It’s not too late for construction companies to take advantage of the IRS’ bonus depreciation – and the tax incentive might actually become permanent.
Why Bonus Depreciation Still Matters for Contractors in 2025
Most fixed assets used in a business, new or used, are eligible for bonus depreciation, says Anita S. Mahamed, a partner at Wipfli who is based in Madison, Wis.
“Eligible assets, such as machinery, computers and certain interior building improvements, must have a recovery period of 20 years or less,” Mahamed says. “Vehicles used in a business can also take advantage of bonus depreciation, but passenger automobiles and lighter trucks have some additional limitations.”
How Much You Can Deduct: 40% Bonus Depreciation and What’s Next
Under current tax law, bonus depreciation still exists, although it’s not at the 100 percent level when it was first introduced, she says. For assets placed in service in 2025, bonus depreciation is 40 percent – with the other 60 percent being written off over the asset’s recovery period, and for 2026, bonus depreciation is 20 percent. If new tax laws are not passed, bonus depreciation will expire after Dec. 31, 2026.
The budget reconciliation bill currently working its way through Congress would extend 100 percent bonus depreciation – under the current House-passed version temporarily and under the Senate Finance version permanently, says Mark Luscombe, principal analyst at Wolters Kluwer Tax and Accounting based in Riverwoods, Ill.
“Most people expect something to get passed this year, probably at least by August, and some version of either temporary or permanent extension of 100 percent bonus depreciation is likely to be included,” Luscombe said.
The Senate Finance version of the budget reconciliation bill has a provision to apply it to qualified improvement property (QIP) – internal improvements to nonresidential buildings, he says. The original use of the property must commence with the taxpayer, although it can also apply to used property that was not acquired from a related party or previously used by the taxpayer.
Section 179 vs. Bonus Depreciation: Which One Should You Use?
Some contractors can take advantage of both the IRS Code Section 179 and bonus depreciation in some combination, but under current law, if contractors place more than $3.13 million of qualifying assets in service in 2025, they would not be eligible for Section 179, Mahamed says. This phaseout threshold is adjusted each year.
For contractors below the $3.13 million threshold, Section 179 allows them to write off 100 percent of an eligible asset, which is currently faster than the 40 percent bonus depreciation they would otherwise receive, she says. Under current law, bonus depreciation doesn’t have the same phase-out, so contractors placing more than $3.13 million of assets in service would be able to take bonus depreciation on the qualifying assets.
“The decision on whether to utilize Section 179 and bonus has some flexibility and doesn’t necessarily need to be decided by December 31 each year, which is great for potential tax planning,” Mahamed says.
Even if 100 percent bonus depreciation is made permanent by Congress, Section 179 could still be useful for a taxpayer to select only certain capital assets for expensing rather than using the broad application of 100 percent bonus depreciation, Luscombe says.
Section 179 expensing has specific dollar limits and a phase-out range, and the 2025 limit is $1.25 million he says. Also, Section 179 expensing cannot be used to the extent that it would create a net loss for the contractor.
“If a contractor would rather spread some of the depreciation deductions over future years, the contractor can use the Section 179 expensing election for specific assets and not for others,” Luscombe says. “Use of 100 percent bonus depreciation would apply to all eligible property.”
Bonus depreciation is generally considered to offer greater simplicity, he says. It is automatically available unless the taxpayer elects out. Section 179 expensing must be elected on IRS Form 4562.
What the Proposed Tax Law Changes Could Mean for Your Business
While the contractor makes the investment to purchase the property in the current year, normal depreciation rules would spread the tax benefit of that purchase over the useful life of the property – up to as long as 20 years, Luscombe says. If reinstated, 100 percent bonus depreciation would permit immediate expensing of that entire investment in the year of purchase, providing a more immediate tax benefit.
It is also possible, if the taxpayer does not have sufficient income to offset the full bonus depreciation deduction, the taxpayer can obtain a net business loss that can be carried forward to offset taxable income in future years, he says.
“Historically, the tax law allowed depreciation over the projected life of an asset or accelerated depreciation over a shorter period,” Luscombe says. “Being able to fully expense property purchases immediately without limit is relatively new to the tax law over the last few years and was designed to encourage businesses to purchase equipment for their businesses.”
Most types of construction companies can benefit from bonus depreciation because the nature of the business requires quite a bit of equipment, Mahamed says.
“The ability to write off equipment faster can add up to not only immediate tax savings versus having to wait for the deduction, but time value of money results in additional savings because interest rates are higher than they were a decade ago,” she says. “The extra cash available now from tax savings could be used to pay down debt faster or to earn interest in an investment account.”
While the fate of tax law is still in legislators’ hands, you can take more steps to keep your construction business financially secure.
Check out these articles to help get your finances in tip-top shape:
5 Ways to Prevent Budget Overruns in Construction Projects
Managing Multiple Construction Projects: Tips for Staying Organized.
Further Reading:
Check out IRS Form 4562 for tax planning.
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