Construction Industry Alert: New Depreciation Rules Under OBBBA Create Major Tax Opportunities

Depreciation plays a strategic role in the construction industry—affecting both financial reporting and tax strategy. While financial statement (book) depreciation follows Generally Accepted Accounting Principles (GAAP), tax depreciation is governed by the Internal Revenue Code. These differences can create timing gaps in reported income, but more importantly, they offer valuable planning opportunities.

The recently enacted One Big Beautiful Bill Act (OBBBA) introduces new rules and enhances existing tax benefits that are particularly important for construction businesses making large equipment and property investments.

Book vs. Tax Depreciation: Why It Matters

Financial Statement (Book) Depreciation

  • Spreads asset costs over useful lives under GAAP, often using straight-line.
  • Companies set capitalization thresholds; smaller items may be expensed immediately.
  • Useful lives vary (heavy equipment over many years, vehicles/equipment usually 5–7 years).

Tax Depreciation

  • Uses IRS rules: MACRS, Section 179, and bonus depreciation.
  • Accelerates deductions to lower taxable income quickly.
  • Ignores salvage value.
  • Includes options like the de minimis safe harbor rule ($2,500 or $5,000 with audited FS).

These different approaches often result in timing variances between book and tax income but also create opportunities for strategic tax planning.

OBBBA’s Impact on Construction Businesses

  • 100% Bonus Depreciation
    • Permanently reinstated for property placed in service after Jan. 19, 2025.
    • Property placed in service between Jan. 1–19, 2025 only gets a 40% deduction.
    • Applies to new and used property, including qualified production property.
  • Section 179 Expensing
    • Limits increased to $2.5M with a $4M phase-out.
    • Cannot create a loss position; limited by taxable income.
    • Not all states conform — many cap Section 179 at $25,000.

Key Planning Considerations

  • Federal vs. state conformity rules.
  • Cash flow impact vs. financial statement presentation.
  • Entity type and owner restrictions (pass-throughs face unique limits).
  • Opportunities to create or increase net operating losses (NOLs).

Final Takeaway

With the OBBBA’s changes, proactive depreciation planning is critical for construction companies. These rules can create immediate tax savings, shape cash flow, and influence long-term growth strategies.

Our Construction Industry Services team helps contractors align financial reporting with tax planning to maximize benefits. Contact us to discuss how these rules may affect your next equipment purchase or capital investment strategy.

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