Blueprints for Success: Navigating the TCJA Sunset Provisions and New Tax Incentives for the Construction Industry (Part 2)

Construction business owners are navigating a pivotal year of potential tax changes and fiscal uncertainty. The expiration of key provisions under the Tax Cuts and Jobs Act (TCJA) of 2017, coupled with a shifting political landscape, is set to bring significant changes that directly impact contractors, subcontractors, and construction firms. While the TCJA stimulated economic growth through tax cuts for corporations and pass-through entities, many of its provisions included sunset clauses set to expire in 2025. New legislation recently passed by the U.S. House of Representatives, now awaiting Senate approval, seeks to make these provisions permanent and introduce additional tax incentives tailored to support continued growth and investment. For the construction industry, this could mean substantial changes in areas such as the Section 163(j) Interest Deduction Limitation, R&D Expense Limitation, State and Local Tax (SALT) Deduction Cap, Estate Tax Exemptions, and Capital Gains. Now is the time for construction businesses to proactively evaluate how these developments may affect long-term profitability, project financing, and entity structure decisions.

 

Section 163(j) Interest Deduction Limitation

The TCJA limited the deductibility of business interest expenses for larger businesses to 30 percent of adjusted taxable income (ATI), aiming to discourage excessive corporate borrowing. It had significant implications for capital-intensive sectors such as construction, where loans fund large-scale projects and equipment purchases. Starting in 2022, the ATI calculation shifted from EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to EBIT (Earnings Before Interest and Taxes), further tightening the limit by excluding depreciation and amortization. The new legislation applies to tax years beginning after December 31, 2023, and before January 1, 2026, and would roll back the more restrictive EBIT standard. Allowing depreciation, amortization, and depletion in the calculation expands interest deductibility and offers meaningful relief to debt-reliant businesses.

R&D Expense Limitation

While construction may not be the first industry associated with research and development (R&D), innovation is becoming a growing focus. Before 2022, businesses could fully deduct their R&D expenses in the year incurred. However, the TCJA required businesses to capitalize and amortize these costs over five years, reducing immediate tax benefits and straining cash flow for many small and medium-sized construction businesses. The new legislation aims to reverse this by allowing full deduction of domestic R&D expenses in the year incurred for tax years beginning after December 31, 2024, and before January 1, 2030. Businesses would still need to amortize foreign R&D expenses over 15 years under IRC Section 174A. This reinstatement of immediate expensing would improve cash flow and encourage continued innovation for those investing in R&D initiatives.

State and Local Tax (SALT) Deduction Cap

The TCJA introduced a controversial $10,000 cap on state and local tax (SALT) deductions, disproportionately affecting business owners in high-tax states such as California, New York, and Illinois. Construction businesses operating in these regions felt the strain, particularly when juggling SALT obligations alongside payroll and property taxes for large-scale projects. New legislation recently passed by the House would raise the SALT deduction cap to $40,000, with a phase-out for incomes above $500,000. However, the Senate Finance Committee’s version of the bill rejects the increase, maintaining the $10,000 cap and omitting the phase-out provision. Multiple sources have described this as a placeholder, as SALT remains a central point of contention in ongoing negotiations.

Estate Tax Exemptions

The higher estate tax exemption established by the TCJA has been advantageous for family-owned construction businesses. Under the current law, the $13.99 million per-person estate tax exemption will drop by roughly half at the end of 2025. The new legislation would make the higher exemption amounts permanent, increasing them to $15 million for single filers and $30 million for married couples filing jointly. Starting in 2026, these exemption amounts will be adjusted annually for inflation. This change provides contractors with long-term certainty and the confidence to manage multi-generational transitions without worrying about unexpected tax changes. As a result, construction business owners can transfer ownership, assets, and equipment to their heirs without incurring federal estate taxes.

Capital Gains

The TCJA preserved favorable capital gains tax rates, which is especially important for construction business owners investing in long-term assets such as real estate, equipment, or partnerships. These lower rates have incentivized investment and helped fuel growth across the construction industry. The new legislation suggests indexing the cost basis of certain assets to inflation. It would reduce the taxable gain upon sale and effectively lower the capital gains tax burden for individuals who have held the asset for more than three years. Additionally, it introduces MAGA accounts—savings accounts for children born between 2024 and 2028, with eligibility linked to parents’ Social Security numbers. Each account starts with a $1,000 seed deposit and allows annual after-tax contributions of up to $5,000. Withdrawals made for qualified expenses such as education, entrepreneurship, or first-time home purchases are subject to preferential capital gains tax rates rather than ordinary income tax. However, the legislation does not include the elimination of Social Security taxes.

Opportunity Zones

Opportunity Zones have driven investment and development in underserved areas, boosting demand for construction projects. The new legislation passed by the House would extend the program beyond its current expiration at the end of 2026 by introducing a new round of Opportunity Zones lasting through 2033. The Senate proposes making the program permanent, with new designations every 10 years beginning in 2027. The legislation strengthens oversight, emphasizes affordable housing, green building, and workforce development, tightens eligibility to target low-income areas, and reserves up to 33 percent of new Opportunity Zone designations for rural communities. It also updates tax incentives and reinstates reporting requirements for Qualified Opportunity Funds (QOFs), improving transparency by requiring data on residential units and full-time equivalent employees. For contractors, this presents renewed opportunities to participate in tax-advantaged projects that support business growth and community revitalization.

Energy Credits

The new legislation passed by the House drastically reduces the clean energy incentives introduced under the Inflation Reduction Act. Projects that do not begin construction within 60 days of enactment would no longer qualify for these benefits, and new restrictions on credit transferability could complicate financing. The Senate proposes a more gradual rollback, ending electric vehicle and home energy credits within 180 days, phasing out consumer solar incentives within six months, and preserving clean electricity credits for nuclear, geothermal, hydropower, and batteries from 2033 to 2036. Wind and solar credits would drop 60 percent in 2026, 20 percent in 2027, and be eliminated thereafter. While credit transferability remains, new limits would apply to leasing arrangements. Meanwhile, traditional energy industries such as oil and gas would receive increased support, marking a policy shift away from clean energy investment. Construction firms focused on green building should closely monitor these changes, as they could significantly impact project cost structures.

Industrial Facilities

The new legislation includes a significant provision targeting industrial facilities. To qualify, construction must begin between January 19, 2025, and December 31, 2028, and the taxpayer must be the first to place the property into service. This change allows construction businesses to immediately deduct the full cost of qualifying facilities, significantly improving cash flow and encouraging rapid expansion and reinvestment in industrial infrastructure.

Current TCJA Legislative Outlook & Fiscal Impact

In April 2025, the House narrowly approved a Republican-sponsored budget resolution that set the stage for legislation to extend or make permanent important TCJA tax provisions. On May 22, 2025, it passed the "One Big Beautiful Bill," a comprehensive tax and spending package that built on those provisions. The legislation also included targeted tax relief, such as exemptions for tips, overtime pay, car loan interest, and Social Security benefits. Furthermore, it included cuts to Medicare and SNAP funding while boosting resources for border security and defense.

The bill is now with the Senate, where lawmakers will use the budget reconciliation process to pass it with a simple majority, avoiding the threat of a filibuster. The Congressional Budget Office estimates it would increase the federal deficit by roughly $2.8 to $3.8 trillion over the next decade, factoring in reduced revenues and higher interest costs.

Tax Planning Strategies for Construction Businesses

As tax laws continue to evolve, construction businesses must stay proactive to safeguard their bottom line. Here are key strategies to help you navigate upcoming changes with confidence:

1. Engage Specialized Tax Professionals: Partner with experts who understand the complexities of construction, including long-term contracts, cash flow timing, and project-based income.

2. Manage Debt Strategically: Reevaluate your capital structure and debt-to-equity ratios.

3. Leverage Innovation Credits: Despite changes to R&D amortization, ensure your business claims all available credits related to innovative materials, designs, or processes.

4. Review Estate Planning: Protect family-owned construction businesses by updating estate strategies.

5. Plan Asset Transactions: Consider timing the sale of real estate or equipment to maximize capital gains rates.

6. Stay Informed and Agile: Follow legislative developments closely to adapt your strategy accordingly.

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