduction remains relevant as project costs rise.

Section 179 allows construction businesses to immediately expense the full cost of qualifying assets, such as equipment, vehicles, software and certain building systems, rather than depreciating them over time. This change provides construction firms with a faster path to tax savings and improved cash flow, especially when managing multiple projects or investing in new tools and technology.

For construction firms and specialty trades, the expanded limits offer greater flexibility in capital planning. Whether upgrading machinery, investing in project management software, or replacing outdated systems, Section 179 enables firms to recover costs more quickly and reinvest in operations without waiting years for depreciation schedules to play out.

4. New 100% Depreciation for Qualified Production Property (QPP)

The 2025 tax reform introduces a new elective 100% first-year depreciation deduction for QPP, a provision that could significantly increase demand for the services of construction firms that design or construct industrial and manufacturing facilities. QPP is defined as nonresidential real property used by the taxpayer as an integral part of a qualified production activity such as manufacturing, refining or processing.

To qualify, the property must:

Begin construction after January 19, 2025, and before January 1, 2029
Be placed in service before the end of 2030
Be used as an integral part of a qualified production activity.
Have its original use commence with the taxpayer and occur within the U.S.

Assets acquired after January 19, 2025, may qualify (written binding contract stipulations will apply when determining in-service date).

There are some exclusions to QPP treatment, including:

Real property used for offices, sales and R&D activities, administrative functions, etc. unrelated to a qualified production activity
Real property leased to others; food or beverage production tied to retail establishments (e.g., restaurants or breweries)
Assets subject to ADS depreciation treatment

This provision is designed to support domestic manufacturing and industrial reshoring by allowing businesses to fully deduct the cost of eligible facilities in the year they are placed in service. For construction firms, this is expected to drive increased demand for the design and build of production facilities, including factories, processing plants and logistics hubs.

While they may not qualify for the deduction themselves, construction firms specializing in industrial and infrastructure projects may see a surge in project volume as qualifying businesses accelerate timelines to meet the eligibility window. The incentive also opens the door to longer-term engagements tied to complex, large-scale builds, offering opportunities for firms to expand their portfolios and deepen relationships with clients in the manufacturing and industrial sectors.

Because the deduction is elective and subject to specific criteria, construction firms should coordinate closely with clients, tax advisors and engineering teams to ensure compliance and maximize the benefit.

For more details on eligibility and planning strategies, read our in-depth article on QPP depreciation.

5. Section 179D Energy-Efficient Deduction Terminated

The 2025 tax reform repeals the Section 179D Energy Efficient Commercial Building Deduction for projects that begin construction after June 30, 2026. This deduction has long served as a valuable incentive for energy-efficient construction and retrofits in commercial buildings. Its repeal creates a narrowing window of opportunity for construction firms to help clients secure the benefit before it sunsets.

In the short term, construction firms and specialty trades involved in energy-efficient upgrades, such as HVAC systems, lighting, insulation and building envelopes, may see a surge in demand as developers and property owners rush to start projects before the deadline. This uptick could lead to increased project backlogs, tighter labor availability, and higher demand for green-certified construction firms and materials.

Firms that specialize in sustainable construction should prioritize project scheduling and resource planning to meet the June 2026 cutoff. Additionally, collaboration with design and engineering teams will be critical to ensure that qualifying features are incorporated early in the planning process. After the deadline, clients may need to rely more heavily on alternative incentives or state-level energy programs to support green building initiatives.

For insights into how the phaseout of 179D and other energy-related tax incentives could affect green building strategies and project planning, see our complete analysis.

6. R&E Amortization Relief: A Boost for Innovation in Construction

The 2025 tax reform introduced a major shift for construction firms investing in innovation. Under the new legislation, businesses can now immediately deduct domestic research and experimental (R&E) expenses, reversing the prior requirement under the TCJA to amortize these costs over five years. This change is not only prospective; there are opportunities to recoup capitalized domestic costs capitalized from 2022 through 2024, as well.

Eligible small business taxpayers can file amended returns, and all taxpayers can deduct any remaining unamortized expenditures over a one- or two-year period beginning in 2025. Guidance is needed from the IRS or Treasury on how to take advantage of these opportunities. Foreign R&D expenses must still be amortized over 15 years. This change significantly improves short-term cash flow for construction companies engaged in activities such as developing proprietary project management software, enhancing energy modeling techniques or engineering new building systems. By allowing immediate expensing, the reform reduces taxable income in the current year and frees up capital for reinvestment in innovation.

How the 2025 R&E Tax Reform Impacts Construction Firms Investing in Innovation

Construction Firms: Firms building custom scheduling tools, estimating platforms or workflow automation systems can now deduct software development costs upfront, improving short-term tax planning and liquidity.
Design-build Firms: Companies integrating architecture, engineering and construction services may benefit from simplified compliance and faster tax recovery for investments in building information modeling (BIM), prefabrication or energy modeling innovations
Specialty Trades: Electrical, mechanical and HVAC specialists investing in energy-efficient system design or installation methods can now realize immediate tax benefits for qualifying R&E activities.
Infrastructure and Civil Specialists: Firms exploring new materials, geotechnical methods or environmental mitigation strategies can accelerate recovery of R&E investments, improving project-level ROI modeling.
Construction Technology Providers: Businesses offering construction-focused SaaS platforms or digital tools can deduct development costs in the year incurred, enhancing investor reporting and capital allocation strategies.

Additional Provisions: Long-term Certainty and Strategic Planning for Construction Firms

Several other provisions offer long-term stability and strategic planning opportunities for construction firms. These updates, some made permanent, others left unchanged, provide clarity for financial forecasting, entity structuring and succession planning.

Section 163(j) Interest Deduction Limitation

The limitation on business interest expense deductions under Section 163(j) remains in effect but was expanded to allow depreciation and amortization to be added back in the calculation, capping interest deductions at 30% of adjusted taxable income (earnings before interest, taxes, depreciation and amortization). For capital-intensive construction firms, especially those financing large-scale projects, this provision continues to impact debt structuring and after-tax cash flow planning.

Pass-through Entity Provisions

Two key provisions affecting pass-through businesses were made permanent:

20% Qualified Business Income (QBI) Deduction under Section 199A: This offers ongoing tax relief for eligible S corporations, partnerships and sole proprietorships, structures commonly used by construction firms.
Excess Business Loss (EBL) Limitation: Also made permanent, with a reset threshold beginning in 2026. This limits the amount of business losses that non-corporate taxpayers can use to offset non-business income, with any excess carried forward as a net operating loss.

While these changes provide welcome certainty, they also require more nuanced tax planning, especially for firms with cyclical earnings or large-scale, multi-year projects.

New Markets Tax Credit (NMTC)

The NMTC program was made permanent, offering long-term support for construction firms working on projects in low-income communities. This complements other incentives like Opportunity Zones and LIHTC, particularly for firms involved in mixed-use, institutional or community-focused developments.

Pass-through Entity (PTE) Taxes

The federal reform does not alter state-level PTE tax regimes, which many states adopted in response to the SALT deduction cap. These remain a critical planning tool for high-income owners of construction pass-through entities, especially in high-tax states.

Carried Interest

Despite speculation, the carried interest rules were not changed. This means construction-focused private equity sponsors and real estate developers can continue to benefit from long-term capital gains treatment, subject to existing holding period requirements.

Estate Tax Exemption Increase

Beginning in 2026, the estate and gift tax exemption will rise to $15 million per individual (or $30 million per couple). This presents a significant planning opportunity for owners of closely held construction businesses looking to transition ownership or preserve wealth across generations.

Your Guide Forward: Turning Insight Into Action for Construction Firms

The 2025 tax reform delivers a sweeping set of changes that will reshape how construction firms plan, invest and manage cash flow. With the permanent return of 100% bonus depreciation, expanded Section 179 expensing and new incentives like QPP depreciation, the legislation offers powerful tools to accelerate cost recovery and fuel growth.

At the same time, the repeal of Section 179D introduces new planning challenges for firms focused on energy-efficient construction. The reform also brings long-awaited relief for innovation-driven businesses by allowing immediate expensing of domestic R&E costs, and for capital-intensive firms by favorably changing the limitation under section 163(j), unlocking near-term tax savings and freeing up capital for reinvestment.

Now is the time to reassess your tax strategy, align with trusted advisors, and ensure your business is positioned to maximize benefits while remaining compliant. Reach out to your Cherry Bekaert professional today. Our construction-focused tax specialists are ready to help you turn insight into action with clarity and confidence.

Connect With Us