Written by Jason Herr, CPA, CCIFP
The sweeping 2025 tax legislation brings major changes for architecture, engineering, and construction (AEC) businesses. From permanent expensing to expanded deductions and energy credit sunsets, this legislation is expected to significantly influence tax planning and project decisions for years to come.
Below, we highlight the key updates, explain how they differ from prior law, and outline practical steps AEC businesses should take now.
Key Takeaways
- 100% bonus depreciation and domestic R&D expensing are now permanent.
- Section 179 expensing limits have increased.
- Energy-efficiency construction incentives are sunsetting.
- The QBI deduction and PTET remain intact for service firms.
- The PCM exception now applies to a broader range of residential contracts.
1. 100% Bonus Depreciation Made Permanent
What Changed:
AEC firms can now permanently expense 100% of qualified property costs in the year placed in service, reversing the prior phaseout that would have reduced bonus depreciation to 0% after 2026.
Planning Tip:
Accelerate capital purchases such as equipment or software installations after January 19, 2025, to leverage immediate write-offs.
2. Section 179 Expensing Limits Significantly Raised
What Changed:
Annual deduction limits have risen to $2.5 million, with a phase-out beginning at $4 million, providing broader expensing ability for machinery, vehicles, and certain building improvements.
Planning Tip:
Evaluate high-spend projects or upgrades, particularly those improving jobsite productivity, and time them to maximize Section 179 benefits.
3. Domestic R&D Expensing Permanently Reinstated
What Changed:
Previously, R&D costs had to be amortized over 5 years. The new law restores full, immediate expensing for domestic R&D and offers retroactive relief dating back to 2022.
Planning Tip:
AEC firms developing new software, construction methods, or materials should review past filings for refund opportunities and reassess R&D budgets moving forward.
4. QBI Deduction and PTET Rules Remain Favorable
What Changed:
The 20% Qualified Business Income (QBI) deduction is now permanent and maintains high income phase-out levels. Additionally, PTET remains available for firms operating as passthrough entities, including those in specified service trades.
Planning Tip:
Partnerships and S Corporations should model out tax savings under the PTET structure and assess ownership compensation strategies to optimize QBI deduction eligibility.
5. Redefined PCM Exception for Residential Contracts
What Changed:
The 2025 tax law redefines the exception to the Percentage-of-Completion Method (PCM) under IRC Section 460(e)(1)(A). Previously limited to “home construction contracts,” the exception now applies to a broader category defined as “residential construction contracts.” This change may expand eligibility for small and mid-sized builders to defer income recognition on qualifying contracts.
Planning Tip:
AEC firms engaged in multifamily or mixed-use residential projects should reassess contract classifications and determine if the new definition allows for more favorable tax treatment.
6. End of Energy Efficiency Credits for Builders
What Changed:
Credits for energy-efficient commercial buildings (179D) and homes (45L) are ending; no 179D deduction for property beginning construction after June 30, 2026, and no 45L credit for homes acquired after June 30, 2026.
Planning Tip:
Fast-track green-certified projects to start construction before mid-2026. Consider including language in contracts to capture any remaining credits before they expire.
Conclusion
The 2025 tax legislation brings a mix of permanent deductions and expiring incentives that will reshape how AEC businesses plan investments and structure operations. Early planning can yield substantial savings and reduce risk in a competitive construction landscape.
For strategic advice on how your AEC business can adapt to these tax changes, please fill out the "Let's Start a Conversation!" form below, and one of our industry experts will contact you.
About the Author
Jason Herr, CPA, CCIFP
Jason joined Trout CPA in 2007 after earning his Bachelor of Science degree in Accounting from Clearwater Christian College. He currently leads the firm’s Construction & Real Estate Industry Group and is actively involved in the firm’s Manufacturing & Distribution Industry Group. Jason serves clients in various industries, including construction, manufacturing and distribution, retail, hospitality, and real estate. Throughout his career, he has also been active in several local charities and organizations.
