Year-End Tax Planning Ideas for Contractors

Sep 18

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As summer draws to a close, it might seem a little early to start thinking about filing your 2026 tax return. But the truth is, now is the perfect time for contractors to begin year-end tax planning while there are still months to implement strategies that could reduce their tax bills.

Make Deductible Capital Investments

Does your construction business need capital assets, such as heavy vehicles, equipment, tools, and office or jobsite technology? If so, buying and placing them in service before year-end could significantly reduce your 2026 tax liability.

The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, made permanent the 100% first-year bonus depreciation deduction for eligible new and used assets acquired after January 19, 2025, and placed in service in 2025 or later. That means, for example, you can buy an excavator or backhoe, or perhaps off-the-shelf accounting software, and immediately deduct the full purchase price. There is also no limit on how much first-year bonus depreciation you may claim.

One important caveat, however, is that the IRS automatically applies first-year bonus depreciation to eligible assets unless you elect out of the treatment. You can elect out of this treatment only by asset class, not for individual assets. In other words, you could elect out of first-year bonus depreciation for all property otherwise subject to a five-year depreciation period, but not for only one asset in that class.

Another way to deduct capital investments is the Section 179 expensing election. It also allows you to immediately deduct, rather than depreciate over a number of years, the cost of eligible new and used assets bought and placed in service this year. However, for 2026, you can deduct only up to $2.56 million of qualifying asset purchases. The tax break begins to phase out, dollar for dollar, when the cost of qualifying property placed in service during the year exceeds $4.09 million.

The good news is you do not have to choose one of these tax breaks over the other. Many construction businesses first elect a Sec. 179 deduction on selected assets and then apply first-year bonus depreciation to remaining qualifying property. But the right approach depends on your situation's facts and circumstances.

Maximize the QBI Deduction

If your construction business is not taxed as a C corporation, make sure to get all you can from the Sec. 199A qualified business income (QBI) deduction. It is available to sole proprietors and owners of pass-through entities, such as partnerships, S corporations, and limited liability companies (LLCs) that are treated as sole proprietorships, partnerships, or S corporations for tax purposes.

The deduction generally equals 20% of QBI, but it cannot exceed 20% of your taxable income (after subtracting net capital gains). QBI is generally defined as the net amount of qualified items of income, gain, deduction, and loss that are effectively connected with the conduct of a U.S. business. It does not include:

Certain investment items,
Reasonable compensation paid to an owner for services rendered to the business, or
Any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.

Also, the QBI deduction is not allowed in calculating your adjusted gross income, but it reduces taxable income. In effect, it is treated the same as an allowable itemized deduction, though you do not have to itemize to claim it.

If your taxable income exceeds a threshold amount, a wage and investment limit begins to phase in. For 2026, the phase-in range is $201,750 to $276,750 ($403,500 to $553,500 for married couples filing jointly). Once your taxable income exceeds the top of the range, your QBI deduction is generally limited to the greater of your share of:

50% of the amount of W-2 wages paid to employees during the tax year, or
The sum of 25% of W-2 wages plus 2.5% of the cost (not reduced by depreciation taken) of qualified property.

Should your taxable income projections indicate you will be near this threshold, you may be able to take action to lower it. For instance, you might maximize contributions to a retirement plan. Or, as feasible, you could accelerate deductible business expenses into this year and push income into next year. (Note: This approach works only for businesses that use cash-basis accounting.)

If you are already planning to add employees before year-end, hiring workers instead of engaging independent contractors could increase the W-2 wages used to calculate the deduction limit. However, the additional wage expense may also reduce QBI. The same applies to taking substantial first-year bonus depreciation and Sec. 179 deductions; they can reduce your QBI and, in turn, your QBI deduction.

Identify Eligible R&E Costs

The OBBBA permanently restored the expensing treatment for domestic research and experimental (R&E) costs that existed before the Tax Cuts and Jobs Act of 2017. An immediate deduction is now allowed for qualifying U.S.‑based R&E expenses paid or incurred, starting with the 2025 tax year.

That means you can once again deduct eligible domestic R&E expenditures related to developing new construction-related processes or software in the year the expenses are incurred or paid. (Foreign R&E costs must still be amortized over 15 years.) If the expenses are related to a specific project, you do not need to complete the job before year-end to deduct those amounts. (Note: Special accounting rules may apply to costs associated with long-term contracts.)

Certain expenses might also qualify for a tax credit for research activities, but you cannot double dip. If you claim the federal research credit, you generally must either reduce your R&E deduction by the credit amount or elect a smaller credit to avoid reducing the deduction.

Account for the Impact

As you can see, taking advantage of one tax break can often impact the value of another. That is why it is critical to start tax planning now, so you can carefully and methodically work through all your options. Plus, if you are considering buying assets, you will want to allow plenty of time to shop carefully and get those purchases into service. Our team can help you model various tax-saving strategies and determine the best course of action for the rest of 2026.

Disclaimer of Liability
Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.