2025 Year End Tax Planning Guide

By Jeffrey T. Rogers, CPA, MST | Partner, E.J. Callahan & Associates

With 2025 rapidly coming to a close, it’s important that Taxpayers take some time to think through how they can optimize their tax position for 2025 and beyond. After a few quiet years on the federal side, 2025 brought significant tax legislation in the form of the One Big Beautiful Bill Act. The bill contained significant extenders (tax rates, standard deduction, etc.) that have served to prevent disruption, several fixes to existing tax law (discussed in detail within) and variations of matters introduced during the 2024 Presidential Campaigns (overtime, tip income, and vehicle interest deductions, etc). The specific details of the One Big Beautiful Bill can be found here.

While the past couple of years were relatively quiet when it came to implementing strategies before the calendar turned to January, for certain taxpayers, 2025 has brought more planning opportunities. 

Increase to the State and Local Tax Cap 

Perhaps the most significant year-end tax planning opportunity can be attributed to the increase in the State and Local Tax Cap to $40,000 for taxpayers earning less than $500,000. The cap phases down as adjusted gross income increases from $500,000 to $600,000. For those earning more than $600,000, the cap will continue at its $10,000 level, which is where it has been since the Tax Cuts and Jobs Act placed the limit on the amount of state and local taxes that could be deducted. Taxpayers with income in the required range could reduce their tax bill by accelerating state income or real estate tax payments into 2025. Owners of pass-through entities will need to evaluate whether paying their business taxes at the individual level will be more advantageous this year. 

Construction Accounting Methods & Income Deferral Strategies

With no income tax increases on the horizon, a somewhat uncertain economy, and higher than typical interest rates, cash savings via income tax deferral is once again a sound planning strategy. As has been well documented, construction contractors have to adhere to the requirements of Internal Revenue Code Section 460 for long-term contract reporting. There are exceptions to every rule and, with respect to construction accounting methods, there are many.

Small Business Taxpayer Exception

A contractor with average gross receipts of $31 million or less over the previous three years is not subject to the IRC § 460 requirement to report long-term contracts using the percentage of completion method. Subject to an adjustment for alternative minimum tax (AMT) purposes, a contractor may report long-term contracts, and all contracts for that matter, under a more tax-efficient method of accounting such as the cash method or completed contract. Contractors that have not been taking advantage of the exception may file Form 3115, Application for Change in Accounting Method, to request an automatic change in method.

Other automatic accounting method-related exceptions that a small contractor may be able to pursue:

• The requirement to maintain inventories under § 471

• Exemption from uniform capitalization provisions under IRC § 263A

  
  

A contractor does not need to meet the small contractor exception requirement to potentially defer income. The following opportunities may exist:

• <10% Complete Deferral - The election to defer gross profit on contracts less than 10% complete

• Home Construction Contracts - The exemption from the percentage of completion requirement for home construction contracts

• Residential Construction Contracts - The exemption from the percentage of completion requirement for residential construction contracts

• Service & Short-Term Contracts - The ability to utilize the cash method for service contracts and potentially short-term contracts

• Retainage Deferral - The ability to take advantage of pay when paid clauses to defer retainage payable and potentially other subcontractor payables

  
  

Of particular note this tax planning season is a change to the reporting requirements for residential construction contracts that came about as part of the One Big Beautiful Bill Act. Residential contracts entered into after July 4, 2025 will be permitted to utilize the same 100% exception from percentage of completion reporting that has historically been allowed for home construction contracts. In other words, 100% of the gross profit on a residential construction contract may be deferred into the tax period in which the contract completes. Previously only 30% of the profit on this type of contract could be deferred. The definitional difference between “home construction” and “residential construction” centers around the number of dwelling units “constructed, improved, or rehabilitated”.  A home construction contract is one where 80% or more of the total estimated costs are attributable to structures with four dwelling units or less. The same definition applies for residential contracts except they include structures with more than dwelling units, such as apartment complexes and dormitories.

As an added benefit, residential contracts reported under this method are expected to receive the same treatment under the alternative minimum tax rules as home construction contracts, which is to say that they would not be subject to an adjustment.

Currently the guidance surrounding whether a change from this 30% deferral to 100% deferral would constitute a change in accounting method is unavailable but should be coming soon.  For certain, any contractor that hadn’t been using the PCCM method to defer 30% of their profit would need to file a change in accounting method, though it is expected that it will be an automatic change that requires neither advanced consent from the Commissioner nor a user fee.

Cash Basis Planning - If utilizing the cash method of accounting for tax purposes, now is the time of year to really start focusing on the company’s cash activity in order to manage the most optimal result. To the extent that it makes business sense, putting greater emphasis on getting those payable or accrual balances down by the close of the year may be wise along with possibly prepaying some expenses that wouldn’t otherwise be deductible until 2026. Paying bonuses in December rather than January should be considered. Recognizing that slowing down billing and collection efforts is almost never a sound business practice, taking the foot off the pedal as the tax year draws to a close can provide tax benefit. 

If cash for expense paydown is limited, focus on the non-job accounts payable along with the amounts that are attributable to service or short-term contract work. Payables related to long-term contracts should have the lowest priority as those may be subject to an AMT adjustment.

Be Wary of Lookback Interest

Many contractors that utilize the percentage of completion method for tax accounting purposes have managed their estimated cost to complete figures to reduce profit recognition in part to be more conservative in their GAAP financial statement presentation.

Large contractors utilizing the percentage of completion method recognize that the requirement to pay “lookback” interest during the year in which a contract completes is a cost that they need to deal with on the back end. Essentially, the lookback rules require that, once a long-term project is complete, the contract must be re-evaluated using actual data to determine how far off income recognition was in prior years when it was based on estimates.  In a higher-interest rate environment, such as the one that we are in, profit pick up late in a project could prove costly, especially since it is generally not a deductible business expense. 

It's important to understand that not all taxpayers and not all long-term contracts are subject to the lookback calculation and this is especially true this year with the previously discussed exception from percentage of completion reporting that is now available for residential construction contracts. 

Maximizing Section 199A Deduction

The Section 199A deduction, or Qualified Business Income (“QBI”) Deduction, was first introduced as part of the TCJA and, in general, is a deduction equal to approximately 20% of a pass-through entity’s profits, subject to certain limitations.  Originally set to sunset in 2026, the One Big Beautiful Bill extended the benefit permanently.

As construction industry activities clearly qualify for the deduction, attention should be given to owner and partner compensation arrangements to ensure that the QBI deduction is being maximized. This QBI deduction also needs to be taken into account when evaluating the benefit of paying into a pass-through entity tax regime.

Maximizing Interest Expense Deductions

Heavily leveraged companies that average more than $31 million in gross receipts have found it more challenging to deduct their interest expense since 2022. The TCJA significantly expanded the existing limitations on the timing of interest deductions. Companies are only allowed to deduct interest expense up to 30% of Adjusted Taxable Income (“ATI”). Any excess gets carried forward but requires “excess business income” from the same entity to utilize. Prior to 2022, ATI was equal to taxable income after adding back the interest expense, depreciation and amortization expense, effectively what is referred to as “EBITDA”. From 2022 through 2024, the ATI base no longer increased by the depreciation and amortization expense addback, which made it “EBIT” and in many cases resulted in a significant hurdle. Between this changing provision, higher interest rates, and potentially lower profits due to higher costs, a lot of interest expense was trapped and carried forward.  Fortunately, this problem was addressed in the One Big Beautiful Bill. While many had hoped that the law would return to where it stood pre-TCJA, that was not to be. It did, however, return to the pre-2022 calculation which allowed depreciation and amortization to increase the ATI base allowing more interest to be deducted currently. 

Construction or real estate businesses have always had the ability to avoid the limitations by making an irrevocable “Real Property Trade or Business Election” but doing so carries a high cost of longer depreciation lives on certain assets, most notable Qualified Improvement Property.

Taking Advantage of Accelerated Depreciation

The government often looks to accelerated depreciation techniques as a means of stimulating the economy. Dating to the passing of the TCJA, companies had been able to utilize “Bonus Depreciation” to immediately write off 100% of the cost of machinery & equipment, most business use vehicles, and even interior tenant improvements. However, between 2023 and 2024, the first year write off was decreased to 80% and 60% respectively and was slated to be 40% for 2025 additions with continuous 20% annual decreases until completely phased out in 2027. The One Big Beautiful Bill returned the law to the pre-2022 100% deduction and made it permanent.

If that weren’t enough, the bill doubled the deductibility limits for the other first-year write off mechanism, referred to as Section 179.  Section 179 expensing is very similar in concept to bonus depreciation, though does carry a few additional limitations including the amount that can be claimed in a given year ($2,500,000 for 2025). 

Between these two provisions, businesses with a need for capital expenditures can significantly reduce their tax bills by taking advantage, even if the purchases require financing.

Businesses should not overlook the option to automatically expense the cost of fixed assets below certain thresholds. Referred to as the De Minimis Safe Harbor election, so long as consistent with their book capitalization policy, a company that has audited financial statements prepared may immediately expense any asset costing less than $5,000 ($2,500 if no Applicable Financial Statement).

Building owners may want to consider having a Cost Segregation study performed on their property to potentially accelerate depreciation deductions. While non-residential buildings typically must be depreciated over 39 years, a cost segregation study could determine that there are component assets that can be carved out into shorter depreciable lives that might be eligible for bonus depreciation. Even if the property was placed in service in a prior year, it may not be too late to benefit from a study and take a retroactive deduction.  As an added benefit, having the building broken down into smaller components may make it easier to write off any remaining basis in the future when the component is replaced or disposed.

Other Tax Credits to Consider

The Research & Development Tax Credit has historically provided an opportunity for contractors, especially those that do a lot of design build work, to monetize some of the costs that they incur while trying to eliminate areas of uncertainty. The following could potentially be characterized as eligible activities: value engineering, pre-construction planning, efficient energy, power, or water usage designs or improvement, use of BIM modeling, and development of innovative methods and techniques to improve the construction process to create efficiencies. There is a Four-Part test that the IRS requires to be performed to evaluate activity eligibility.

Many companies that incur research & experimentation expenses hit a roadblock in recent years as a result of tax law change enacted as part of the TCJA with a delayed effective date until 2022. Effectively, research and development expenses, including most software development costs, were required to be amortized over five years (15 years if the activities were performed internationally). Previously the expenses could be deducted immediately. The more troubling part of this development is that the research & experimentation expenses that are eligible for consideration in the R&D credit calculation represent only a small portion of the research & experimentation expenses defined in Section 174 that must be amortized. The result was that there was a significant disincentive to engage in research and development activities. 

Recognizing this to be a major problem, the One Big Beautiful Bill “fixed” this issue. Beginning in 2025, companies will no longer be required to amortize domestic research activities, only international R&E. Companies that have unamortized research & experimentation costs on their books at the end of 2024 have a few different measures to recoup. While certain smaller companies have the ability (but not the requirement) to amend their 2022 through 2024 returns prior to July 4, 2026, larger companies will be allowed to deduct the unamortized costs either entirely in 2025 or split evenly between 2025 and 2026. Careful planning is required in light of loss limitations that exist, particularly companies based in Massachusetts where individuals are not permitted to carry forward net operating losses. There may be instances where allowing the 2022 – 2024 amortized costs to run their scheduled course may be prudent.

Companies that abandoned or significantly toned down their R&D efforts the last few years can confidently ramp back up at this point.  And for those companies that may not have gone out of their way to acknowledge what they were doing on the R&D front, the opportunity would still exist to retroactively pursue R&D Tax Credits.

The Fuel Tax Credit allows businesses that operate fuel-powered machinery and equipment to recover the excise taxes paid in conjunction with the cost of the fuel. These taxes are only intended to be levied on highway-use vehicles so owners of non-highway vehicles should be aware that there is a means to recover.

All businesses should have the Work Opportunity Tax Credit (“WOTC”) on their radar as part of their hiring strategy, though only currently through the end of 2025. The WOTC is a credit jointly administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL). It may be claimed by any employer that hires and pays or incurs wages to certain individuals who are certified by a state workforce agency as being a member of one of 10 targeted groups, with certain veterans being among them. In general, the WOTC is equal to 40% of up to $6,000 of wages, which is a maximum of $2,400 per employee.

For more information on this credit, feel free to review this slide deck from a previous EJC presentation.

Final Chance to Take Advantage of the Inflation Reduction Act

The Inflation Reduction Act (“IRA”), which was passed in 2022, introduced or enhanced several Energy savings-related provisions.  The One Big Beautiful Bill cut several of these incentives in an effort to pay for some of the other taxpayer-friendly provisions.  As a result, only limited time remains to take advantage of the below benefits:

The §45L New Energy Home Credit, saw its availability increased to more property types (i.e.; high rise apartments) which made the benefit more lucrative. The value of the credit is $2,500 per unit with the potential to reach $5,000 if Zero Energy Ready Home Program conditions are met.  Taxpayers have until June 30, 2026 to take advantage of this credit.

The §179D Energy Efficient Commercial Buildings deduction is a tax deduction that has historically been available to building owners or designers of government-owned buildings that build or improve energy efficient commercial property. The deduction can reach as high as $5.00 per square foot with 50% energy savings if the owner or designer meets the prevailing wage and apprenticeship requirements. Perhaps the most significant change for design builders is the fact that buildings owned by other tax-exempt entities, beyond government agencies, would be eligible for the deduction. Taxpayers have until June 30, 2026 to take advantage of this deduction.

The IRA enhanced the energy efficient home improvement credit. Since the start of 2023, taxpayers have had a $1,200 annual credit available to offset 30% of the cost. Doors, windows, energy equipment and even home energy audits are all eligible but may be subject to their own limitations. Tax year 2025 will be the last year to take advantage of this enhanced credit.

The 30% Investment Tax Credit that has been available to commercial wind and solar projects has been given a slightly longer shelf life as the projects must commence prior to July 5, 2026 and be in service by the end of 2027. 

Other Tax Planning Considerations

Considering most construction companies and/or real estate developers are structured as pass-through entities, it’s important to consider steps that you can take at the personal tax level to reduce taxes.

• Utilizing Lower Tax Brackets – It can be tempting to employ a tax strategy in a given year that will eliminate all or most of your tax liability.  However, if you typically find yourself in the top income tax bracket (currently 37%), not utilizing the lower brackets, particularly the 10%, 12%, 22%, and 24% brackets, along with the permitted standard or itemized deductions may not be tax efficient. For a married taxpayer in 2025, the 24% tax bracket is in effect until around $394,600 of income. Related, there are other credits and incentives, such as the $2,200 Child Tax Credit, that begin to phase or eliminate around a similar $400,000 income level. Tax bracket planning is especially important now that the previously discussed SALT cap has been raised to $40,000.

• Retirement Contributions - Maximizing retirement contributions will reduce taxable wages which will drive down tax liabilities. 

  • For 2025 the maximum 401k contribution for those under the age of 50 is $23,500.

  • Those over the age of 50 may contribute an extra $7,500 to their plan

  • Those in the 60-63 age range being allowed an $3,750 on top of the $7,500, if their employer’s plan allows.

• Roth IRA Conversions – Exploring whether converting traditional IRAs into Roth IRAs to take advantage of future tax-free appreciation is always something that should be reviewed. It’s an ideal strategy in a year where you project to be in a lower tax bracket than usual. If you have no other IRAs in your portfolio, there is very limited downside in contributing to a non-deductible IRA and immediately converting to a Roth before it has time to appreciate.  This is often referred to as a “backdoor roth”.

• Capital Loss Harvesting - Investors with unrealized capital losses inside their portfolio may want to realize some prior to the end of the tax year, especially if they incurred capital gains on the sale of property or a business.

• Charitable Contribution Planning - Taxpayers whose itemized deductions closely approximate their standard deduction may wish to bunch up multiple years’ worth of charitable deductions to maximize total deductions.

  • Contributing into a Community Development Corporation could provide added benefit as a Community Investment Tax Credit (CITC) may be available to go along with the federal deduction. This credit was recently made permanent.

  • Donating appreciated stock in lieu of cash allows for a fair market value deduction without first having to pay tax on the appreciated gain.

  • Taxpayers over the age of 70 ½ are permitted to make a qualified charity donation up to $108,000 directly from an IRA to satisfy their required minimum distribution requirement. Contributing to charity in this manner can be very beneficial for those taxpayers who are utilizing the standard deduction and in future years can help avoid the 0.5% charitable floor discussed below.

  • Beginning in 2023 Massachusetts has permitted a charitable contribution on the MA return even if not itemizing deductions on the federal return.

A fairly negative provision of the One Big Beautiful Bill that is going into effect in 2026 has provided a planning opportunity in 2025. Beginning in 2026, in order for taxpayers who itemize their deductions to receive a benefit, their charitable contributions must exceed 0.5% of their AGI. Such a limitation does not exist in 2025. Further, those in the top 37% tax bracket will find that the tax benefit from their itemized deductions, of which a charitable contribution is one, will be capped at 35%. Accelerating 2026 contributions into 2025, perhaps through a Donor Advised fund, may provide some permanent tax benefit.

In the other direction, Congress recognized that the increased standard deduction, which reduced the number of itemizers, provided a disincentive to contribute to charity.  Beginning in 2026, non-itemizers will be able to write off up to $1,000 (single) and $2,000 (married) for donations to qualified charities.  No 0.5% AGI floor for these donations.

• Estate & Gift Tax Planning - Beyond income tax planning, owners of construction companies, especially well-established businesses, would be wise to evaluate their estate and gift tax positions on an annual basis. Individuals that project to have a taxable estate which, for Massachusetts residents, is anyone that owns more than $2 million in assets, should consider whether they want to engage in gifting strategies.

  
  

  The annual gift tax exemption for 2025 is $19,000 (remaining at $19,000 in 2026). This means that, in 2025 an individual can give away up to $19,000 to as many individuals as they choose without it impacting their lifetime estate tax exclusion. A married individual can double that gift if their spouse is willing to split the gift with them.

State and Local Tax Matters

State Pass-Through Entity Taxes

Through the 2024 tax year, most advisors agreed that paying into the Massachusetts Pass-Through Entity Tax (“PTET”) regime or any states’ PTET program was advisable almost to the point of becoming business as usual.  For those unfamiliar, a Pass-Through Entity Tax regime has been a state’s attempt to work around the $10,000 state & local tax (SALT) deduction cap that had been put into place as part of the TCJA. Effectively, a company organized as a pass-through entity, elects to pay the state income tax that would otherwise be payable by the shareholders or partners directly. In doing so, a deduction is permitted to reduce federal ordinary income, which wouldn’t have otherwise been allowed because of the cap. 

With the One Big Beautiful Bill increasing the SALT cap to $40,000 for certain taxpayers, paying tax into a PTET program is no longer automatic, especially in a state such as Massachusetts, Connecticut, and now Rhode Island, that takes a cut. 

Massachusetts Now Requires Multi-State Businesses to “Apportion” Income Using Single Sales Factor

As was discussed in this article, in October 2023, significant state tax legislation was passed as part of the Massachusetts Act to Improve the Commonwealth's Competitiveness, Affordability, and Equity. 

Included in the bill was a decision to change to a single sales factor approach to apportioning multi-state business income beginning in 2025. Specifically, Massachusetts no longer takes payroll and property into account and, instead, Massachusetts apportioned income is determined solely on the basis of MA sales as compared to overall sales. The change benefits Massachusetts-based businesses with limited out of state payroll but significant out of state sales. As an example, a business whose payroll and property are 100% MA but with only 60% in-state sales, would have previously been taxed on 80% of their income ((100%+100%+60%+60%)/4). Now they are taxed on 60% of it. With net income of $1 million and a C-Corp tax rate of 8%, that is a $16,000 annual savings.  On the flip side, an out of state business with limited MA payroll or property presence but significant MA sales will see a larger percentage of their income subject to the corporate excise tax. While a Massachusetts resident should not expect to see a change to their Massachusetts personal income tax, a non-resident would be impacted in the same manner as a non-resident business. There is not much that can be done at this point by way of planning as it is in effect.

New Hampshire Tax Changes

Repeal of Interest & Dividends Tax

For many years, residents of New Hampshire have been subjected to a state level tax on the interest and dividends that they earn in excess of a $2,400 standard deduction. This included distributions of earnings and profits from certain business entities. Historically the tax rate was 5% of the income earned. The rate has been phasing out since 2023 and is now officially repealed as of 2025.

Section 163(j) Decoupling

While much of the focus has been on the federal changes to the Section 163(j) business interest limitation calculation, New Hampshire previously made a change, effective January 1, 2024 to stop conforming with the federal treatment.  Beginning in 2024, businesses have been able to fully deduct business interest expense without limitation and, for interest that had been suspended to that point, the requirement became to claim the deduction in three equal installments beginning in 2024.

Massachusetts “Millionaire’s Tax”

Tax Year 2025 is now the third year since the imposition of the 4% surtax on income in excess of $1 million, now commonly referred to as the Millionaire’s tax. Read more about this surtax here. The inflation-adjusted threshold increased to $1,083,150.  A couple of things to remember: First, taxpayers whose income fluctuates above and below that $1.083 million threshold should do their best to not fall below one year if it means going over the following. A taxpayer with $800,000 of MA income in one year and $1.3 million the following will end up paying an extra $8,000+ in MA taxes by going over in year 2. In many cases there isn’t much that can be done to balance the income but, as with any tax bracket planning, don’t lose sight of the potential.  

Second, primarily for pass-through business owners that have gotten accustomed to their business paying their personal MA income taxes through the pass-through entity tax (“PTET”) regime, this is the annual reminder that this surtax cannot be paid at the entity level, so estimated taxes need to be paid at the individual level to cover the tax liability.

This is clearly a lot to think about and, in a lot of cases, not a lot of time left to do it. We highly encourage you to schedule an appointment with an EJC Partner right away. We, at EJC, would be happy to discuss anything contained in this summary with anyone that has questions.

About the Author:

Jeffrey T. Rogers, CPA, MST

Partner | E.J. Callahan & Associates

Jeff has 20 years of experience specializing in tax planning, tax research & compliance, IRS & State Exam Representation, Mergers & Acquisitions, and Business succession & ownership transitions with a focus in the construction, real estate, non-profit, restaurant, manufacturing & distribution industries.  He helps businesses adopt the most tax efficient accounting methods available to them and identifies all tax credit and incentives to which they may be entitled.  Jeff has presented for multiple trade associations, Chambers of Commerce, and at other business events. He has been published in the Boston Business Journal and the Cape and Plymouth Times, and has been featured on NBC News Boston as a subject matter expert. Prior to joining E.J. Callahan & Associates, Jeff served as both a Partner and Director at regional and national CPA firms. He holds a Bachelor of Science Degree in Accounting from Merrimack College and a Master of Science degree in Taxation from Bentley University. Jeff is an active member of the American Institute of Certified Public Accountants (AICPA), the Massachusetts Society of Certified Public Accountants (MSCPA), the Construction Financial Management Association (CFMA), and the Associated Subcontractors of Massachusetts (ASM). Jeff is also Treasurer for the Danvers American Little League and a volunteer coach in several youth sports programs.