Request an owner-and-property tax review when your construction business is profitable but a new job, equipment commitment or shop purchase makes the next decision unclear. The engagement should reconcile project accounting with the owner's income and cash requirements before a purchase or election is made.
Who this review is for
This scope is most relevant to contractors who own or are considering a shop, yard or warehouse, employ crews, and need decisions across both the operating business and property ownership. If you only need a routine return filed, identify that separately. If a contract dispute or legal restructuring is involved, establish which questions require legal counsel.
Define the work you want commissioned
- Contract-income reconciliation: request a written list of accounting methods, unresolved job-cost items and assumptions that could change projected taxable income.
- Purchase alternatives: request a comparison of keeping existing equipment, replacing it, or purchasing premises, including deduction timing and cash committed.
- Owner/property coordination: request a map of entities, leases, debt and loss limitations, with issues requiring separate study or legal review identified.
- Execution plan: specify who will handle payroll changes, elections, filings and retirement-plan coordination, with deadlines and separate fees where applicable.
These are proposed engagement requirements to discuss, not a statement that every service is included. Confirm the agreed work in a signed engagement letter.
For the technical background, read the industry tax-strategy guide. This page focuses on selecting and scoping an owner-and-property advisory engagement.
Decision 1: establish reliable project income
Reconcile job-cost reports, retainage, progress billings, deposits and estimated costs to complete before projecting taxable income. Cash in the bank and financial-statement profit do not necessarily equal taxable profit. Long-term contract rules may require percentage-of-completion accounting; qualifying home-construction and certain small-contractor contracts have exceptions. The small-contractor exception includes an expected completion period and a gross-receipts test, not simply the owner's annual take-home pay.
Have the preparer identify the accounting method and applicable exception for each contract before changing recognition. A method change can require consent or Form 3115. The IRS Form 8697 instructions explain contract exceptions and look-back requirements; use the inflation-adjusted threshold for the contract's applicable year rather than carrying forward a prior-year figure.
Decision 2: compare equipment and property commitments
| Purchase | Tax review before signing | Records needed |
|---|---|---|
| Excavator, truck or machinery | Business use, asset classification, acquisition date, placed-in-service date, section 179 limits and bonus eligibility. | Invoice, financing, delivery and operating records; vehicle-use logs where applicable. |
| Owned shop or warehouse | Allocate land and building basis; identify supported shorter-life assets without treating the entire building as equipment. | Closing statement, appraisal allocation, plans and improvement invoices. |
| Building leased to the operating company | Identify landlord and tenant tax classifications, fair rent, participation, self-rental treatment and debt allocation. | Ownership chart, signed lease, payment records and loan-use documentation. |
For qualifying property acquired and placed in service after January 19, 2025, federal bonus depreciation is generally 100%. Contract dates, used-property acquisition restrictions, elections and asset eligibility still matter. Section 179 has separate dollar, investment and business-income limits. A purchase financed with debt can create a deduction before the loan is repaid, but debt service continues. Do not buy an unnecessary asset just to reduce tax. See IRS Publication 946.
Issue to resolve: can the owner use a property loss?
When an owner rents a building to a business in which the owner materially participates, self-rental rules generally recharacterize net rental income as nonpassive. A net rental loss does not automatically receive the same treatment. Cost segregation may accelerate depreciation without producing a currently usable offset against the contracting business. Basis, at-risk, passive-loss and excess-business-loss limits must be modeled in order. Any grouping analysis requires its own support; common ownership alone is insufficient. See IRS Publication 925.
Also review interest limitations before making a real-property-business election. A building rented to a commonly controlled operating company can encounter special election restrictions, and an election can change depreciation treatment. An LLC label is not an interest-deduction exemption.
Request one owner-level compensation and QBI projection
An S corporation must pay reasonable compensation for shareholder services before treating payments as nonwage distributions. Estimate the owner's estimating, management and field-work roles rather than selecting a standard salary percentage. Payroll-tax savings are not 15.3% of every distribution: the Social Security wage base, Medicare taxes, other wages and employer costs affect the comparison. Include state taxes, payroll administration and retirement contribution capacity. See IRS S-corporation compensation guidance.
Construction income may qualify for the section 199A deduction, but it is not a blanket 20% reduction of gross revenue. Taxable income, qualified income, wages, qualified property and other limits affect the result. Depreciation and retirement deductions can also change QBI. Model them together using IRS QBI guidance.
Include crew coverage in the retirement scope
A contractor with eligible employees cannot assume an owner-only plan. Review employee eligibility, seasonal and part-time service, related businesses and employer funding before selecting a plan. For 2026, the general defined-contribution annual-additions ceiling is $72,000, excluding eligible catch-up contributions; the employee elective-deferral limit is $24,500. Those are ceilings, not a promised owner deduction. Compensation and plan terms constrain contributions. A cash-balance plan requires actuarial design and ongoing funding analysis, including employee costs. Sources: IRS 2026 retirement limits; IRS one-participant plan rules.
Records to supply before the engagement is scoped
- Job schedules with contract start dates, expected completion dates and accounting methods.
- Current balance sheet, payroll by employee and owner duties.
- Equipment purchase agreements and placed-in-service evidence.
- Building leases, ownership percentages, loan uses and depreciation schedules.
- Suspended losses, prior elections and existing retirement plan documents.
Frequently asked questions
What should the signed advisory engagement include?
Specify the entities and decisions covered, written deliverables, assumptions, responsible parties, fees and deadlines. Identify separately any filing, legal, valuation, cost-segregation or retirement-plan administration work rather than assuming it is included.
Can a contractor deduct a new warehouse immediately?
Not generally as a whole building. Land is not depreciable, and the building and eligible components require separate classification. Bonus eligibility and owner-level loss limits must be tested.
Does renting my shop to my construction company make losses nonpassive?
Not automatically. Self-rental generally recharacterizes net rental income, not a net loss. Participation, permissible grouping and other loss limits require separate review.
Can a construction company with employees use a solo 401(k)?
An owner-only plan cannot exclude employees who satisfy eligibility rules. Review the workforce and related businesses before selecting retirement plan coverage.
Discuss your review scope with AE Tax Advisors
Contact AE Tax Advisors to discuss the entities, property and decisions you want reviewed. Ask for a written engagement identifying deliverables, responsible parties, fees and deadlines before signing. A consultation does not by itself include a cost-segregation study, valuation, plan administration, amended return or legal work.
General federal tax information, researched November 6, 2026. State rules and individual facts can change the result. This guide is not a determination of eligibility or a promise of tax savings.