The Tax Cuts and Jobs Act is Riding into the Sunset: Here’s How to Prepare

This article was originally featured in Surety Bond Quarterly.

The Tax Cuts and Jobs Act (TCJA) of 2017 marked a significant shift in U.S. tax policy, introducing a range of changes aimed at stimulating economic growth and corporate investment. The landmark legislation included a whole host of provisions and significant changes to existing tax policies, including a corporate tax rate reduction, depreciation enhancements, and limited interest deductibility—to name just a few.

But all good things must or, in this case, may come to an end.

Pending congressional action, certain TCJA provisions will begin to sunset after December 31, 2025. This ending means that construction firms, general contractors, and specialty subcontractors will face several significant changes that could impact their financial performance, strategic planning, and operational practices. The same can also be said for business owners themselves, especially when it comes to estate and gift tax lifetime exclusions. Here’s a quick breakdown of what to expect and when the provisions will expire:

Bonus Depreciation:

Bonus depreciation will continue its phase-out at 20% per year, ending December 31, 2026. As of 2024, bonus depreciation is at 60% (in the year of acquisition) and will decrease every year by 20% until it hits 0% in 2027. In 2027, bonus depreciation will revert to pre-TCJA rules, requiring firms to depreciate assets over their useful lives, with no upfront acceleration. As a result, construction firms may be less inclined to invest in new equipment, vehicles, or technology due to the longer depreciation schedules. They may need to reassess their capital expenditure plans, potentially delaying modernization investments or seeking alternative financing methods to manage the impact on cash flow.

Lifetime Estate & Gift Exclusion:

The amount a taxpayer can gift over his or her lifetime is set to be lowered by roughly 50%. One of the main provisions that will sunset after 2025 is the lifetime estate exclusion limit. The limit will go from roughly $13.61 million per taxpayer over his or her lifetime, to roughly $7 million per taxpayer. Now is the time for construction business owners to look at succession planning. If done properly and surrounded by the right advisors and professionals, early planning from an estate standpoint can leave the company in good standing for the next generation of family or key stakeholders and not burdened by a large estate tax bill. There are many options for succession planning, whether that is gifting individually or using trusts such as Spousal Lifetime Access Trust or Dynasty; but it is vital to have the conversation while the limits are still raised over the next 12 months. Leaving a healthy company behind, based on your wants and wishes, is important and something your financial partners will be on board with.

Pass-Through Entity Deductions:

The 20% deduction for qualified business income from passthrough entities will end. For construction business owners, this deduction has been advantageous for their firms operating as pass-through entities. Since 2018, trade or business income for owners of pass-through entities has been taxed with a 20% haircut included in the rate. This cut has allowed owners to invest more back into the company and go after a larger bid pool. Now is the time to discuss whether it makes sense to accelerate income while the tax rates are lower compared with other tax planning options. Business owners might consult with their leadership team and financial advisors to evaluate whether remaining a passthrough entity is advantageous, or if converting to C corporation status could be more beneficial, as those provisions were made permanent in the TCJA.

Interest Deductibility Limitations:

The limitation on interest deductibility to 30% of adjusted taxable income will end. The expiration of this limitation could result in an increased ability to deduct more interest expense annually, as companies may now be able to fully deduct interest payments on their debt. With interest rates likely on the way down, and the ability to deduct the interest payments through their profit and loss more readily available, companies may be more inclined to borrow to invest in their equipment, fleet, and technology versus looking at their capital stack being more investor-driven, keeping ownership as originally intended.

The Right Sounding Board

It is crucial for contractors, their ownership, and key stakeholders to surround themselves professionally with the right people to have the necessary tools in the toolbox. One person won’t have all the answers, so try to gather all the facts, get on paper what everyone needs to succeed, and have a timeline to properly execute plans. Change is inevitable. But with the proper planning, understanding the potential risks and pitfalls, and vetting out multiple forecasts, contractors can come out of the legislative changes stronger, better positioned in their backlog and bid process, and ready to accelerate their strategy.

The sunset of individual and estate provisions of the TCJA presents significant challenges and opportunities for construction firms and general contractors. The changes to accelerated depreciation benefits, limitations on interest expense deductibility, and the elimination of the 20% pass-through entity deduction could impact financial performance and strategic planning. By proactively addressing these potential changes through careful tax planning, financial forecasting, and legislative engagement, construction firms can better position themselves to navigate the evolving tax landscape and sustain their growth and profitability in the coming years.