Section 199A, enacted under the Tax Cuts and Jobs Act (TCJA) and made permanent by the One Big Beautiful Bill Act (OBBBA), allows eligible taxpayers to deduct up to 20% of qualified business income (QBI) for federal income tax purposes. The deduction is available to qualifying owners of S corporations, partnerships, multi-member LLCs, and sole proprietorships, as well as certain trusts and estates.
Because so many construction businesses are closely held, the QBI deduction represents a significant opportunity for many owners and operators in the industry. While it is a known quantity and claimed by many eligible owners, relatively few are investing the time and energy necessary to maximize the value of the QBI each year.
Owners need to understand that eligibility for the deduction is contingent on meeting requirements relating to business activity, inclusive of the nature of the business, and can be limited by W-2 wages paid by the entity, the cost of certain depreciable property held, and other factors. Determining your eligibility requires consultation with a tax professional.
The following planning techniques can be employed in consultation with your advisor to help ensure your business is able to maximize the full benefits of QBI.
Analyze Owner Compensation and Guaranteed Payments
Guaranteed payments, which are common in partnerships, are payments made to partners for services provided to the partnership, regardless of the partnership’s profitability. These payments are deductible by the partnership and taxable to the partner as ordinary income, generally subject to self-employment tax. While many business owners view guaranteed payments as a simple compensation method, they can have an unintended tax cost: converting income that may qualify for the 20% qualified business income (QBI) deduction into income that is not eligible for the deduction.
The same unintended impact occurs in S corporations with highly compensated owners. Owner compensation taken as a payroll deduction on the S corporation’s return becomes ordinary compensation income to the owner that is ineligible for the QBI deduction.
Identify Opportunities
Actively seek out signs that your business’s tax strategy may be overlooking QBI-related opportunities or is otherwise not fully optimized. To fully realize your tax benefits:
- Evaluate owner compensation. Recognize that each dollar paid to owners, whether through an S corporation payroll or partnership guaranteed payments, could work against the owner’s QBI savings. Companies with highly compensated owners could be underutilizing their QBI deduction.
- Do not forget the importance of planning for state and local taxes. The rules of every tax jurisdiction must be taken into consideration as non-resident tax allocations may affect the efficacy of your tax strategy and efforts to maximize QBI.
- Start tax planning several months before year end. Putting tax planning off until December risks rushing through a process that requires careful consideration and . Taking ample time to devise a thorough strategy helps avoid leaving money on the table.
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Align Owner, Tax, and Business Objectives
Effective planning should reflect your priorities. Those with business growth top of mind will be particularly appreciative of the advantages QBI can offer while those prioritizing personal financial benefit may understandably want to pursue strategies more accommodating of large distributions.
Start by asking these three questions:
- Does the current structure of owner compensation suit the business’s goals?
- What are the tax implications of current bonus and distribution structures?
- Is the business structure appropriate for tax purposes?
Answering these questions comprehensively requires knowledge of the tax laws, rules and regulations. Furthermore, only tax advisors leveraging extensive construction industry experience will be equipped to advise on the strategy that best suits each business’s unique goals.
Conclusion
Tax planning is ultimately about defining and pursuing success, as defined by your circumstances and goals. Whether that’s business growth or financial reward, sufficient planning amplifies benefits and reduces risk. In an increasingly uncertain environment, a built-for-purpose tax strategy can unlock cash flow to open new avenues for growth or safeguard your financial future, depending on your personal aims.
Frequently Asked Questions
Owners of S corporations, partnerships, sole proprietorships, and certain LLCs may qualify for the deduction. For construction companies, business structure can significantly impact both tax liability and the available QBI deduction amount. Factors such as owner compensation, payroll levels, and business income all influence tax outcomes. Because different entity types are taxed differently, construction business owners often review their legal structure as part of a broader tax planning strategy to maximize deductions, improve cash flow, and support long-term growth.
In many cases, construction firms may benefit from both bonus depreciation and the Section 199A deduction, but careful tax planning is required. Purchasing equipment, vehicles, and other qualifying assets can generate accelerated depreciation deductions while also affecting QBI calculations. Business owners should evaluate how capital expenditures, equipment financing, and depreciation strategies interact with their overall tax plan.
Construction companies face unique tax challenges, including fluctuating revenue, project-based accounting, equipment investments, and multi-state operations. Tax planning allows construction businesses to make informed decisions regarding hiring, payroll, distributions, estimated tax payments, and capital investments before deadlines arrive. Waiting until tax season can limit available strategies and increase the risk of missed deductions. Regular reviews with a construction-focused tax advisor can help improve cash flow management, reduce tax exposure, and identify opportunities to maximize federal, state, and local tax benefits throughout the year.
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