Tax Strategies for Construction Companies

Running a construction company involves far more than keeping projects on schedule and under budget. Each job produces layers of tax-sensitive transactions: retainage, change orders, materials purchases, equipment investments, multiyear contracts, all which can either erode working capital or strengthen it. Clear, proactive tax planning turns those moving pieces into reliable savings that improve cash flow, bondability, and competitive pricing power. The ideas below draw on 2025 federal rules and common state-level patterns, giving owners a road map they can start using today with guidance from Toran Accounting.

Back to Blogs

Choose the Most Advantageous Accounting Method

The first tax decision every contractor must get right is how and when revenue is recognized.

Small-Contractor Exception: Firms whose average annual gross receipts do not exceed $30 million for 2025 may elect the completed-contract method (CCM) for jobs expected to finish within two years, deferring income until the project wraps up.

Percentage-of-Completion Method (PCM): Larger contractors, or small firms with longer projects, must generally report income as work progresses. Regularly updating cost-to-complete schedules prevents surprise tax bills.

Cash vs. Accrual for Overall Books: The same $30 million threshold lets qualifying contractors adopt the cash method for everything outside long-term contracts, delaying tax on receivables and retainage until cash is collected.

Review these elections annually. Rapid growth may push revenue above the limit; conversely, a slower cycle could let a midsize builder move back to more flexible methods.

Accelerate Equipment Write-Offs With Section 179 and 100% Bonus Depreciation

Construction is capital intensive. Trucks, excavators, form systems, office servers, and even specialized drones qualify for first-year expensing under Section 179, up to $1.25 million in 2025, with the deduction beginning to phase out after $3.13 million of purchases.

Planning tips:

Time deliveries so equipment is placed in service before year-end.
Spread large orders across two tax years if spending is near the phase-out ceiling.
Remember that Section 179 can create or widen a deduction; coordinate with owners’ personal returns to ensure the deduction is fully usable.

Optimize Project-Level Timing

Construction revenues often spike late in the year, while expenses hit earlier. A few proven tactics smooth taxable income:

Retainage Deferral: Under cash or CCM, tax on retainage can be postponed until payment is actually received.

Change-Order Planning: Document scope changes quickly and classify costs in the same period as the related revenue.

Pre-Contract Costs: Track bidding expenses separately; many qualify for immediate deduction when incurred rather than being capitalized.

These adjustments require careful job-cost tracking, and Toran Accounting can help set up field-friendly coding systems that feed directly into tax schedules.

Unlock Hidden Cash With Cost Segregation

Contractors who own shops, yards, or rental units often depreciate the whole building over 39 years. A cost-segregation study reallocates parking lots, lighting, fencing, and other components into 5-, 7-, or 15-year classes that qualify for Section 179 or bonus depreciation. The accelerated write-off generates sizable deductions without affecting book income and can be performed on properties placed in service in prior years, creating a catch-up deduction through Form 3115.

Leverage Research & Development Credits

Many contractors assume the federal R&D credit applies only to laboratories. In reality, credits can be claimed for expenses tied to designing innovative building systems, testing new materials, developing BIM templates, or improving safety processes activities common on complex projects. Qualified wages, supplies, and third-party contractor costs all count. Even if the firm cannot use the credit immediately, it can be carried forward for up to twenty years, offsetting future profits.

Maximize the Qualified Business Income (QBI) Deduction

Eligible S-corporations, LLCs, and sole proprietorships can deduct up to 20 percent of qualified business income through Section 199A. Once taxable income for the owner exceeds about $197,300 single or $394,600 joint (inflation-indexed annually), wage and capital limits apply.

Contractors with fluctuating margins can:

Shift bonuses or equipment purchases between years.
Evaluate reasonable-compensation levels for shareholder-employees.
Consider a management-fee structure that aligns wages with QBI needs.

These moves must have solid business purpose and documentation.

Stay Ahead of State and Local Taxes

Every new project can create tax exposure in a different jurisdiction.

Sales and Use Tax: Some states exempt materials incorporated into real property; others tax the full purchase. Planning deliveries through exempt resale certificates can avoid double taxation.

Franchise and Gross-Receipts Taxes: Even a brief job may trigger filing obligations.

Nexus from Remote Employees: Temporary supervision or a project trailer may establish corporate presence; budget for returns before work starts.

Toran Accounting uses project kickoff checklists so site managers capture location data needed for timely registrations.

Keep Excellent Records (and Automate Where Possible)

The best strategy fails without support documentation. Leading contractors deploy:

Cloud-based expense capture that tags costs to jobs in real time.
Digital timesheets integrated with certified payroll when prevailing-wage rules apply.
Asset-tracking apps that record service dates, placing equipment “in service” for depreciation.

Accurate records speed up bonding, improve bank ratios, and provide a defensible audit trail for every tax position outlined above.

Hire Top-Rated Construction Company Tax Pros Today

Tax rules affecting construction change often, yet the core principle remains: align recognition of income and deduction of costs with the economic reality of each project. By selecting the right accounting method, accelerating equipment write-offs, leveraging specialized credits, and staying alert to multistate risks, builders can turn compliance into a strategic advantage.

Toran Accounting specializes in guiding construction companies through these choices. Our team translates complex regulations into clear steps that fit daily job-site operations, freeing owners to focus on building. Contact Toran Accounting today to schedule a planning session that turns the next filing season into a powerful tool for growth.