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As the political landscape shifts, construction companies across the nation are closely watching the potential changes to tax laws that could significantly impact their operations and bottom line. With President-elect Trump’s tax proposals coming into focus, it’s crucial for industry leaders to understand the potential implications and prepare for what lies ahead.

The construction industry, known for its resilience and adaptability, now faces a new set of challenges and opportunities as tax reform looms on the horizon. From potential changes to corporate tax rates to modifications in depreciation rules, the proposed reforms could reshape the financial landscape for builders, contractors and related businesses, affecting day-to-day operations, long-term planning and overall industry growth.

Extending the Tax Cuts and Jobs Act

The cornerstone of President-elect Trump’s tax proposal for the construction industry revolves around making the Tax Cuts and Jobs Act (TCJA) permanent. This act, which has been a significant factor in shaping the tax landscape since its inception, could have far-reaching implications for construction companies if extended indefinitely.

Under the current TCJA, construction firms have benefited from various provisions that have helped reduce their tax burden and increase cash flow. These benefits have allowed many companies to reinvest in their businesses, purchase new equipment and expand their operations. The potential permanence of these provisions could provide a stable foundation for long-term planning and growth strategies within the industry.

One of the key aspects of the TCJA that construction companies have leveraged is the reduced corporate tax rate. This lower rate has enabled businesses to retain more of their earnings, which can be crucial in an industry known for its tight margins and cyclical nature. By making this reduction permanent, Trump’s proposal aims to help ensure that construction companies can continue to benefit from this tax relief for years to come.

The potential permanence of the TCJA also includes provisions for accelerated depreciation, which allows companies to write off the cost of new equipment more quickly. For construction firms that regularly invest in heavy machinery and specialized tools, this could mean significant tax savings and improved cash flow. The ability to plan for these deductions long-term could influence equipment purchasing strategies and overall capital investment decisions.

Impact of the 199A deduction on construction businesses

The 199A deduction, also known as the Qualified Business Income Deduction, has been a game-changer for many construction companies operating as pass-through entities. Trump’s proposal to make this deduction permanent could have substantial implications for the industry’s tax landscape.

Under the current law, eligible construction businesses can deduct up to 20% of their qualified business income. This deduction has provided significant tax relief for S corporations, partnerships and sole proprietorships, which make up a large portion of the construction industry. The potential permanence of this deduction could offer long-term tax planning opportunities for these entities.

For construction company owners, the 199A deduction has meant more money staying within the business, allowing for reinvestment in equipment, workforce development and expansion. This has been particularly beneficial for smaller and medium-sized construction firms that often operate on tighter margins. The continuation of this deduction could help these businesses remain competitive and resilient in a challenging market.

The potential permanence of the 199A deduction also raises questions about its long-term impact on the industry’s competitiveness. While it provides immediate tax benefits, some economists argue that it may create distortions in the market, potentially favoring certain business structures over others. Construction industry leaders will need to consider these broader economic implications as they plan for the future.

Bonus depreciation and its significance for construction equipment

One of the most impactful aspects of Trump’s tax proposals for the construction industry is the potential restoration of 100% bonus depreciation. This provision, which allows companies to immediately deduct the full cost of eligible property in the year it’s placed in service, could have significant implications for construction firms’ equipment acquisition strategies.

Under the current law, bonus depreciation is set to phase down by 20% each year until it reaches 0% after 2026. Trump’s proposal to restore it to 100% and make it permanent could provide a substantial incentive for construction companies to invest in new machinery and equipment. This could lead to increased productivity, improved safety and enhanced competitiveness within the industry.

For construction firms that rely heavily on capital-intensive equipment, such as earthmoving machinery, cranes and specialized tools, the potential for 100% bonus depreciation could dramatically alter their financial planning. The ability to write off the entire cost of new equipment in the first year could free up cash flow for other investments or help offset the costs of large projects.

However, construction companies need to consider the long-term implications of accelerated depreciation. While it provides immediate tax benefits, it also means that future years will have less depreciation to claim. This could lead to higher taxable income in subsequent years, which businesses need to factor into their long-term financial planning.

The potential permanence of 100% bonus depreciation could also influence the timing of equipment purchases. Construction firms might choose to delay or accelerate purchases based on when the law takes effect, potentially creating fluctuations in the equipment market. Industry suppliers and manufacturers would need to be prepared for these potential shifts in demand.

Additionally, the bonus depreciation provision could impact decisions about whether to buy or lease equipment. With the ability to fully deduct purchases in the first year, buying might become more attractive than leasing for some companies. However, this decision would still need to be weighed against other factors such as cash flow, maintenance costs and technological obsolescence.

Estate tax exemption and succession planning in construction

Succession planning is a critical issue for many construction companies, particularly those that are family-owned or closely held. Trump’s proposal to make the increased estate tax exemption permanent could have significant implications for how these businesses approach long-term ownership transitions.

The current estate tax exemption, which was doubled under the TCJA, allows individuals to pass on up to $13.61 million (as of 2024) to heirs without incurring federal estate taxes. For married couples, this amount is effectively doubled. The potential permanence of this higher exemption could provide more flexibility for construction company owners in their estate planning strategies.

With a higher permanent exemption, owners of construction businesses may have more options for transferring ownership to the next generation without triggering substantial tax liabilities. This could help ensure the continuity of family-owned construction firms, which are often the backbone of local economies and communities.

However, estate planning involves more than just tax considerations. Construction company owners will still need to carefully consider issues such as management succession, equitable distribution among heirs and the long-term viability of the business. The potential permanence of the higher exemption should be viewed as one tool among many in comprehensive succession planning.

The estate tax exemption also interacts with other aspects of business valuation and transfer. For instance, construction companies often have significant assets in the form of equipment and real estate, which can complicate valuations for estate tax purposes. Business owners and their advisors will need to stay informed about how changes to the estate tax exemption might affect these valuations.

Additionally, while the federal estate tax exemption may become permanent under Trump’s proposal, state-level estate taxes could still be a consideration for many construction business owners. Some states have their own estate tax systems with lower exemption thresholds, which could still impact succession planning strategies.

Energy incentives and the construction industry

While much of Trump’s tax proposal focuses on extending or making permanent various provisions of the TCJA, there are also potential changes to energy-related tax incentives that could impact the construction industry. These changes could have significant implications for companies involved in both traditional and renewable energy projects.

One area of potential change is the repeal of certain energy incentives that were implemented or expanded under previous administrations. This could affect construction companies that have specialized in renewable energy projects such as solar installations, wind farms or energy-efficient building upgrades. The potential loss of these incentives could shift the economics of such projects, potentially reducing demand in these sectors.

For construction companies involved in traditional energy infrastructure, such as oil and gas facilities or power plants, Trump’s proposals could potentially create a more favorable environment. Reduced regulations and potential new incentives for domestic energy production could lead to increased construction activity in these sectors.

The potential changes to energy incentives also intersect with broader trends in sustainable and green building practices. Many construction companies have invested in developing expertise in energy-efficient construction methods and materials. While specific tax incentives may change, the overall trend towards more sustainable building practices is likely to continue, driven by market demand, local regulations and long-term cost savings for building owners.

SALT limitation and its impact on construction

The state and local tax (SALT) deduction limitation has been a contentious issue since its implementation under the TCJA. Trump’s proposal to potentially repeal this limitation could have significant implications for the construction industry, particularly in high-tax states.

Currently, the SALT deduction is capped at $10,000 per year for individuals, which has particularly affected taxpayers in states with high property taxes and income taxes. The construction industry has felt the ripple effects of this limitation, as it has potentially reduced the tax benefits of homeownership and impacted real estate markets in certain areas. Most states have adapted and allowed passthrough entities to pay and deduct state taxes at the entity level. If the cap is lifted business owners most likely want to pivot back to paying state taxes at the individual level.

If the SALT limitation is repealed, it could potentially stimulate demand for residential construction and renovations in high-tax areas. Homeowners who regain the ability to fully deduct their state and local taxes might be more inclined to invest in home improvements or even purchase new homes, which could benefit the construction industry.

Construction companies operating in multiple states will need to carefully consider how changes to the SALT deduction might affect their operations and the markets they serve. It could potentially shift the relative attractiveness of working in different regions, influencing business expansion decisions.

Focusing on the future

As the construction industry looks toward the future, the potential impact of Trump’s tax proposals looms large. From the extension of the Tax Cuts and Jobs Act to potential changes in corporate tax rates and energy incentives, these proposals could reshape the financial landscape for construction companies of all sizes.

While the potential for more permanent tax provisions could provide a stable foundation for long-term planning, it also requires careful consideration and strategic thinking. Construction company leaders will need to stay informed about the evolving tax landscape and be prepared to adapt their strategies accordingly.

Ultimately, while Trump’s tax proposals could bring significant changes to the construction industry, they also present an opportunity for companies to reassess and optimize their operations. Those who approach these changes strategically and adaptively will be best positioned to succeed in the years to come.

How Wipfli can help

Major change is on the horizon, and it's essential to have the right team on your side to navigate an uncertain future. That’s where Wipfli comes in. Our team of dedicated tax professionals are committed to staying up to date with all the latest tax policy changes and crafting strategies to make the most of every opportunity. Contact an advisor today and see what the future could hold for your business.