Preparing for 2026 Tax Season: What Contractors Should Know After the Big Beautiful Bill

Tax season may still feel a few months away, but the 2026 filing year will be the first full cycle under the One Big Beautiful Bill Act (Public Law 119-21) — and it brings some big shifts for contractors.

The new law reshapes how you expense equipment, recognize revenue and handle payroll calculations. Getting familiar with the highlights now can save headaches (and missed deductions) later.

Equipment and Software Expensing: More Power, Same Rules of Timing

For most contractors, the biggest advantage of the bill is the return of full expensing for qualified property plus higher Section 179 limits

Before you buy or upgrade, remember that “placed-in-service” dates drive eligibility — delivery alone doesn’t count.

Quick checklist for expensing decisions:

• Know your limits: For 2025, Section 179 lets many contractors deduct up to $2.5 million, with a phase-out starting at $4 million
• Use the right mix: Section 179 is flexible and line-item based; full expensing generally covers a broader range of assets
• Track timing: Create a short asset timeline (PO → delivery → in-service) so nothing slips past year-end

A quick talk with your CPA about which assets to expense under which rule can keep your GL, fixed-asset and state filings in sync.

Revenue Recognition: New Options for Residential Work

The law adds an exception to the percentage-of-completion method (PCM) for certain residential construction contracts.

That may sound like a small technical change, but it can shift when (and how) you report income.

If a job qualifies, you might be able to use a simpler method — but you’ll need to coordinate with your CPA and update your WIP reporting and contract documentation.

Ask your CPA:

• Does this project meet the residential definition?
• How will switching methods affect WIP and margin timing?
• What documentation supports the new method?

Getting that clarity early prevents surprises in 2026 close-outs.

Payroll Updates: “No Tax on Overtime” and “No Tax on Tips”

The Big Beautiful Bill changes contractor payroll by exempting overtime and tips from federal income tax while keeping employer payroll taxes in place.

Employer taxes (FICA, FUTA, Workers’ Comp) still apply — the change applies only to federal income-tax treatment for employees.

To prepare:

• Review pay codes for overtime and tips to match IRS guidance
• Communicate clearly with employees about why gross pay and taxable pay may differ
• Watch state differences — some states may not conform to the federal change

A test payroll run before January 2026 can confirm calculations look right.

Fading Energy Credits and Interest Deductions

The law phases out several clean-energy incentives, including the §179D commercial buildings deduction, for projects beginning after June 30, 2026

That can alter owner assumptions and bidding strategies.

Meanwhile, new business-interest-limitation rules may reduce how much loan interest you can deduct each year. Contractors who rely on equipment financing or credit lines should review the math with both lenders and CPAs before year-end.

A good way to prepare would be to run a simple “buy vs. lease vs. finance” model that toggles expensing choices and interest limits so you can see the after-tax difference before making decisions.

Year-End Planning Moves

Contractors can avoid 2026 tax surprises by pulling accounting, operations and tax teams together before December 31:

• Build an asset plan: Identify equipment, vehicles, tools and IT with target in-service dates
• Draft or update accounting policies: Note which assets will use Section 179 vs. full expensing
• Check payroll setups: Verify overtime/tip coding against IRS guidance
• Document WIP and contract methods: Especially for residential jobs that might shift off PCM
• Track state conformity: Some states cap or decouple from federal expensing; plan for add-backs

That short list keeps financial statements, tax returns and bids aligned through the transition.

For many contractors, getting the accounting mechanics right depends on the system: fixed-asset schedules tied to in-service dates, clean WIP and payroll codes that match the new rules. If you’re already using construction-specific software, now’s the time to make sure those features are switched on and mapped to your 2026 policies.

Final Thought

With the right setup, the Big Beautiful Bill can simplify more than it complicates. If you want help tracking placed-in-service dates, aligning WIP with recognition choices and tuning payroll codes for 2026, FOUNDATION® brings job-cost accounting, fixed assets and payroll tools together in one system.

Want clarity on Section 179 and how software purchases fit? Our new deep dive explains 2025 expensing thresholds, in-service rules and how contractors can use Section 179 alongside full expensing. It’s a fast way to confirm what counts — and what doesn’t.

If you’re spending time trying to understand the broader tax changes from the Big Beautiful Bill, we break down how the law affects revenue recognition, equipment financing strategies and tax-timing decisions for contractors — including what to discuss with your CPA before year-end.

When you’re ready, schedule a live demo to see how FOUNDATION supports your 2026 workflow.