Many construction business owners accept their tax bill without question. Don’t be one of them. The construction industry comes with some of the most powerful tax deductions available—but because the rules are complex, many contractors miss out on savings that could add up to tens of thousands of dollars each year.

Unlike a consulting firm or retail shop, a construction company deals with heavy equipment, project-based accounting, multiple job sites, and subcontractor relationships. These unique factors create deduction opportunities most other businesses never see.

And here’s the best news: major tax law changes in 2025—like the permanent return of 100% bonus depreciation and a higher Section 179 limit—make these deductions even more valuable.

Why Construction Tax Deductions Are Different

Construction companies face financial realities that most other industries never encounter. Large equipment purchases, project-based accounting, constant travel between job sites, and reliance on subcontractors all create unique challenges—but also major tax opportunities.

While a service business might deduct office supplies or software subscriptions, a contractor can deduct the cost of excavators, cranes, safety gear, and temporary job site utilities. The scale of these write-offs—especially under the 2025 tax law changes—means construction companies that plan carefully can see a dramatic reduction in taxable income.

Equipment and Machinery: Your Biggest Tax Opportunity

100% Bonus Depreciation Is Back for Good

The biggest tax news of 2025 for contractors: 100% bonus depreciation is now permanent for property acquired and placed in service after January 19, 2025.

That means if you buy qualifying equipment this year—excavators, cranes, skid steers, or even heavy-duty trucks—you can deduct the entire purchase price immediately instead of depreciating it over several years.

For example, if your construction company nets $800,000 in profit, a $50,000 excavator purchase could bring taxable income down to $750,000. Depending on your bracket, that one purchase might cut $12,000 or more off your tax bill in year one.

The timing matters: both acquisition and “placed in service” must occur after January 19, 2025, to qualify for full expensing.

Section 179 Gets a Major Increase

On top of bonus depreciation, Section 179 expensing jumped to $2.5 million for 2025, with a phase-out beginning at $4 million. This is a dramatic increase from prior years and makes Section 179 a powerful tool for contractors investing in new assets.

Qualifying property includes heavy machinery and specialized construction equipment, work trucks and vehicles, computers and construction software, office furniture, and most other business assets with a useful life of 20 years or less.

The key difference: Section 179 lets you choose which assets to expense, while bonus depreciation applies automatically to all eligible property (unless you elect out). Smart planning often means layering Section 179 and bonus depreciation together—using Section 179 to target specific purchases, then applying bonus depreciation to the rest.

Cost Segregation: Hidden Money in Your Buildings

If your construction company owns a shop, office, or warehouse—or if you develop properties—cost segregation studies can unlock tax savings that standard depreciation rules hide. Instead of depreciating the entire building over 39 years, a study breaks it into components (like specialized electrical systems, flooring, and site improvements) that can be written off much faster.

For example, a $500,000 shop building might include $150,000 worth of components eligible for 5- or 7-year write-offs instead of 39. Pair that with 100% bonus depreciation, and you could deduct much of that $150,000 immediately.

Why it matters for contractors:

• Buildings often contain significant portions of short-life assets.

• Bonus depreciation makes accelerating those components far more valuable.

• It frees up cash flow so you can reinvest in equipment, payroll, or project expansion.

Cost segregation isn’t just for large developers—contractors with modestly sized facilities can often benefit, too.

Project-Related Expenses That Add Up Fast

Job Site Costs Contractors Often Overlook: Because construction work happens at temporary locations, contractors face expenses office-based businesses never see. These are fully deductible as ordinary business costs when tied to specific projects:

• Temporary utilities like power, water, or internet connections

• Site security including fencing, cameras, and on-site services

• Portable facilities such as trailers, storage units, or temporary offices

• Waste removal: dumpsters, hauling, and specialized debris disposal

• Site preparation: grading, cleanup, and ground stabilization before building begins

These items may feel routine, but capturing them consistently can create thousands in deductions across multiple jobs in a year.

Materials and Supplies Strategy: Materials directly used in construction flow into your cost of goods sold (COGS), reducing taxable income dollar-for-dollar. The key is accurate job costing—every nail, pipe, and bag of concrete should be assigned to the correct project.

Small tools and supplies under $2,500 per item can usually be expensed right away under the IRS de minimis safe harbor rule. Think hand tools, safety gear, or consumables that wear out quickly. Many contractors miss this election, but it’s one of the simplest ways to accelerate deductions.

Other Key Deductions Contractors Shouldn’t Miss

Home Office Deduction: Many contractors handle scheduling, billing, and other administrative tasks from home—even if most of the work happens in the field. If you use part of your home exclusively and regularly for business, you may qualify for the home office deduction.

You can choose between:

• The simplified method, which multiplies your office square footage by an IRS-set rate, or

• The actual expense method, which allocates a portion of mortgage interest (or rent), utilities, insurance, and repairs to your business.

For contractors who don’t maintain a separate office, this deduction can deliver meaningful annual savings and also help qualify mileage from home to job sites as business travel instead of commuting.

Crew Meals and Meals With Clients: Through the end of 2025, most business meals remain 50% deductible. This includes client or prospect meals where business is discussed, as well as meals provided to employees for the convenience of the employer—such as keeping crews on-site during a concrete pour or when no meal facilities are nearby. Starting in 2026, meals for employees will only be deductible if they are treated as taxable wages, while client meals will no longer qualify. For contractors who regularly provide food on job sites or take clients to dinner, 2025 is the last full year to capture these deductions.

Vehicle and Travel: Major Deductions for Mobile Businesses

Construction professionals rack up serious vehicle expenses traveling between projects, suppliers, and client sites. The IRS gives you two main ways to deduct these costs:

1. Standard Mileage Rate

• For 2025, the IRS rate is 70 cents per mile, up 3 cents from 2024—effective January 1, 2025

• This rate covers gas, maintenance, insurance, and depreciation with a single figure, simplifying tracking and minimizing audit risk.

2. Actual Expense Method

• Here, you deduct the real costs of operating your vehicle—fuel, repairs, insurance, depreciation, and lease payments.

• This approach often yields larger deductions for contractors using heavy-duty or high-value vehicles.

Note that you cannot claim both methods for the same vehicle in the same year.

Planning Tip: Switching Methods: Your choice in the first year the vehicle is placed in service matters. If you start with the standard mileage rate, you can switch to actual expenses in a later year. But if you start with actual expenses (and claim depreciation), you can’t go back to the standard mileage method for that vehicle.

Recordkeeping Is Non-Negotiable: Accurate documentation is essential for audit protection and maximum deductions. Your logs should include:

• Dates, destinations, miles driven, and the business purpose for each trip.

• And remember: commuting from your home to your regular shop or yard is NOT deductible—unless you have a qualified home office serving as your principal place of business.

To simplify tracking, use apps like MileIQ, Everlance, or TripLog (or QuickBooks’ built-in tracker). Many of these offer real-time capture, categorize trips automatically, and generate easy-to-submit reports.

Labor Costs and Subcontractor Payments

Employee Expenses

Wages, salaries, and benefits paid to employees are fully deductible business expenses. This includes overtime pay, payroll taxes, health insurance premiums, retirement plan contributions, workers’ compensation insurance, and even training or certification costs.

In addition to deductions, contractors can also tap into employee-related tax credits, such as:

• The Work Opportunity Tax Credit (WOTC) rewards businesses for hiring veterans, individuals with felony records, and other targeted groups, with credits ranging from $2,400 to $9,600 per qualified employee. 

• The Federal Paid Family and Medical Leave Credit offers a 12.5% to 25% credit on wages paid during qualifying leave, creating both a retention tool and a tax benefit.

• Contractors should also check for state-level credits tied to apprenticeships and trade training, which can stack on top of federal benefits.

Subcontractor Strategy

Payments to subcontractors are deductible and often represent one of the largest expense categories in construction. To protect these deductions, issue accurate Form 1099-NEC to any subcontractor paid $600 or more in a year in 2024 ($2,000 in 2025), and make sure they’re properly licensed and insured.

It’s also critical to classify workers correctly. Treating an employee as an independent contractor can trigger payroll tax liabilities, penalties, and interest if the IRS or state agencies reclassify the worker. In construction, where the line between employees and subs can get blurry, misclassification is a major audit risk. Careful documentation of contracts, scope of work, and independence is essential to defend your position.

Planning note: Many contractors now use W-9 collection tools, payroll software, or accounting platforms that automate 1099 tracking. These systems make it easier to stay compliant, avoid missed filings, and reduce audit risk.

Energy Efficiency Deductions Still Available

Section 179D: A Valuable but Time-Limited Deduction: If your construction company designs or installs energy-efficient improvements in commercial buildings—such as upgraded lighting, HVAC systems, or building envelope improvements—you may qualify for the Section 179D deduction. The deduction amount is based on square footage, up to $1.16 per square foot for projects that meet specific energy-saving thresholds. For a 50,000-square-foot building, that could translate into a deduction of nearly $58,000.

What makes 179D unique is that the building owner can allocate the deduction to the contractor or designer who performed the work, provided the allocation is made in writing. This creates a major planning opportunity for construction companies involved in new builds or major retrofits.

Timing is critical. Under current law, the Section 179D deduction sunsets for construction that begins after June 30, 2026. Contractors working on projects with long lead times should coordinate with building owners now to ensure projects qualify while the deduction is still available.

Recent Tax Law Change: Qualified Business Income Deduction Extended Permanently

The 20% qualified business income (QBI) deduction for pass-through entities—S corporations, LLCs, and sole proprietorships—has been made permanent under the OBBBA. That means contractors operating through pass-through entities can continue to deduct up to 20% of qualified business income each year, creating significant savings for profitable companies.

Starting in 2026, a new minimum deduction rule kicks in: any active trade or business with at least $1,000 of qualifying income will receive at least a $400 QBI deduction, even if income is modest.

The income thresholds for phaseouts have also been increased. For 2025, the phaseout begins at $75,000 for single filers and $150,000 for joint filers. These higher limits mean more construction business owners will qualify without worrying about losing the deduction due to income levels.

For example, if your construction company generates $600,000 in qualified business income, the QBI deduction could be $120,000—potentially reducing your tax bill by $30,000 or more, depending on your bracket.

Documentation and Record-Keeping Essentials

Tax deductions only work if you can back them up. Construction companies face heavier documentation requirements than many other industries, so keeping organized records is critical. At a minimum, maintain:

• Equipment purchases: Invoices, delivery receipts, and placed-in-service records to show when an asset was actually put to work.
  
  

• Vehicle expenses: Mileage logs or actual expense reports, with the business purpose of each trip documented.
  
  

• Job costs: Project-level accounting for materials, subcontractor payments, and site-specific expenses to ensure accurate job costing.
  
  

• Receipts and invoices: Digital systems that scan, tag, and store receipts make year-end reporting—and audit defense—much smoother.

Good record-keeping isn’t just about compliance. It also creates better visibility into project profitability, cash flow, and the timing of deductions, which can drive smarter business decisions.

Planning Strategies to Maximize Your Deductions

Time Major Purchases Wisely: With 100% bonus depreciation made permanent and Section 179 limits dramatically higher, contractors have powerful tools for immediate write-offs. But timing still matters. If 2025 is shaping up to be a high-profit year, placing new equipment in service before year-end can cut your tax bill right away. If you expect larger profits in 2026, it may be worth delaying purchases to maximize the deduction when it’s most valuable.

Choose the Right Entity Structure: Your entity type determines how deductions and credits flow to owners. An S corporation may reduce employment taxes, while LLCs and partnerships allow flexibility with allocations and distributions. With the permanent extension of the QBI deduction, entity choice takes on added importance. A construction-focused CPA can model different scenarios to show which structure delivers the greatest net savings.

Plan for Multi-Year Projects: Construction contracts often span multiple years, creating opportunities to manage income recognition and deductions strategically. Methods like percentage-of-completion and completed-contract accounting can accelerate or defer taxable income. Aligning your accounting method with equipment purchases, labor costs, and financing decisions can smooth out taxable income year to year, avoiding spikes that push you into higher tax brackets.

What This Means for Your Construction Business

The construction industry offers some of the most powerful tax deduction opportunities available, and the recent 2025 tax law changes make them even more valuable. The return of 100% bonus depreciation, higher Section 179 limits, and permanent extension of the QBI deduction create immediate and long-term savings opportunities. Add in project-related expenses, subcontractor deductions, and industry-specific credits like the Work Opportunity Tax Credit, and it’s possible to trim tens of thousands of dollars off your annual tax bill.

The key is understanding which deductions and credits apply to your situation and keeping the documentation to back them up. Contractors who take a proactive approach—timing purchases, structuring their entities wisely, and managing multi-year projects with tax in mind—gain a lasting edge in both cash flow and profitability.

Don’t leave money on the table. A construction-focused CPA can help you identify missed opportunities, keep you compliant with changing rules, and turn complex tax law into real savings. At Town, our CPAs specialize in construction industry taxes and can show you how to put these deductions and credits to work for your business.

Disclaimer: This content is for educational purposes only and does not constitute personalized tax advice. Tax laws are complex and subject to change, and individual circumstances vary widely. Strategies that work for one business or taxpayer may not be appropriate for another. Always consult a qualified tax professional before making decisions based on this information.