Are there specific tax credits and deductions for construction businesses?

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A: Yes, construction businesses have access to a variety of tax credits and deductions that can significantly reduce their taxable income and overall tax liability. Understanding and utilizing these construction tax deductions and credits is essential for maximizing profitability and maintaining compliance with federal tax law. Below, we outline the most relevant opportunities for the construction industry, referencing authoritative government sources.

1. Section 179 Deduction and Bonus Depreciation

Section 179 Deduction:
Construction companies can elect to expense the cost of qualifying equipment and certain property in the year it is placed in service, rather than depreciating it over several years. For 2025, the maximum Section 179 deduction is $1,250,000, with a phase-out threshold of $3,130,000. This allows construction businesses to immediately write off the cost of machinery, vehicles, computers, and certain improvements to nonresidential real property, such as roofs, HVAC, fire protection, and security systems, provided these are not structural components of a building [3].

Bonus Depreciation:
In addition to Section 179, construction companies may also claim bonus depreciation, allowing immediate expensing of qualified property (new or used tangible property with a recovery period of 20 years or less, including QIP). Under current law (following the One Big Beautiful Bill Act, signed July 4, 2025), 100% bonus depreciation is permanently restored for qualified property acquired and placed in service after January 19, 2025. For property acquired and placed in service on or before January 19, 2025, the rate remains at 40% for tax year 2025.

2. Energy Efficient Commercial Building Deduction (Section 179D)

The Section 179D deduction is specifically relevant for construction businesses involved in the design or installation of energy-efficient systems in commercial buildings. This deduction allows for an immediate deduction of the cost of energy-efficient property installed as part of a building’s interior lighting, HVAC, hot water systems, or building envelope. The deduction amount is based on the square footage of the building and the level of energy savings achieved, with a maximum deduction per square foot that is adjusted for inflation [1].

For construction companies that design systems for government-owned or tax-exempt buildings, the deduction can be allocated to the designer, which is often the construction contractor or engineering firm responsible for the energy-efficient design [1].

3. Qualified Business Income Deduction (Section 199A)

Many construction companies organized as pass-through entities (such as S corporations, partnerships, or sole proprietorships) may be eligible for the Qualified Business Income (QBI) deduction under Section 199A. This deduction allows eligible businesses to deduct up to 20% of their qualified business income, subject to certain limitations based on income, wages paid, and the unadjusted basis of qualified property [4].

4. Research and Development (R&D) Tax Credit

Construction companies that engage in activities such as developing new construction techniques, improving processes, or designing innovative building systems may qualify for the federal R&D tax credit. This credit is available for expenses related to qualified research activities, including employee wages, supplies, and contract research costs. The R&D credit can be a valuable construction tax write offs available to companies that invest in innovation and process improvements [4].

5. Domestic Production Activities Deduction (Repealed, but Replaced by Section 199A)

While the Domestic Production Activities Deduction (DPAD) under former Section 199 was repealed, its replacement, Section 199A, continues to provide significant tax benefits for construction companies as described above.

6. Other Construction Industry Tax Deductions

• Ordinary and Necessary Business Expenses: Construction companies can deduct ordinary and necessary expenses such as materials, supplies, labor, subcontractor costs, insurance, utilities, and repairs. These are foundational construction company tax deductions [4].
• Vehicle and Equipment Expenses: Deductions are available for the business use of vehicles and equipment, including fuel, maintenance, and lease payments. The standard mileage rate or actual expense method may be used for vehicles [2].
• Start-Up and Organizational Costs: New construction businesses can elect to deduct up to $5,000 of start-up and $5,000 of organizational costs in the year the business begins active operations, provided total costs don’t exceed $50,000 [2].
• Interest and Taxes: Interest on business loans and certain taxes (such as real estate and payroll taxes) are deductible [4].

7. Tax Credits for Hiring and Training

• Work Opportunity Tax Credit (WOTC): Construction businesses that hire employees from certain targeted groups (such as veterans or long-term unemployed individuals) may qualify for the WOTC, which provides a credit based on a percentage of first-year wages [4].

8. Recordkeeping and Compliance

To substantiate construction industry tax deductions and credits, businesses must maintain thorough records, including receipts, contracts, payroll records, and documentation of business use for vehicles and equipment. Good recordkeeping is essential for both maximizing deductions and withstanding IRS scrutiny.

In summary, construction businesses have access to a wide range of tax credits and deductions, including those for equipment purchases, energy-efficient building improvements, research and development, and hiring. By staying informed and maintaining proper documentation, construction companies can take full advantage of these tax-saving opportunities.

Cited sources

[1]Sec. 179D Energy efficient commercial buildings deduction

[2]Publication 583 (12/2024)

[3]Publication 946 (2024)

[4]Publication 535 (2022)

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