What Contractors Should Know About Bonus Depreciation and Long-Term Contract Rules 

Bonus Depreciation for Contractors in 2026

Construction businesses enter 2026 with a lot to manage. Bonus depreciation for contractors adds another planning layer, especially for businesses making equipment purchases or managing long-term contracts while also watching labor availability, material costs, project timelines, and margin pressure.

Bonus Depreciation and Equipment Purchases 

Treasury and the IRS issued Notice 2026-11 to provide guidance on the permanent 100% additional first-year depreciation deduction for eligible depreciable property acquired after January 19, 2025. The IRS release also notes that taxpayers may generally rely on existing bonus depreciation regulations while additional guidance is developed.  

For contractors, this change can affect the timing and tax treatment of equipment purchases. Heavy machinery, vehicles, technology, and certain other business assets may create larger first-year deductions when they meet the applicable rules. That can improve near-term cash flow, but it also makes timing, documentation, financing structure, and placed-in-service dates more important. 

The key point is not simply whether a contractor plans to buy equipment. It is whether the purchase fits within the rules and supports the company’s broader tax, cash-flow, and operational strategy. 

Long-Term Contracts and Income Timing 

Contract accounting also deserves attention. Form 8697 is used to figure interest due or refunded under the look-back method for certain long-term contracts accounted for under the percentage of completion method or percentage of completion-capitalized cost method.  

The current IRS instructions include updated exceptions for certain construction contracts. For long-term contracts entered into after July 4, 2025, the instructions state that the look-back method does not apply to regular taxable income from residential contracts, including home construction contracts. They also note expanded treatment for certain construction contracts estimated to be completed within two years, as well as a small contract exception that, for contracts entered into after July 4, 2025, applies to contracts completed within three years of the contract start date.  

These rules can influence how contractors think about estimating, billing, project completion, and year-end income timing. 

Cash Flow Planning Comes First 

Tax planning for contractors is rarely about one isolated rule. Bonus depreciation, contract accounting, retainage, financing costs, bonding capacity, and estimated tax payments all connect back to cash flow. 

As 2026 planning begins, contractors may benefit from reviewing upcoming equipment needs, contract schedules, project cost estimates, and expected taxable income together. A coordinated review can help identify questions early and support better conversations with tax advisors, lenders, and leadership teams. 

Brady Martz works with contractors to understand how tax and accounting changes may affect business decisions. Before making significant purchases or entering new long-term contracts, construction leaders should connect with a trusted advisor to evaluate how the rules may apply to their specific situation. 

Sources:  

Internal Revenue Service. (2026). About Form 8697, interest computation under the look-back method for completed long-term contracts.

https://www.irs.gov/forms-pubs/about-form-8697

Internal Revenue Service. (2025). Instructions for Form 8697 (12/2025): Interest computation under the look-back method for completed long-term contracts.

https://www.irs.gov/instructions/i8697

Internal Revenue Service. (2026, January 14). Treasury, IRS issue guidance on the additional first year depreciation deduction amended as part of the One, Big, Beautiful Bill.

https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill