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Tax reform in action: What Charlotte's construction, law and A&E firms need to know
There's no doubt that Charlotte businesses will be impacted by P.L. 119-21, Republicans' 'One Big Beautiful Bill Act,' which was recently signed into law. The sweeping domestic policy legislation reflects key elements of President Trump's agenda, including the extension of existing as well as creation of new tax relief measures, changes to energy policy, increased funding for national defense and immigration enforcement, reductions in Medicaid and SNAP benefits, and an increase to the debt limit.
The Bill includes the extension of many Tax Cuts and Jobs Act (TCJA) provisions, new tax relief measures, limitations on both individual and business deductions, changes to central international tax provisions and the curtailment of certain Inflation Reduction Act (IRA) incentives. Provisions have varying effective and expiration dates, with some, but not all, provisions enacted on a permanent basis.
We'll briefly discuss a few of the tax provisions that are relevant to the construction, real estate and professional services industries, but you can refer to the in-depth article on Cherry Bekaert's website to explore the full scope of changes introduced in the 2025 Final Budget Reconciliation Bill.
2025 Tax Reform and Percentage-of-Completion Accounting: What Construction and Real Estate Firms Need To Know
The 2025 tax reform introduces significant changes to the rules governing percentage-of-completion method (PCM) accounting. These changes affect how construction and real estate firms recognize revenue, particularly for residential projects. By redefining key terms and eliminating certain exceptions, the legislation reshapes the tax landscape for contractors and developers.
Redefining the PCM Exception: From Home to Residential Construction Contracts
One of the most notable changes is the redefinition of the exception to percentage-of-completion accounting. Previously limited to "home construction contracts" for dwellings with four or fewer units, allowing builders to defer income using the completed contract method, it now applies to "residential construction contracts." This broader category includes multi-family housing such as apartments and condominiums, expanding eligibility for PCM relief and offering greater flexibility to developers and contractors beyond single-family projects.
Elimination of the Special Rule for Residential Construction Contracts
The reform also eliminates the special rule under IRC Section 460(e)(4), which previously allowed certain residential construction contracts to use methods other than PCM even if they didn't meet the general exception criteria. This removal narrows the flexibility available to contractors and may require a shift in accounting practices for firms that previously relied on this provision.
Alternative Minimum Tax (AMT) Exception Updated to Match Residential Construction Contract Definition
In addition to changes under IRC Section 460, the legislation aligns the AMT exception with the new 'residential construction contract' definition. This ensures consistency across tax regimes and simplifies compliance, but it also means that firms must reassess their AMT exposure under the new framework.
Law Firms: Entity Structure and Partner Planning in Focus
Law firms, especially those structured as partnerships or S corporations, can benefit from the permanent extension of the Section 199A deduction, but specified service trades or businesses (SSTBs) still face limits above certain income levels, making entity structure and income planning crucial.
The restored EBITDA limitation under Section 163(j) improves interest deductibility for partner buy-ins and expansion strategies, enhancing after-tax cash flow and capital flexibility. A temporary increase in the State and Local Tax (SALT) deduction cap provides some relief in high-tax areas, though pass-through entity tax (PTET) elections still need careful coordination.
Architecture and Engineering: Capital Investment Gains but 179D Loss Looms Large
A&E firms are well-positioned to capitalize on the reinstated 100% bonus depreciation and expanded Section 179 expensing cap. These provisions support investment in qualifying design software, modeling tools and infrastructure upgrades.
However, the termination of Section 179D, a deduction for energy-efficient commercial building design, represents a significant loss. For years, 179D has served as a valuable incentive for A&E firms working on government and nonprofit projects, particularly those focused on sustainability and LEED certification.
Business Consulting: Innovation, Equity Planning and Talent Strategy
The restoration of the EBITDA-based limitation under Section 163(j) noted above is especially impactful for consulting firms with private equity backing or leveraged growth strategies. It increases the amount of deductible interest, improves tax efficiency, and supports more aggressive investment in expansion and innovation.
Your Guide Forward
To learn more about how the final reconciliation bill could impact your business or individual tax situation, reach out to a knowledgeable Cherry Bekaert advisor.
Upcoming Webinars
Please join Cherry Bekaert's six-part webinar series Tax Horizons: Planning Ahead After the Reconciliation Bill, where we explore the reconciliation bill in more detail and deliver insights that will help you adjust to changes in the tax landscape.
Cherry Bekaert, ranked among the largest assurance, tax and advisory firms in the U.S., serves clients across industries in all 50 U.S. states and internationally.
