A construction business can deduct the ordinary and necessary expenses of running the business, the test written into Section 162 of the tax code. For a contractor that covers field and office payroll, payroll taxes, materials and supplies, subcontractors, equipment rent, insurance, licenses and vehicle costs. Equipment and trucks are usually recovered through depreciation, with Section 179 and bonus depreciation as ways to speed that up. Owners can also deduct contributions to SEP, SIMPLE and qualified retirement plans. Fines paid to a government for breaking the law, personal expenses and entertainment are not deductible.
Contractors spend a lot of money to make money: crews, trucks, equipment, insurance, bonds. Most of it is deductible. The details decide when a cost comes off your taxes and how much of it does.
What makes a business expense deductible?
The rule fits in one sentence. 26 U.S.C. 162(a) allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year" in carrying on a trade or business.
The IRS defines both words in Publication 583. An ordinary expense is "common and accepted in your field of business, trade, or profession." A necessary expense is "helpful and appropriate" for the business. It doesn't have to be indispensable.
Two more rules shape almost everything below. First, if an expense is partly business and partly personal, Publication 334 says you separate the two, and the personal part generally isn't deductible. Second, you generally have to capitalize the cost of buildings, equipment and other property that lasts well beyond the year, and recover it over time instead of deducting it all at once.
A note on sources: the IRS discontinued Publication 535 after 2022, and its topics moved mainly to Publication 334 (small businesses) and Publication 542 (corporations).
Which job costs can a construction company deduct?
The bulk of a contractor's spending lands here. Publication 334 covers each category:
- Employee pay. Wages for field and office staff, as long as the pay is reasonable and for services actually performed. You can't deduct your own draws as a sole proprietor.
- Payroll and business taxes. Employment taxes, personal property tax, real estate tax on business property and other taxes tied to the business. Federal income tax isn't deductible.
- Materials and supplies. Listed by the IRS among the other expenses you can deduct, along with repairs and maintenance, utilities, advertising and bank fees.
- Equipment rent. "Rent is any amount you pay for the use of property you do not own." Renting a lift or an excavator for a job is deductible, unless the deal gives you equity in or title to the machine.
Timing is the catch. When a job spans year-end, your accounting method decides which year the costs and the revenue fall in. That's a planning question worth settling before December, and it ties directly to percentage of completion accounting.
How do subcontractor payments and Form 1099-NEC work?
Paying subcontractors is an ordinary and necessary cost of construction. The deduction is rarely the issue. The paperwork is.
Under the Form 1099-NEC instructions, you generally report a payment as nonemployee compensation when four things are true: it went to someone who isn't your employee, it was for services in your trade or business, it went to an individual, partnership or estate (or in some cases a corporation), and it reached the threshold for the year. For tax years beginning after 2025 that threshold is $2,000, and the IRS says it may be adjusted for inflation starting in 2027.
Payments to corporations are generally exempt from 1099-NEC reporting, but the exemption doesn't apply to legal services. Form 1099-NEC is due to the IRS and to the recipient by January 31. The practical habit: collect a Form W-9 before the first check, not in January.
Whether someone is a subcontractor or an employee isn't decided by the 1099. It's decided by how the relationship works. Our post on subcontractor vs employee covers that line.
Standard mileage or actual expenses: which works for your trucks?
For a business vehicle you can deduct either the standard mileage rate or your actual costs, plus business tolls and parking either way. For 2026 the IRS set the business rate at 72.5 cents per mile for January 1 through June 30, then raised it to 76 cents per mile from July 1 through December 31 (IRS standard mileage rates, Announcement 2026-11 in Internal Revenue Bulletin 2026-29).
Publication 463 sets the rules that matter for a contractor:
- For a car you own, you must choose the standard mileage rate in the first year it's used in the business.
- You can't use the standard rate if you operate five or more vehicles at the same time, or if you've claimed Section 179 or bonus depreciation on that vehicle.
- Actual expenses (gas, repairs, tires, insurance, registration, lease payments, depreciation and the like) are multiplied by the business use percentage.
- Commuting to your regular place of work isn't deductible. If you have a regular work location away from home, daily trips to a temporary work location (expected to last, and lasting, one year or less) generally are.
- Records need each business trip's mileage, date, destination and purpose, plus total miles, kept at or near the time.
Here's one pickup driven 20,000 miles in 2026, 15,000 of them for business (75%):
| Method | Calculation | Deduction |
|---|---|---|
| Standard mileage, January to June | 7,000 business miles × $0.725 | $5,075 |
| Standard mileage, July to December | 8,000 business miles × $0.76 | $6,080 |
| Standard mileage total | plus business tolls and parking | $11,155 |
| Actual costs | Gas $6,000, insurance $2,400, repairs $1,800, tires $900, registration $300 = $11,400 | |
| Actual expenses total | $11,400 × 75%, plus 75% of the year's depreciation | $8,550 + depreciation |
Which wins depends mostly on depreciation. And claiming Section 179 or bonus depreciation on a truck takes the standard rate off the table for that truck.
How do equipment, depreciation and Section 179 work?
Publication 946 says property is depreciable if you own it, use it in the business, it has a determinable useful life and it's expected to last more than a year. Most of it is depreciated under MACRS. Land never is, because it doesn't wear out.
Two elections let you take the cost faster:
- Section 179 lets you elect to deduct a limited amount of the cost of qualifying property in the year it's placed in service, instead of depreciating it. The deduction has a dollar cap, a phase-out and a business income limit. We cover the details in our Section 179 guide.
- Special (bonus) depreciation. Publication 946 explains that P.L. 119-21 reinstated the 100% special depreciation allowance for certain qualified property acquired and placed in service after January 19, 2025. Our post on the One Big Beautiful Bill Act for contractors covers what changed.
Faster isn't always better. A big deduction in a slow year can be worth less than the same deduction spread into higher-income years.
What about tools and small equipment?
Supplies and materials are deductible when used. For small tools and equipment, Publication 334 describes a de minimis safe harbor that lets you deduct tangible property up to $2,500 per item or invoice, or up to $5,000 if you have an applicable financial statement, instead of capitalizing it. Set the policy with your CPA and apply it consistently. Larger tools and machines go back to the depreciation rules above.
Are insurance, bonding and licenses deductible?
Insurance. Publication 334 lists the business insurance premiums you can generally deduct, including fire, theft and flood coverage, liability, workers' compensation, business vehicle insurance and business interruption. Self-insurance reserves, policies that replace your lost earnings from sickness or disability, and insurance taken out to secure a business loan are on its non-deductible list. Prepaid premiums are deducted in the year the coverage applies, not all in the year you pay.
Licenses. "Licenses and regulatory fees" are on the IRS list of deductible business expenses, so state contractor licenses, business licenses and similar fees qualify.
Bonding. The IRS small business guide doesn't list surety bond premiums by name, so they're tested under the general ordinary and necessary rule. How and when they come off your taxes depends on how your contracts are accounted for, so settle it with your CPA, and carry them in the job's costs either way. More in our bonding capacity post.
Can an owner deduct a home office?
Publication 587 allows the deduction only when a specific area is used regularly and exclusively for the business. A home office can count as your principal place of business when you use it for administrative or management work, such as billing, bookkeeping, ordering supplies and scheduling, and you have no other fixed location where you do substantial amounts of that work.
The simplified method multiplies $5 by the square footage used, limited to 300 square feet. The regular method uses actual expenses on Form 8829.
Entity matters here. If your company is an S corporation or C corporation and you're its employee, Publication 587's own flowchart says there's no home office deduction for using part of your home as an employee. The route to look at instead is a reimbursement from the company under an accountable plan, which Publication 463 says must meet three rules: a business connection, an adequate accounting to the employer and the return of any excess.
Which retirement plans can a construction company deduct?
Publication 334 lists the plans a small business can set up for the owner and employees: SEP, SIMPLE and qualified plans, including Keogh plans. Publication 560 confirms that you can deduct the contributions you make to the plan for your employees, and there's a separate tax credit for the startup costs of a new qualified plan. Self-employed owners may also be able to deduct medical and dental insurance premiums for themselves and their families.
What can't a contractor deduct?
Publication 334's non-deductible list includes:
- Penalties and fines paid to a government agency because you broke the law. Note the contrast: penalties for late performance or nonperformance of a contract, such as liquidated damages, are on the deductible list.
- Entertainment, and dues to social, athletic, luncheon and similar clubs
- Political contributions and lobbying
- Personal, living and family expenses
- Improvements to property, which are capitalized instead
Meals are generally limited to 50%.
What records do you need to keep?
Publication 583 lists the supporting documents to keep (paid bills, invoices, receipts, deposit slips, canceled checks) until the period of limitations runs out, generally three years, and at least four years for employment tax records. Clean construction bookkeeping is what turns deductions you're entitled to into deductions you can defend.
Planning deductions around equipment purchases, entity choice and year-end timing is part of our tax planning and preparation service for construction companies.