Tax Strategy for Construction Company Owners

Construction is one of the best tax planning industries in the country, for a reason owners often miss: it is not a specified service trade or business. That single fact means the Section 199A deduction survives at income levels where physicians, attorneys, and consultants lose it entirely.

Entity Structure

Most construction companies belong in an S corporation, either directly or as an LLC electing S treatment. Above reasonable salary, distributions avoid the 15.3% combined self-employment tax up to the Social Security wage base and the 2.9% Medicare tax above it.

Reasonable Compensation

For a company with substantial payroll and equipment, the wage limit is rarely binding and salary should be set on normal reasonable compensation principles, generally what a hired general manager would earn, often $150,000 to $300,000. For a lightly staffed company with high profit, raising owner salary can actually increase the total after-tax result by unlocking a larger QBI deduction. That calculation should be run, not assumed. See our reasonable compensation analysis guide.

Equipment Depreciation

Excavators, dozers, loaders, cranes, trucks, trailers, and tooling are five-year and seven-year MACRS property. With 100% bonus depreciation restored under OBBBA for property acquired after January 19, 2025, the full cost is deductible in the year placed in service, including financed purchases.

Section 179 remains an alternative with a taxable income limitation, which makes bonus depreciation generally preferable for a company that wants to create a loss. Note the practical constraint: equipment must be placed in service, meaning delivered and ready for its intended use, by December 31. Ordering in December for February delivery does not work. Our heavy equipment write-off guide covers the timing rules.

Accounting Method Choices

Contractors under the gross receipts threshold, currently around $31 million on a three-year average and indexed, may use the completed contract method for long-term contracts rather than percentage of completion, deferring income until contracts finish. Home construction contracts have their own exception. Small contractors may also use the cash method.

These are genuine timing levers unavailable to most industries, and switching methods requires Form 3115. The decision interacts with bonding and bank covenants because it changes reported income, so it should be made with the surety and lender in view.

Accountable Plan

A written accountable plan under Treas. Reg. Sec. 1.62-2 lets the company reimburse the owner tax-free for the home office used for bidding and estimating, personal vehicle use for job site visits, tools purchased personally, licensing and continuing education, safety certifications, and phone and internet.

For an owner visiting five job sites weekly in a personal truck, mileage reimbursement alone commonly exceeds $15,000 per year. See our accountable plan guide and our vehicle deduction guide.

The Augusta Rule

IRC Sec. 280A(g) allows the company to rent the owner's home for up to fourteen days per year with the rent deductible to the company and excluded from the owner's income. Annual planning, safety meetings, bid strategy sessions, and quarterly financial reviews all qualify when they are real meetings.

Support the rate with comparable local venue quotes, sign a rental agreement, and keep an agenda and attendance record for each date. Fourteen days at $1,500 is $21,000 deducted with no offsetting income. See our Augusta Rule guide.

Real Estate and Cost Segregation

Contractors typically own a shop, yard, and office. These are excellent cost segregation candidates because industrial property carries heavy site improvements: paving, fencing, yard lighting, drainage, and utilities, plus shop-specific electrical, compressed air, overhead cranes, and specialty doors.

Studies on contractor facilities commonly reclassify 30% to 40% of depreciable basis. Because the operating company rents from an entity the owner controls, the self-rental rule under Treas. Reg. Sec. 1.469-2(f)(6) applies and the loss offsets business income, which is the desired result. Our cost segregation service page covers scope and pricing.

QBI: Construction Is Not an SSTB

This is the headline. Construction is not listed in IRC Sec. 199A(d)(2) and is not a specified service trade or business, so the 20% deduction is available at any income level subject only to the wage and property limitation.

For an owner with $1,000,000 of qualified business income, adequate W-2 wages, and substantial equipment basis, the deduction can reach $200,000, worth roughly $74,000 at a 37% rate. The wage and property test is where planning happens: increasing W-2 wages, timing equipment purchases to raise unadjusted basis in qualified property, and aggregating related businesses under Treas. Reg. Sec. 1.199A-4 can all expand the allowable deduction. Our QBI optimization guide covers the mechanics.

Frequently Asked Questions

Do construction companies qualify for the QBI deduction?

Yes. Construction is not a specified service trade or business under IRC Sec. 199A(d)(2), so the 20% deduction is available at any income level, limited only by the W-2 wage and qualified property test. Most contractors clear that test easily given payroll and equipment.

Can I deduct a new excavator in full this year?

Yes, if it is placed in service by December 31. Construction equipment is five or seven-year MACRS property qualifying for 100% bonus depreciation under IRC Sec. 168(k). Financing does not reduce the deduction. Ordering without delivery does not count as placed in service.

Should equipment be held in a separate LLC?

Often yes, for liability separation and succession flexibility, with an arm's length written lease to the operating company. Check with your surety first, because removing assets from the contracting entity's balance sheet can reduce bonding capacity.

What is the completed contract method worth?

It defers income on long-term contracts until completion, available to contractors under roughly $31 million in average gross receipts. In a year with several large contracts in progress, the deferral can be substantial. It requires Form 3115 to adopt and affects reported income for bonding.

How much does cost segregation recover on a contractor yard and shop?

Commonly 30% to 40% of depreciable basis. Industrial sites carry heavy paving, fencing, yard lighting, drainage, and utilities as 15-year land improvements, plus shop electrical, compressed air, and overhead cranes as shorter-life personal property.

---