The recently passed 2025 Act, formerly One Big Beautiful Bill, includes several high-impact tax law changes directly affecting contractors. Here’s what you need to know:
Overtime Pay Gets a Tax Break—But Requires Payroll Precision
Effective: January 1, 2025 – December 31, 2028
For the first time, overtime wages are partially exempt from federal income tax—up to $12,500 for single filers and $25,000 for joint filers. It begins to phase out for taxpayers with modified adjusted gross income (MAGI) exceeding $150,000 for individuals and $300,000 for joint filers, with thresholds adjusted annually for inflation. This does not apply to FICA, Medicare, or state taxes.
Action Required:
Contractors should begin reconfiguring payroll systems to track and report overtime wages separately and update W-2 mapping accordingly.
The IRS is expected to issue transition relief guidance for 2025 W-2 reporting. This may provide some flexibility for reporting overtime for wages already paid in 2025, but relief will likely be limited to specific circumstances. Contractors should not assume blanket protection and are advised to monitor IRS updates closely while proactively preparing systems for compliance by Q4 2025.
100% Bonus Depreciation Returns—With a Catch
Effective: For assets placed in service on or after January 20, 2025
Full expensing is back—but only for qualifying property placed in service after January 19, 2025. Assets placed in service before that date remain subject to 40% depreciation. This change allows for full expensing of qualifying purchases such as vehicles, tools, and machinery. It improves cash flow and provides long-term planning certainty for contractors who rely on capital investment to support their operations.
Unlike previous versions of bonus depreciation, this provision has no scheduled phase-outs, making it a more permanent fixture in tax planning strategies.
Action Required:
Contractors should document placed-in-service dates carefully and review Q1 purchases to ensure they qualify for the full deduction.
Section 179 Expensing Expanded for Equipment and Tools
Effective: Tax year 2025 and forward
The Section 179 expensing limit has been raised, allowing contractors to fully expense qualifying purchases like tools, vehicles, and software—subject to annual caps and phase-outs. The maximum amount a taxpayer may expense under Section 179 has been increased to $2.5 million, with the phase-out threshold beginning at $4 million. The deduction is reduced dollar-for-dollar by the amount by which the cost of qualifying property exceeds $4 million.
Strategic Tip:
Pair Section 179 with bonus depreciation for maximum upfront tax savings, especially for small and midsize contractors, to offset taxable income and invest in operational upgrades without long depreciation schedules.
Residential Contractors Get Accounting Relief
Effective: For contracts entered into after July 4, 2025
Certain residential contractors exceeding the gross receipts threshold may now opt out of percentage-of-completion (POC) accounting and use completed contract or other simplified methods.
Why It Matters:
This change can defer taxable income and simplify reporting, but eligibility should be reviewed with a CPA.
Clean Energy Credits Eliminated
Effective: Beginning in 2025
Tax credits for energy-efficient homes, EV chargers, and clean vehicle fleets have been repealed. Contractors in green construction should reassess project pipelines and adjust expectations accordingly.
Impact: This change will significantly impact design-build firms, engineers, and contractors engaged in sustainable building projects, especially those serving public sector and nonprofit clients. Firms should immediately assess their pipeline and determine whether to accelerate construction timelines to qualify for expiring credits.
Opportunity Zones and LIHTC Made Permanent
Effective: 2025 and beyond
The bill permanently extends and enhances the Opportunity Zone and Low-Income Housing Tax Credit (LIHTC) programs. This provides long-term certainty for contractors involved in affordable housing and urban revitalization.
Outlook:
Expect increased demand for public-private partnerships and tax-advantaged development.
Payroll Compliance: A New Priority
With new overtime exemptions and W-2 reporting fields, payroll systems must be fully updated. Contractors should confirm with providers like ADP, Paychex, or Gusto that updates will be in place by year-end.
Next Steps:
Coordinate with your CPA and payroll vendor now to avoid costly noncompliance.
R&D Expense Deduction Fully Restored
For tax years 2025 through 2029, domestic research and experimentation (R&E) expenses are now fully deductible in the year they are incurred. Foreign R&E expenses must still be amortized over 15 years.
Small businesses with average gross receipts of $31 million or less may apply this change retroactively to tax years beginning after December 31, 2021, by filing amended returns. Other taxpayers may elect to accelerate the remaining deductions over one or two years beginning in 2025 using a change in accounting method. IRS procedural guidance on prior-year expenses is expected soon.
This change reverses a burdensome rule introduced under the Tax Cuts and Jobs Act (TCJA) and provides an immediate benefit for firms investing in new technology, prefab systems, software, and other productivity-enhancing tools.
Pass-Through QBI Deduction Becomes Permanent
The 20% Qualified Business Income (QBI) deduction is now permanent for S corporations, partnerships, and sole proprietors. This change ensures that the top federal tax rate for eligible pass-through business owners remains at 29.6%, compared to 37% under prior law.
This provision preserves tax parity between C corporations and other business structures, giving contractors more confidence in their entity planning and long-term strategy.
Interest Deduction Limit Now Based on EBITDA
Previously, business interest deductions were limited to 30% of taxable income before interest and taxes (EBIT). The new law changes the calculation to 30% of EBITDA, allowing contractors to add back depreciation and amortization when determining their deduction limit.
This adjustment provides meaningful tax relief to capital-intensive businesses like construction firms that rely on financing for equipment or real estate. Contractors should work with their CPA to recalculate their expected deductions under the new EBITDA standard.
Higher SALT Deduction Cap Offers Temporary Relief
The state and local tax (SALT) deduction cap has increased from $10,000 to $40,000 for tax years 2025 through 2029, with annual inflation adjustments. Taxpayers with MAGI over $500,000 will see a phase-down of the deduction, but it will never fall below $10,000.
This temporary change offers relief to contractors and business owners in high-tax states and may also enhance planning opportunities using Pass-Through Entity (PTE) tax elections.
Estate and Gift Tax Exemptions Are Increased
Starting in 2026, the lifetime estate and gift tax exemption will rise to $15 million for individuals and $30 million for married couples, adjusted annually for inflation.
For many privately held construction firms, this increase reduces the pressure to sell business assets to pay estate taxes. It provides owners with more flexibility in succession planning and business continuity.
Charitable Contribution Deductions Now Have a Floor
Beginning in 2025, individuals must contribute at least 0.5% of their adjusted gross income (AGI) before they can deduct charitable contributions. C corporations face a similar threshold of 1% of taxable income.
For example, an individual with $1 million in AGI would need to donate at least $5,000 for any portion to be deductible. A $4,000 donation would receive no tax benefit under the new rules.
HORNE’s Bottom Line
These tax changes affect labor costs, capital planning, project accounting, and compliance workflows. Contractors should begin working with their advisors, controllers, and payroll partners immediately to implement the law’s provisions.
