The United States is on the precipice of the most significant tax legislation in almost a decade and real estate and construction firms are facing a pivotal moment. Last week, the House of Representatives passed their version of Republicans’ multi-trillion-dollar tax and spending reconciliation bill, which has advanced to the Senate, where the upper chamber is expected to refine the bill to reflect their priorities.
The proposed changes could significantly impact how firms plan, invest and operate. For an industry already navigating rising costs, labor shortages, and regulatory complexity, understanding the implications of this reform is essential for staying competitive and compliant.
For a more detailed breakdown of the proposed changes and their implications, be sure to read Cherry Bekaert’s Tax Policy Insights.
1. Bonus Depreciation Phaseout
Proposed legislation could significantly reshape how firms approach capital investments by reinstating and expanding full expensing provisions. Key updates include restoring 100% bonus depreciation, increasing Section 179 limits, and introducing a new temporary depreciation allowance for certain non-residential structures.
One of the most significant developments of the Tax Cuts and Jobs Act (TCJA) was the scheduled phaseout of 100% bonus depreciation. Under current law, businesses were allowed to fully expense qualifying property in the year it was placed in service through 2022. Beginning in 2023, this benefit began phasing out by 20% annually, ultimately reaching 0% by 2027.
The House tax package proposes to restore 100% bonus depreciation for eligible property placed in service from January 20, 2025, through the end of 2029, (2030 for longer production period property). If enacted, this would reopen a valuable window for firms to fully expense capital investments and improve after-tax cash flow.
In addition to bonus depreciation, the ability to immediately expense assets under Internal Revenue Code (IRC) Section 179 remains a complementary and powerful tool. Section 179 allows businesses to immediately expense the full cost of qualifying property, up to a specified threshold, rather than depreciating it over time.
The proposed legislation increases the Section 179 allowance from a maximum of $1.25 million to a maximum of $2.5 million in 2025. It also raises the threshold of assets placed in service at which Section 179 phases out from $3.3 million to $4 million in 2025.
This provision is especially beneficial for smaller firms or those investing in lower-cost assets, such as office equipment, vehicles and certain building improvements. Firms should consider using Section 179 in tandem with bonus depreciation to optimize their capital investment strategy. It’s important to note that rental property generally does not qualify for expensing under Section 179.
In an attempt to incentivize an increase in domestic production capacity, a new provision would also create a temporary 100% depreciation allowance for certain non-residential structures. To qualify, the property must:
- Be placed in service in the U.S. before January 1, 2033,
- Begin construction between January 19, 2025, and January 1, 2029, and
- Be used for qualified production activity, which includes manufacturing, refining, agricultural production or chemical production
Notably, offices, lodging and parking structures are excluded from this deduction. While this provision may not apply broadly across the real estate sector, it could be highly relevant for construction firms and developers involved in industrial or production-related projects.
To capitalize on the proposed reinstatement of full expensing, firms should be mindful of the timing and placed-in-service dates of capital assets. Potential legislative changes could create opportunities for tax benefits by accelerating capital purchases and ensuring assets are placed in service shortly after any final legislation.
How Real Estate and Construction Firms Can Maximize Bonus Depreciation
Firms should start planning now to capitalize on the proposed reinstatement of full expensing. While the Senate’s version of the bill will likely include bonus depreciation through 2029 — at a minimum — firms could see tax benefits by accelerating capital purchases, such as equipment, vehicles, and building systems, and ensuring assets are placed in service shortly after the January 20, 2025, effective date.
Aligning project timelines with this window can help reduce taxable income and improve cash flow ahead of a more restrictive tax environment. Firms should also explore financing options that support timely acquisition, while spreading out costs and consider leveraging Section 179 for qualifying assets.
- Construction Firms: These firms should prioritize fast-tracking equipment and property acquisitions to take advantage of the renewed bonus depreciation window. For firms involved in industrial or production facility builds, the new 100% expensing for qualified structures could increase demand for that specific build type.
- Property Owners and Investors: Those managing portfolios of commercial properties should evaluate whether upcoming capital improvements, such as HVAC upgrades or energy-efficient retrofits, can be timed to qualify for bonus depreciation or Section 179. This is especially relevant for real estate investment trusts (REITs) and pass-through entities seeking to optimize after-tax returns.
- Real Estate Developers: Developers planning new builds or major renovations should reassess project timelines to ensure qualifying assets are placed in service during the reinstated expensing period. Bonus depreciation can significantly enhance project-level cash flow, making timing and cost segregation studies especially valuable. For those involved in production-related developments, the new structure expensing provision presents an additional opportunity whereby developers should consider accelerating these projects to take full advantage of the temporary 100% depreciation benefit.
2. Federal Tax Structure Shifts
The 2025 tax reform framework includes several provisions that could reshape how real estate and construction firms approach entity selection, income planning and long-term investment strategy.
The proposed reform would permanently extend the deduction for qualified business income (QBI) from pass-through entities, commonly referred to as the Section 199A deduction, and increase the deduction from 20% to 23%. The House proposal would also generally make the deduction more accessible by changing the phaseout formula for taxpayers with a taxable income above the threshold amount.
Finally, the proposal would expand eligibility by adding a new category of qualifying income: qualified business development company (BDC) interest income. However, it’s important to recognize that there is considerable opposition, particularly directed at specified service trades or businesses (SSTBs).
While these changes are broadly favorable, income-based limitations would still apply in some cases. This is particularly relevant for high-income partners in real estate partnerships and construction firms who may need to reassess whether their current pass-through structure remains optimal, or if a C corporation conversion could offer greater tax efficiency under the evolving tax landscape.
Although widely discussed, there was no decrease to the corporate rate included in the House’s version of the bill. If the Senate and/or ultimate final version of the Republicans bill includes a change in rates, real estate firms should evaluate their entity structure. While real estate and construction firms may not directly qualify for these targeted rates, any shift in corporate tax policy could influence long-term structuring decisions, especially for firms reinvesting heavily in capital assets or evaluating entity conversions.
Notably, the proposed legislation does not include any changes to the treatment of carried interest; however, President Trump has asked the Senate to address it in their version of the reconciliation bill. Whether the current treatment of carried interest continues is significant for real estate developers and fund managers who rely on the provision as a key component of their compensation structure.
Proposed legislation aims to permanently increase the estate and gift tax exemption to an inflation-adjusted $15 million, beginning in 2026. With the exemption currently set at $13.99 million for 2025, and set to decrease roughly to half this amount if legislation is not passed, business owners should be considering estate tax planning regardless of the potential new reset.
Operating businesses and real estate often appreciate over time, potentially increasing the value of a taxable estate. Thoughtful planning can help minimize tax exposure and enhance wealth being transferred to heirs.
How Firms Can Utilize Strategic Tax Planning for Entity Optimization
To navigate these potential changes, firms should model the comparative tax impact of pass-through versus corporate structures under various rate scenarios. This includes evaluating:
- The benefit of a higher Section 199A deduction versus the flat corporate rate
- The impact of retained earnings strategies under a lower corporate rate, which could make it more attractive to retain earnings within the entity for future growth
- How entity structure affects eligibility and utilization for other incentives, such as bonus depreciation, Section 179 expensing and energy credits
- How net operating losses (NOL) are generated and applied under different structures
C corporations can carry forward NOLs indefinitely (subject to an 80% taxable income limitation), while pass-through entities pass losses through to owners who may face limitations based on basis, at-risk rules and passive activity restrictions. Strategic planning around timing, structure and income recognition can help maximize the tax benefit of NOLs, particularly in years with large capital expenditures or project delays.
3. SALT Deduction and PTET Restrictions
The reform proposes raising the state and local tax (SALT) deduction cap from $10,000 to $40,000 ($20,000 for married filing separately or single filing) with an income limitation of $500,000 ($250,000 for married filing separately), effective in 2025. At the same time, it seeks to limit the use of pass-through entity taxes (PTETs) for certain types of entities, notably specified service trade or businesses (SSTBs), which many states adopted to help business owners bypass the SALT cap. Most real estate businesses are not considered to be SSTBs and would likely not be impacted much by this change.
How Pass-Through Entities Should Prepare for SALT and PTET Changes
To prepare for the proposed SALT cap increase and PTET limitations, firms should reassess their entity structures and evaluate whether their current pass-through setup remains tax efficient.
The interaction between income thresholds, state-specific regulations and entity classification is becoming increasingly significant. Given the complexity of these factors, a comprehensive discussion is beyond the scope of this article. Each scenario will present unique considerations, and a tailored analysis will likely be necessary to optimize the benefits of the PTE election and the corresponding state tax deduction.
4. Interest Deductibility and Business Structuring
The 2025 tax reform proposal revisits key provisions under IRC Section 163(j), which limits the deductibility of business interest expense. While the current law restricts deductions to 30% of adjusted taxable income (ATI), calculated on an earnings before interest and taxes (EBIT) basis, the new bill would temporarily restore the more favorable earnings before taxes, depreciation, and amortization (EBITDA)-based calculation of ATI for tax years 2025 through 2029. This change would allow firms to deduct more interest, offering relief to capital-intensive businesses.
Additionally, the proposed restoration of 100% bonus depreciation for qualifying property placed in service from January 20, 2025, through 2029 (or 2030 for longer production period property), could significantly influence how firms structure and finance projects.
How Firms Should Respond to Section 163(j) and Bonus Depreciation Changes
With potential reforms to Section 163(j) and bonus depreciation rules, firms should reassess how they finance and structure projects. While interest deductibility may improve temporarily, long-term planning should account for the eventual return to stricter limitations. Evaluating alternative financing models and adjusting asset strategies will be key to maintaining tax efficiency and financial flexibility.
- Construction Firms: These firms should model how restored interest deductions and bonus depreciation affect project-level cash flow. Leasing or shared ownership structures may offer additional flexibility.
- Property Owners and Investors: Revisiting depreciation assumptions and exit strategies can help property owners and investors plan for these changes. The interplay between bonus depreciation and interest deductibility could shift the timing of capital improvements or refinancing.
- Real Estate Developers: For enhanced tax efficiency and flexibility, developers should assess how these changes impact return on investment (ROI) and holding periods. Joint ventures or equity partnerships may reduce reliance on debt and preserve after-tax returns.
5. Energy Efficiency Incentives
The Inflation Reduction Act of 2022 (IRA) significantly expanded energy-related tax incentives, offering meaningful opportunities for real estate and construction firms to reduce tax liability while advancing sustainability goals. Retaining Section 179D and retiring 45L are two key provisions that remain central.
Section 179D offers deductions for energy-efficient improvements to commercial buildings, including HVAC, lighting and building envelope upgrades.
While not directly impacted by the proposed reform, this provision remains a valuable tool for firms investing in sustainable infrastructure.
This section provides credits for energy-efficient residential construction, including single-family homes and multifamily units.
Under the proposed tax reform, the Section 45L credit for new energy-efficient homes would be eliminated for projects beginning after December 31, 2025. This creates a limited window for developers and builders to take advantage of the credit before it sunsets.
The proposed legislation would eliminate several energy-related business credits for new projects beginning after December 31, 2025, including:
- Section 45W (Commercial Clean Vehicles)
- Section 30C (EV Charging Stations)
- Section 45V (Clean Hydrogen)
Tips for Proactive Energy Tax Planning
To make the most of current Sections 179D and 45L incentives before potential changes, firms should prioritize qualifying projects and engage energy modelers early to ensure compliance and certification.
Close coordination with tax advisors is essential to align project timelines with eligibility windows and maintain thorough documentation to support claims. Staying ahead of legislative developments and educating internal teams on these opportunities can help maximize tax savings and enhance project ROI.
- Construction Firms: Contractors, especially those working on public or nonprofit buildings newly eligible under the IRA, should integrate energy modeling and certification into early project phases. Accelerating qualifying improvements can help secure deductions before any policy shifts.
- Design and Engineering Firms: These firms play a critical role in specifying energy-efficient systems. By aligning design choices with 179D requirements and collaborating with contractors on documentation, they can help clients and themselves capture available deductions.
- Property Owners and Investors: Owners planning retrofits or new developments should evaluate whether energy-efficient upgrades can be accelerated to qualify under current rules. Partnering with energy consultants and tax professionals can help prevent missed opportunities.
- Real Estate Developers: Developers of residential and mixed-use properties should assess which upcoming projects may qualify for Section 45L credits. Early planning around design specs and energy efficiency standards can unlock substantial per-unit savings.
6. Opportunity Zones and Low-Income Housing
The 2025 tax reform framework includes notable updates to two key community investment tools: the Opportunity Zones (OZ) program and the Low-Income Housing Tax Credit (LIHTC). While the proposed changes to the OZ program reflect a broader push for accountability and measurable community impact, the LIHTC is poised for expansion, creating a mixed outlook for real estate and construction firms focused on community development. The proposal does not include any changes to the Historic Tax Credit (HTC) or provisions for extending the New Markets Tax Credit (NMTC).
The proposed changes introduce two significant shifts to the Opportunity Zone program. First, the current round of designations would sunset earlier than anticipated, ending in 2026 instead of 2028. In its place, a new round of Opportunity Zones would be introduced, effective from 2027 through 2033, with a heightened focus on supporting rural communities.
Second, taxpayers would gain a renewed opportunity to defer capital gains tax. This new designation would feature updated investment incentives designed to promote more targeted and impactful economic development in rural and underserved areas.
The proposed reform would boost the state housing credit ceiling by 12.5% for calendar years 2026 through 2029. In addition, it would lower the bond financing threshold, making it easier for more affordable housing projects to qualify for tax-exempt bond financing. These changes are designed to expand access to LIHTC funding and accelerate the development of low-income housing during the designated period.
How To Maximize Tax Incentives Amid OZ Reform and LIHTC Expansion
To navigate the proposed changes effectively, firms should align their strategies with both the sunsetting and expansion of these key programs.
- Construction Firms: With the LIHTC expansion and lower bond financing thresholds beginning in 2026, construction firms should prepare for a potential surge in affordable housing projects. To meet increased demand and tighter timelines, construction firms should strengthen subcontractor networks, enhance workforce planning and streamline permitting workflows.
- Fund Managers and Investors: The early sunset of current OZs at the end of 2026 and the introduction of a new round from 2027 – 2033, focused more on rural areas, will require a two-pronged strategy. First, accelerate investments in existing zones to maximize current benefits. Second, begin evaluating rural markets and fund structures that align with the modified incentives of the upcoming designation.
- Real Estate Developers: For OZ projects, explore pipeline opportunities in rural or underserved areas that may qualify under the new OZ designation. For LIHTC projects, reassess financing strategies to take advantage of the expanded credit ceiling and relaxed bond thresholds, especially for developments launching between 2026 and 2029.
7. R&E Expensing and IRS Scrutiny
While not exclusive to real estate, the treatment of research and experimental (R&E) expenses is especially relevant for architecture, engineering (A&E) and design-build firms. The proposed reform may roll back the requirement to amortize R&E costs under IRC Section 174, restoring the ability to expense them immediately.
More information on the bill’s impacts to Section 174 can be found in our recent article: Deduction of Domestic Research and Experimental Expenditures.
How A&E and Design-Build Firms Can Maximize R&E Expensing
With the potential rollback of Section 174 amortization rules, architecture, engineering and design-build firms have a renewed opportunity to fully expense qualifying R&E costs. However, this comes amid heightened IRS scrutiny, particularly in the A&E sector, making robust documentation and compliance practices more important than ever. Firms should proactively assess their eligibility under both current and proposed rules and refine their methodologies to align with IRS expectations.
- Architecture Firms: Firms engaged in sustainable design, energy modeling or innovative building systems should ensure that technical challenges and design iterations are well-documented. Strengthening time-tracking systems to link employee hours to specific R&E activities will be key to supporting claims.
- Construction Technology Innovators: Firms developing proprietary tools, automation platforms or AI-driven solutions for project delivery should assess whether these efforts meet the four-part test for qualified research. Partnering with tax advisors can help unlock overlooked credit opportunities.
- Design-Build Firms: With integrated project delivery models, design-build firms should coordinate across teams to capture and document qualified research activities embedded in construction technology, prefabrication methods or energy-efficient innovations.
- Engineering Firms: Given their central role in developing technical solutions, engineering firms should maintain detailed records of project objectives, testing processes and problem-solving efforts. These firms are often well positioned to benefit from research and development (R&D) credits but must be audit ready.
Conclusion: A Call for Proactive Planning
The Republican effort to enact tax reform presents both risks and opportunities for the real estate and construction industry. Firms that act now by accelerating investments, leveraging energy and R&D incentives and reassessing their tax structures can position themselves for success in a more complex and competitive environment.
As always, collaboration between tax, finance and project teams will be key. And with the right guidance, firms can not only weather the changes but thrive because of them. If you have questions about how these changes could impact your business or would like help developing a proactive tax strategy, reach out to your Cherry Bekaert advisor or contact one of our tax professionals today.
We’re here to help you navigate what’s next.
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