On July 4, President Trump signed into law landmark tax legislation, commonly known as the One Big Beautiful Bill (OBBB). At a whopping 869 pages, the new law covers a variety of topics beyond just taxation and plainly lives up to its namesake as “big.” But more relevant here, its tax provisions also promise to prove “beautiful” for businesses.
The OBBB reinstates many of the favorable provisions (and tax rates) enacted in the Tax Cuts and Jobs Act of 2017 (TCJA). Better yet, the OBBB includes new changes that should help many businesses reduce their federal income taxes. Of course, the bill also includes some provisions that are not favorable, as well as others that create an immediate compliance burden for contractors, such as new overtime reporting rules.
In this article, we’ll explore some of the most important tax components of the OBBB that contractors should understand. We’ll discuss opportunities that the new law creates or expands, as well as new requirements that it imposes. Our focus is primarily on changes affecting contractors who serve public-sector clients, but many of these provisions will be relevant for contractors of all types in addition to other businesses.
To provide just a few highlights, the OBBB:
- Avoids federal tax increases for businesses and individuals
- Expands business incentives, including:
- 100% bonus depreciation (i.e., immediate expensing) of certain capital expenditures
- Immediate deductibility for domestic research and development expenditures
- A more taxpayer-favorable cap on the deduction for interest expenses incurred by businesses, potentially increasing the ability of debt-financed businesses to deduct more of their interest expense
- Raises the maximum amount of the federal deduction for state and local taxes paid (the infamous SALT cap)
- Contains a variety of other changes related to payroll tax, including a deduction for individuals receiving certain overtime compensation – which comes with significant compliance obligations for employers
Of course, it is impossible to provide a complete discussion of all the OBBB’s tax changes here. The following should serve as a starting point for a dialogue with a trusted tax professional about how the OBBB will affect your business specifically. Some of the most consequential changes for contractors are already in effect, such as 100% bonus depreciation and payroll tax compliance requirements related to overtime. Contractors should be proactive and reach out to their tax advisers as soon as possible to understand how the OBBB may affect project economics as well as overall tax planning and compliance.
I. The OBBB’s Tax Benefits for Businesses
The OBBB’s business-friendly tax changes generally focus on reinstating and making permanent tax cuts and incentives enacted under the TCJA in 2017. However, the OBBB also introduces new tax concepts and opportunities.
A. Rate Stability
The OBBB permanently extends the Qualified Business Income (QBI) deduction of Internal Revenue Code Section 199A, which was previously set to expire at the end of 2025. This deduction allows eligible pass-through businesses – sole proprietorships, partnerships (which includes most LLCs for tax purposes), and S Corporations – to deduct up to 20% of their qualified business income, reducing their effective tax rates.
Section 199A was originally enacted as a temporary measure under the TCJA to complement the TCJA’s permanent reduction of the corporate tax rate to 21% (which remains unchanged by the OBBB). Making the QBI deduction permanent preserves broad tax parity between corporations and pass-throughs and maintains a key tax benefit for contractors operating in pass-through form.
The OBBB makes permanent the individual income tax rate cuts enacted by the TCJA, which had also been set to expire at the end of this year.
B. 100% Bonus Depreciation & Other Capital Expenditure Incentives
Section 168(k) Bonus Depreciation. Under the OBBB, businesses can immediately deduct the entire adjusted basis of qualified property acquired after Jan. 19, 2025. This is known as 100% bonus depreciation. It generally applies to certain types of property depreciated for tax purposes under the federal Modified Accelerated Cost Recovery System (MACRS) rules with a useful life of 20 years or less, certain computer software and several other property types.
The permanent nature of this deduction is significant. Under the TCJA, 100% bonus depreciation was only allowed temporarily and, after 2022, was in the process of being gradually phased down. Before the OBBB, only 40% bonus depreciation was allowed for 2025 and this was scheduled to decrease to 0% by 2027. Permanent 100% bonus depreciation provides a strong incentive for businesses to invest in new capital assets. For contractors, this could include equipment used during construction, tools, safety and communications equipment and many other types of tangible property used in their business.
New Section 168(n) Deduction for Qualified Production Property. In addition to making 100% bonus depreciation permanent, the OBBB allows a new 100% depreciation deduction for “qualified production property.” Broadly speaking, qualified production property must be nonresidential real property (and therefore would not normally qualify for “traditional” Section 168(k) bonus depreciation) used by the taxpayer as an integral part of the manufacturing of tangible personal property in the United States.
The taxpayer also must generally be the original user of the qualified production property and must begin construction after Jan. 19, 2025 but before Jan. 1, 2029, except in certain cases where the property is purchased from an unrelated seller. The deduction is subject to recapture if the taxpayer ceases to use the property for qualified purposes within 10 years.
While this deduction is plainly aimed at helping industrial manufacturers, it could also be available to contractors in certain circumstances. Contractors who have dedicated facilities to pre-fabricate materials used in construction might be able to qualify in some cases. However, guidance is currently limited about which activities qualify as “manufacturing” and which materials qualify as “tangible personal property” – especially if the contractor intends to permanently install an item on real property. Contractors considering the construction or purchase of a facility that they believe might qualify should exercise caution and consult with a tax professional before relying on the applicability of this deduction or claiming the deduction on their tax return.
Section 179 Expense Cap Increase. Rounding out our discussion of OBBB’s beautiful provisions favoring business capital expenditures, the maximum amount of Section 179’s immediate expensing deduction for certain business property has been doubled to $2.5 million for 2025 (adjusted for inflation moving forward and subject to a phase-out). Section 179 applies to many types of property that would otherwise be eligible for 100% bonus depreciation under Section 168(k), but Section 179 can extend to additional property types as well, including certain real property improvements and certain used property that would not be eligible for Section 168(k).
C. Immediate Deductibility for Domestic Research & Development
The OBBB repeals the TCJA’s requirement that domestic research and experimental (R&E) expenditures be capitalized and amortized over five years. Instead, domestic R&E costs paid or incurred after Dec. 31, 2024, may be immediately expensed. For many businesses, this is a very beneficial change.
In general, R&E relates to work undertaken to discover new information (resolving uncertainty) for use in developing a new or improved business component and must be experimental in nature. Mere quality control or routine testing does not qualify. For instance, eligible activities for contractors might include the research and testing of new construction techniques intended to improve durability or safety; the development of specialized equipment or new building materials; or the internal development of specialized bidding or project-management software. Contractors who may have potentially qualifying activities, particularly those who tend to innovate, should review their operations and consult a tax professional.
Small businesses with average annual gross receipts under $31 million may elect to apply immediate expensing retroactively to qualified R&E expenditures incurred after Dec. 31, 2021. Businesses that have been amortizing R&E under the TCJA and that satisfy the gross receipts threshold should consider filing an amended tax return to claim a refund.
D. More Favorable Business Interest Deduction Limitation
The OBBB increases the maximum amount of the Section 163(j) business interest deduction for most businesses. The new law accomplishes this by reversing a 2022 change in how the deduction limitation is calculated.
Business interest expense is generally deductible to the extent of (1) 30% of adjusted taxable income, plus (2) business interest income, plus (3) floor-plan financing (relevant only for auto dealers). The OBBB redefines “adjusted taxable income” so that depreciation and amortization no longer needs to be subtracted in calculating the deduction ceiling. As a result, the maximum amount of the business interest expense deduction will increase for many taxpayers. This will be favorable for contractors who rely on debt-financing and who have significant depreciation and amortization expenses. The change is effective for this year, 2025.
On the other hand, taxpayers who capitalize interest for federal income tax purposes should be aware that, beginning in 2026, capitalized interest will need to be included in calculating the Section 163(j) deduction cap. For those taxpayers, reducing the deductible interest ceiling will partially offset the benefits of the depreciation/amortization change. Taxpayers who capitalize interest for federal income tax purposes need to be aware of this change and plan accordingly.
E. Accounting Method Change for Certain Residential Construction Contracts
While it may not affect most public-sector contractors, the OBBB does contain one tax accounting change that bears mentioning. The OBBB eliminates the requirement to use the percentage-of-completion method (PCM) for certain residential construction contracts entered into after July 4, 2025. The change is targeted at developers of large-scale residential construction projects, who will be able to use a more favorable tax accounting method for eligible projects, such as the completed-contract method.
This change serves as a reminder that tax accounting methods can significantly affect a contractor’s business. Tax accounting methods affect the timing of income recognition and, therefore, can accelerate or delay tax liabilities. While taxpayers may often be restricted to a single accounting method for certain types of income or expenses, it is important to regularly review accounting methods to identify any opportunities to adopt a more favorable method.
II. State Tax Components of the OBBB
The OBBB will also have important consequences for state and local taxation. It raises the limit on the amount of state and local taxes that individuals may deduct from their federal taxable income, which is beneficial for pass-through businesses. In addition, the OBBB may cause new disparities between state and federal tax rules that are normally in conformity with one another. It is likely that most of these disparities will prove temporary, as states without automatic conformity to federal tax laws eventually enact legislation to come back into conformity. However, some states may choose to reject certain OBBB changes. Even in states that follow the OBBB, differences may affect some taxpayers in the interim.
A. SALT Deduction Cap Increase
Perhaps one of the most deeply contentious parts of the OBBB is its approach to the cap on the federal deduction for state and local taxes, commonly known as the SALT cap. Under the TCJA, individuals were limited to deducting no more than $10,000 in state and local taxes from their federal taxable income. SALT had generally been fully deductible prior to the TCJA. After much pressure from congressional Republicans in high-tax states, the OBBB loosens but does not eliminate the SALT cap.
Effective for tax year 2025, the SALT cap is raised from $10,000 to $40,000. Then, for the subsequent 4 years, the cap will increase by 1% annually. The increased SALT cap phases down by 30% of the amount by which a taxpayer’s modified adjusted gross income exceeds $500,000 (adjusted for inflation), but it cannot be phased down below $10,000. In 2030, the TCJA’s $10,000 cap is scheduled to come back into effect.
Despite plentiful rumors, the OBBB didn’t ultimately make other dramatic changes to the SALT cap. Some speculated that it might impose a SALT cap on corporations for the first time or disallow the deduction entirely for specified service trades or businesses (SSTBs), which could potentially have affected certain consulting services that contractors might provide. Thankfully, these hypothetical provisions were not included in the final legislation.
Also preserved is the ability of pass-through entities, such as partnerships, to use state “SALT cap workarounds.” Many states, including Ohio, make available elective pass-through entity tax regimes that can allow eligible businesses to pay tax at the entity level and, thus, avoid passing through pre-state-tax income to their owners that would then be taxed by the state at the individual level without a full federal deduction. These elective arrangements remain viable under the OBBB. However, because of the temporary increase in the SALT cap, these state-specific elections may not be as necessary or beneficial in some cases.
B. State-Federal Conformity Issues
In most states, the tax law relies heavily on federal law as a starting point for calculating taxable income and for definitions. As with any significant federal tax legislation, taxpayers need to track whether the states in which they earn taxable income adopt the federal changes, in whole or in part, or decouple from them entirely. In states with “rolling” conformity, meaning that they automatically follow any federal changes, this will generally be less of a concern. Although, rolling-conformity states could still choose to specifically reject or modify certain OBBB provisions.
Other states, however, use a system of “fixed” conformity, incorporating into state law the federal tax code as it existed on a specific date. For instance, Ohio is a fixed-conformity state with a current conformity date of March 7, 2025. Ohio uses federal adjusted gross income as its starting point for individual income tax, subject to certain adjustments.
Unless and until Ohio enacts new legislation to update its federal conformity date, Ohio’s income calculation starting point is federally adjusted gross income as calculated before the OBBB’s enactment. Ohio historically has been consistent about updating its conformity date before tax returns are due for years that saw federal changes. However, due to the magnitude of some of the OBBB’s taxpayer-favorable provisions, it is possible that Ohio may choose to modify some of these. For example, Ohio currently requires taxpayers to add back certain amounts of accelerated federal depreciation expenses under Section 179 and Section 168(k).
III. The OBBB’s Payroll Tax Provisions
The OBBB also included important changes related to payroll tax. These include a deduction available to individuals for certain overtime compensation, which also means new compliance and reporting requirements for employers. The OBBB also made changes to certain payroll tax credits for employers as well as the processing of Employee Retention Credit claims.
A. “No Tax on Overtime”? – A Deduction for Certain Overtime Wages
Much discussion about the OBBB has highlighted the bill’s promise of “no tax on overtime.” In reality, the OBBB’s approach to overtime is more nuanced. It is true that the OBBB provides significant tax benefits to overtime recipients and that, in many cases, this could result in an effective tax rate of zero on overtime for certain individuals. However, this does not mean that overtime is “exempt” from tax. And – more importantly from an employer’s perspective – it does not mean that tax compliance functions can ignore overtime. In fact, proper tax compliance will now require employers to pay closer attention to overtime than before.
Rather than exempting overtime completely, the OBBB creates a new above-the-line deduction (i.e., a deduction available even for individuals who do not itemize) for qualified overtime compensation (codified in new Section 226). This deduction can be up to $12,500 per year for single filers and up to $25,000 annually for joint filers. The deduction is subject to income limits, phasing out beginning at modified adjusted gross income of $150,000 for single filers and $300,000 for joint filers. The deduction is available for tax years 2025 through 2028, and it is scheduled to expire for 2029 and later years unless extended by Congress. (The OBBB also includes a similar deduction for tips, Section 225, but that deduction is outside the scope of this article.)
The new overtime deduction is subject to various compliance requirements that demand careful attention from employers and from others who pay overtime. For instance, the deduction only applies to overtime required to be paid under the federal Fair Labor Standards Act (FLSA). Overtime paid solely due to state or local law or as the result of a company’s own policy does not qualify.
As a result, employers and other payors need to be able to identify which overtime amounts are required by FLSA and which are not. Further, the annual amount of qualified overtime must be reported on Form W-2 (for employees), Form 1099 (for independent contractors), or other relevant statement. The IRS is expected to provide additional guidance and transition relief to assist employers and other payers in meeting the reporting requirements for tax year 2025.
B. Permanent Employer Credit for Paid Leave
The OBBB makes the employer credit for paid family and medical leave (Section 45S) permanent. This credit was previously set to expire at the end of 2025. The credit ranges in amount from 12.5% to 25% of the wages paid to employees pursuant to qualified leave programs. Employers who had been planning for the credit’s expiration in 2026 should reassess their paid leave policies.
C. Expanded Employer Credit for Employer-Provided Childcare
The credit for “qualified childcare expenditures” paid by an employer (Section 45F) is expanded for amounts paid or incurred beginning in 2026. The amount of the credit will increase from 25% to 40% of qualified expenses for most business, and it increases to 50% for certain small businesses. The maximum credit will also increase from $150,000 to $500,000 (or $600,000 for eligible small businesses), indexed for inflation.
And the credit has been expanded so that additional types of childcare programs can qualify, including certain care arrangements that rely on third-party intermediaries and jointly owned and operated childcare facilities. This enhanced credit is now more valuable and may be available for some businesses with childcare programs that did not previously qualify.
D. Crackdown on Employee Retention Credit Claims
We conclude with a cautionary note. The OBBB adds new processing rules for the Employee Retention Credit (ERC). The ERC is a refundable tax credit for eligible businesses harmed during the COVID-19 pandemic. Prior to the OBBB, the last date taxpayers could file ERC refund claims for 2020 was April 15, 2024, and the last date to file claims for 2021 was April 15, 2025.
The OBBB retroactively imposes a more stringent deadline. It bars the IRS from issuing any ERC refunds for claims filed after Jan. 31, 2024. Businesses that filed after that date should expect the IRS to deny their claims.
More significantly, the OBBB also includes a significant change for recipients of ERC refunds. It extends the statute of limitations for assessing erroneous ERC refunds to six years from the date the claim was filed. (Normally, the IRS only has three years to make an assessment.) Many taxpayers who relied on contingent-fee ERC promoters filed ERC claims based on aggressive interpretations of the ERC rules, particularly the rules dealing with whether a business was partially suspended by a governmental order.
Taxpayers who filed ERC claims should reexamine the validity of their position and ensure that relevant documentation is complete. If the IRS claws back a refund claim during the OBBB’s extended limitations period, the associated interest and penalties could be significant.
The OBBB provides many opportunities for contractors and for other businesses to minimize their tax burdens. To fully seize these opportunities, the time to start planning is now. Several of the OBBB’s new tax rules are effective for 2025, and many of the rest become effective for 2026. In certain cases, such as domestic research expenditures for qualifying small businesses, there may even be opportunities to file amended returns and claim a tax refund for prior years.
Contractors should consult their tax advisers about what the OBBB means for them. By proactively responding to these new changes, contractors can efficiently incorporate the new law into their federal and state tax planning strategies.
Zaino Hall & Farrin LLC (ZHF) is an Ohio-based law firm focusing on multistate and local taxes, business and economic development incentives, federal taxes, political law and government affairs. For more information on ZHF, visit www.zhftaxlaw.com.
