What Contractors Need to Know About the OBBBA

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, creates meaningful opportunities for contractors to improve tax efficiency and strengthen cash flow. Cash is one of a contractor’s most valuable assets.

In profitable years, large tax expenses can significantly reduce available cash, weaken the presentation of financial statements, and limit growth opportunities. A common phrase related to contractors is “Cash is King.”

The following are important tax provisions within the OBBBA that contractors should understand and work with their advisors to explore how they may impact their business.

Qualified Business Income (QBI)

The QBI deduction allows a 20% deduction on eligible pass-through income, such as K-1 income from S corporations and partnerships. This deduction was created by the Tax Cuts and Jobs Act (TCJA) of 2017 and was initially scheduled to expire for tax years beginning after 2025. The OBBBA has now made the QBI deduction permanent, preventing a significant future tax increase and helping business owners preserve cash flow. This provision is one of the most impactful changes in the new tax law, as it significantly affects tax savings.

Research and Development (R&D)

R&D credits are available to taxpayers who create or improve a product or process. To qualify for the R&D credit, there is the “four-part test,” which requires the research/project to:

1. Have a permitted purpose,
2. Eliminate Uncertainty,
3. Be technological in nature, and
4. Involve a process of experimentation.

Performing “value engineering” is an excellent example of what could qualify for the R&D tax credit, which is an immediate source of cash for companies and is better than a tax deduction. For qualifying taxpayers, the R&D credit provides a dollar-for-dollar reduction in tax liability equal to the credit amount.

Most R&D costs that qualify for the credit are also categorized as Section 174 costs. Beginning in tax year 2022, these costs were required to be capitalized and amortized over 5 years for domestic research expenses and 15 years for foreign research expenses. This change significantly reduced current-year deductions and, as a result, increased taxable income for tax years 2022 through 2024.

Under the OBBBA, starting with tax years after 2024, domestic research costs are once again fully deductible in the year incurred. In addition, taxpayers may expense remaining unamortized Section 174 costs over one or two years, and small business taxpayers with average annual gross receipts of $31 million or less for the three years preceding 2025 may amend prior year returns to recover deductions related to previously amortized research costs.

Depreciation

Contractors often invest significant amounts in machinery and equipment, and depreciation expense can be a powerful tool to reduce taxable income and improve cash flow by lowering taxes.

The OBBBA introduced several favorable changes to the depreciation rules, which the following chart details:

For contractors who routinely purchase large amounts of machinery and equipment, these changes significantly enhance the ability to expense assets upfront, reduce taxable income, and preserve cash.

When choosing what type of depreciation to use, either bonus depreciation or section 179, it is vital to know the following:

• Most states do not recognize bonus depreciation, resulting in state addbacks, in the year bonus depreciation is elected.
• Section 179 Depreciation cannot be used to create or increase a taxable loss.
• Estates and non-grantor trusts do not permit Section 179 deductions.

Accounting Method Considerations

One of the most significant ways contractors can minimize tax liability is by selecting the most advantageous accounting method to prepare their tax returns. Before the OBBBA, taxpayers were exempt from using the percentage-of-completion method for two types of contracts: (1) those qualifying under the small contractor exemption and (2) home construction contracts, defined as buildings with four dwelling units or less. Residential contracts for buildings with more than four dwelling units could have elected to use the percentage-of-completion capitalized cost method, reporting 70% of the contract under the percentage-of-completion method and 30% under an allowable elected exempt method. This tax accounting method was often referred to as the 70/30 method.

The OBBBA changes the general exception of using the percentage-of-completion for “home construction contracts” to “residential construction contracts”. As a result, many larger residential construction contracts now have greater flexibility in choosing the most favorable accounting method.

For some contractors, the completed contract method may provide the maximum tax deferral opportunity. Under this method, revenue and cost of a contract are not recognized for tax purposes until the contract is 95% complete and used for its intended purpose. This change represents a meaningful planning opportunity.

The new tax treatment of residential construction contracts applies to contracts entered into in tax years beginning after July 4, 2025. The IRS will issue further guidance on the necessary steps to elect this method. Although the OBBBA provides greater flexibility for residential contracts, contractors should also be aware that additional deferral strategies are available under IRC §460.

It is important to understand that while these tax deferral strategies and opportunities reduce overall tax liability, they do not reduce a company’s financial statement income. Having a keen understanding of all available options is essential for business owners to optimize tax savings, improve cash flow, and keep more cash, which is king, in the business.

To learn more about these tax strategies and how they impact your business, please contact Joseph Molloy or your Anchin Relationship Partner.