Mid-Year Tax Planning for Construction and Real Estate Businesses

10 strategies to manage tax exposure, preserve cash flow, and prepare for year-end decisions. 

By Jason C. Herr, CPA, CCIFP

By mid-year, the financial picture for a construction or real estate business may look very different from what was expected in January. Project delays, rising costs, financing changes, equipment purchases, and property transactions can quickly shift both cash flow and taxable income.

A mid-year tax planning review gives contractors, developers, and real estate owners time to reassess year-to-date results, update projections, and act while planning opportunities are still available. Instead of waiting until tax season to find out what happened, businesses can use the second half of the year to manage estimated payments, maximize available deductions, and prepare for upcoming transactions.

In this article, we highlight 10 key areas real estate and construction businesses should review to identify potential risks and planning opportunities while there is still time to act.

1. Update Your Full-Year Income and Cash Flow Projections

Start by comparing year-to-date results with the budget and tax projections prepared at the beginning of the year.

For contractors, this review should extend beyond the income statement. An updated work-in-progress, or WIP, schedule may reveal margin changes that have not yet appeared in the financial statements. Review:

• Original and revised contract values

• Costs incurred and estimated costs to complete

• Approved and pending change orders

• Underbillings and overbillings

• Retainage receivable

• Expected project completion dates

• Projects experiencing margin fade 

A project that appeared profitable in January may look different after labor shortages, delayed materials, disputed change orders, or subcontractor cost increases.

Real estate businesses should update projections by property or project. Consider anticipated rental income, vacancy, operating expenses, debt service, capital improvements, refinancing activity, and planned acquisitions or dispositions.

Updated projections allow your tax advisor to estimate taxable income more accurately and determine whether estimated tax payments should be adjusted. They can also help identify potential cash shortages before tax payments, debt payments, and major project expenses become due.

2. Review Estimated Tax Payments

Quarterly estimated tax payments are generally based on projections that may no longer reflect current operating results.

Businesses experiencing stronger-than-expected profitability may need to increase upcoming payments to reduce potential underpayment penalties and avoid a large balance due when returns are filed. Businesses with delayed projects, increased expenses, or weaker rental activity may be able to reduce future payments and retain more cash for operations.

Owners of partnerships and S corporations should review both the entity’s projected taxable income and each owner’s personal tax position. Business income may be only one component of an owner’s total liability, which can also be affected by wages, investments, property sales, losses from other activities, and prior-year carryforwards.

The objective is not necessarily to pay the lowest possible amount during the year. It is to make payments that are appropriate for the projected liability while maintaining adequate liquidity.

3. Plan Equipment and Property Purchases Carefully

The timing of equipment and property purchases can significantly affect taxable income. For tax years beginning in 2026, businesses may elect to expense up to $2.56 million of qualifying property under the Section 179 deduction. The deduction begins to phase out when the total cost of qualifying property placed in service during the year exceeds $4.09 million.

Potentially eligible purchases may include:

• Construction equipment and machinery
• Certain vehicles
• Computers and technology
• Office furniture
• Qualified improvement property
• Certain components identified through a cost segregation study

Purchasing an asset alone is not always sufficient. In many cases, the property must be placed in service, meaning it is ready and available for its intended use, before the deduction can be claimed.

These findings reinforce the importance of modeling depreciation, financing, and state tax consequences together rather than evaluating each provision separately.

Businesses should also avoid making capital purchases solely for a tax deduction. A deduction reduces the after-tax cost of an asset, but it does not make an unnecessary purchase financially beneficial. Before accelerating a purchase, evaluate financing terms, operational needs, cash reserves, projected taxable income, and state conformity with federal depreciation rules.

4. Consider Whether a Cost Segregation Study Is Appropriate

Real estate owners who recently purchased, constructed, expanded, or renovated a building may benefit from a cost segregation study.

A cost segregation study separates qualifying building components from property that would otherwise generally be depreciated over 27.5 or 39 years. Certain components may instead qualify for five-, seven-, or 15-year recovery periods and may be eligible for accelerated depreciation.

Examples can include certain:

• Electrical systems serving specialized equipment

• Decorative finishes and flooring

• Site improvements and landscaping

• Parking areas

• Specialized plumbing

• Removable partitions

A cost segregation study can create a substantial current deduction, but the analysis should not focus only on first-year tax savings. Property owners should also consider future depreciation recapture, passive activity limitations, state tax treatment, planned holding period, and whether the deduction creates a loss that can currently be used.

Mid-year is a practical time to evaluate completed projects and gather the construction records, invoices, and cost details needed for the study.

Learn more about the potential tax and cash flow benefits of a cost segregation study.

5. Review Construction Contract Accounting Methods

The tax treatment of long-term construction contracts can differ significantly from financial statement reporting.

Many long-term contracts are subject to the percentage-of-completion method for federal income tax purposes. Certain residential construction contracts and qualifying small-contractor contracts may be eligible for other methods, including the completed-contract method.

Businesses should review:

• Whether each contract is being classified correctly

• Whether the company still qualifies for a small-contractor exception

• Estimated total contract costs

• Contract completion percentages

• Changes in project scope or pricing

• Look-back requirements for completed contracts

The IRS released a Percentage-of-Completion Method Look-Back Interest Calculator in 2026 to assist businesses and tax professionals with calculations required for certain completed long-term contracts. The calculator does not address every fact pattern and does not replace the governing tax rules.

Accurate job costing is essential. When project managers and the accounting team do not communicate changes promptly, estimated profits and taxable income can be materially misstated.

6. Revisit the Business Interest Expense Limitation

Highly leveraged real estate businesses should evaluate the potential application of the Section 163(j) business interest expense limitation.

Some real property trades or businesses previously elected to be excluded from the limitation. That election generally required the use of the alternative depreciation system for certain real property, which can reduce or eliminate access to accelerated depreciation on affected assets.

Revenue Procedure 2026-17 allows certain taxpayers to withdraw real property trade or business elections made for tax years beginning in 2022, 2023, or 2024. Because withdrawing an election can affect both interest deductions and depreciation, the decision requires detailed modeling and may involve amended returns or partnership administrative adjustment requests.

Businesses that made this election should compare the value of the interest deduction with the depreciation benefits that may become available after withdrawal.

7. Begin Planning Early for Property Sales and 1031 Exchanges

A potential property disposition should be discussed with tax and legal advisors before a purchase agreement is finalized.

A properly structured Section 1031 exchange may defer gain when business or investment real estate is exchanged for qualifying replacement real estate. Section 1031 applies only to real property and generally does not apply to property held primarily for sale, such as dealer inventory.

Planning considerations include:

• The property owner’s intent and holding period

• The use of a qualified intermediary

• The 45-day identification requirement

• The 180-day exchange completion requirement

• Debt replaced or relieved in the transaction

• Cash or other nonqualifying property received

• Related-party rules

• State tax treatment

Waiting until closing to discuss an exchange may be too late. Once the seller receives or controls the proceeds, the opportunity to defer the gain may be lost.

Businesses not pursuing a 1031 exchange should still model the consequences of a sale, including capital gain, depreciation recapture, state income tax, debt payoff, and the amount of cash that will remain after taxes.

8. Evaluate Time-Sensitive Energy Incentives

Construction companies, developers, homebuilders, and building owners should review potentially qualifying energy projects immediately. Also, contractors working with government and non-profit clients should consider ‘direct pay’ refundable and/or transferable credit opportunities.

Under current law, the Section 179D energy-efficient commercial buildings deduction is terminated for property whose construction begins after June 30, 2026, although many experts believe it will be extended. The Section 45L credit generally cannot be claimed for qualifying energy-efficient homes acquired after June 30, 2026.

Depending on the project, planning may require:

• Confirming when construction began

• Determining when a home was acquired

• Obtaining required energy certifications

• Documenting eligible building systems

• Reviewing prevailing wage and apprenticeship requirements

• Coordinating with architects, engineers, contractors, and tax advisors

These incentives involve technical qualification and documentation requirements. Businesses should not wait until return preparation to determine whether a project qualifies.

9. Review State and Local Tax Exposure

Construction and real estate companies frequently create tax obligations in multiple jurisdictions without realizing it.

Potential exposure can arise when a business:

• Sends employees or subcontractors into another state

• Performs work at an out-of-state jobsite

• Stores materials or equipment in another jurisdiction

• Owns or manages property in multiple states

• Purchases materials without paying the correct sales or use tax

• Has remote administrative or sales employees

• Earns income through multiple entities

For contractors working across state lines and real estate businesses with properties in multiple jurisdictions, this makes it especially important to review filing requirements, nexus, sales and use tax exposure, and state conformity with federal tax rules.

Contractor sales tax rules can vary based on the state, the type of project, the materials installed, and whether the contract is structured as lump sum, time and materials, or separately stated labor and materials.

Mid-year is a good time to compare jobsite activity, payroll records, equipment locations, property ownership, and vendor purchases with the company’s current state registrations and tax filings.

Let Trout CPA help evaluate your SALT nexus and filing requirements.

10. Align Tax Planning With Financing and Business Decisions

The largest deduction is not always the best business outcome.

Accelerating depreciation, deferring income, or creating a tax loss may reduce current taxes, but it can also affect financial statements, debt covenants, bonding capacity, lending relationships, and future deductions.

Before implementing a strategy, consider its effect on:

• Cash flow

• Bank reporting

• Surety requirements

• Debt-to-equity ratios

• Future property sales

• Owner distributions

• Capital needs

• Succession or transaction plans

For example, a contractor seeking additional bonding capacity may place greater value on strong working capital and reliable financial reporting than on maximizing every available current-year deduction. Similarly, a property owner preparing to refinance may need to consider how tax planning decisions interact with lender underwriting.

Tax planning is most effective when it is integrated with the business’s broader financial strategy.

What Information Should You Gather for a Mid-Year Review?

• Current-year financial statements

• Updated WIP and backlog reports

• Year-to-date payroll

• Fixed asset purchases and anticipated capital expenditures

• Estimated tax payments made

• Property acquisition and renovation records

• Planned property sales or exchanges

• Debt agreements and refinancing plans

• Entity ownership changes

• Significant pending contracts or change orders

• Activity in new states or municipalities

Complete and current information allows your advisor to model alternatives rather than relying on assumptions.

Final Thoughts

Mid-year planning gives construction and real estate businesses an opportunity to influence results while decisions are still actionable. Updating projections, reviewing contract performance, planning capital expenditures, assessing property transactions, and addressing multistate exposure can help reduce surprises and improve cash flow.

Trout CPA works with construction companies, real estate developers, property owners, and investors to coordinate tax planning with their operational and financial objectives. Contact our team to begin your mid-year planning review.

Frequently Asked Questions

When should construction and real estate businesses begin mid-year tax planning?

Ideally, the review should begin after reliable second-quarter financial information is available. Starting during the summer provides enough time to update projections, revise estimated payments, evaluate capital purchases, structure property transactions, and complete documentation before year-end.

At Trout CPA, we meet with clients monthly or quarterly, depending on their needs, so tax planning can be incorporated into ongoing business decisions rather than addressed only at year-end.

Is bonus depreciation automatically the best choice?

No. Bonus depreciation can create valuable current deductions, but businesses should consider state conformity, future taxable income, passive loss restrictions, depreciation recapture, financing needs, and the asset’s expected holding period. Taxpayers may also be able to elect out for a class of property.

Why is the WIP schedule important for tax planning?

The WIP schedule helps determine project profitability, contract completion percentages, underbillings, overbillings, and projected taxable income. Inaccurate costs or outdated completion estimates can lead to unexpected taxes and misleading financial results.