By December, most of a contractor’s tax result for the year is already set by the jobs that were bid, billed, and finished. What can still change is a short list: when certain payments are made, what equipment is bought and put to work, how the owner is paid, and which estimated tax payments are still due.
This article is organized around those decisions and what each one does to cash. It is not a list of deductions. A deduction reduces tax by a fraction of the money spent, so the first question about any year-end move is whether the business needs it. This article covers federal income tax only; state and local tax rules are separate and are not covered. This article focuses on calendar-year businesses and owners. Fiscal-year deadlines and special relief can differ.
This is a 2026 planning article. It is general information and not tax advice for a specific business. Figures are for tax years beginning in 2026 unless stated and can change. Examples are hypothetical. Research checked: October 19, 2026.
Start with a number, not a deduction
Every decision below depends on a projection of the year’s taxable income. A useful one needs:
- Books that are current. Bank and credit card accounts reconciled through the latest closed month, payroll posted, and loans recorded.
- Job costs coded by job. If costs are sitting in a general account, the projection cannot see which jobs are profitable. See Job Costing for Contractors.
- A reconciled WIP schedule for open jobs, so that income and the estimated cost to complete reflect where each job actually stands. See The WIP Schedule for Contractors.
- Known year-end items: equipment on order, owner pay, and large bills not yet received.
The output is not a refund or a bill. It is an estimate of taxable income, an estimate of the tax on it, and a comparison with what has already been paid. If the books are months behind, the first step is catching them up, not planning around them. See Outsourced Accounting.
What a year-end move is actually worth
Two different things are called “tax savings,” and neither is free.
- A deduction reduces taxable income. Its value is roughly the deduction times the owner’s or company’s marginal tax rate; a large deduction can reach income taxed at more than one rate, so a single rate is an approximation. A hypothetical $10,000 deduction at an assumed 30 percent marginal tax rate reduces tax by $3,000. The business still spent the $10,000.
- A credit reduces the tax itself, dollar for dollar. A hypothetical $10,000 credit reduces tax by $10,000. Credits are narrower: they depend on a specific activity, carry their own eligibility rules and dates, and are not the same thing as a deduction for the cost of the activity.
The difference matters because a purchase made to save tax usually costs more than it saves. In a hypothetical case, spending $100,000 on something that is fully deductible in the year, at an assumed 30 percent marginal tax rate, reduces tax by $30,000 and leaves a net cash cost of $70,000. That is a good trade only if the business needed the purchase.
For every decision below, the order of questions is: does the business need it, can it afford the cash, when does the cash leave, and then what does it do to the tax.
Decision 1: What estimated tax is still due, and how will it be paid?
Owners of pass-through businesses (S corporations, partnerships, and sole proprietorships) generally pay estimated tax personally. For a sole proprietor or a partner, the estimated tax generally includes self-employment tax. Under the regular installment method, an individual avoids the underpayment penalty if the payments made by each due date equal the required installment, which is 25 percent of the required annual payment. The required annual payment is the lesser of:
- 90 percent of the tax shown on the current year’s return, or
- 100 percent of the tax shown on the prior year’s return (110 percent if the prior year’s adjusted gross income was more than $150,000, or more than $75,000 for a married individual who files a separate return for the current year). This option is not available if the prior year was not a 12-month year or no return was filed for it.
For a calendar-year individual, the installments are due April 15, June 15, September 15, and January 15 of the following year. For 2026 the last one is due January 15, 2027. No penalty applies if the tax, after subtracting tax credits and withholding, is less than $1,000.
A hypothetical example. An owner’s prior-year tax was $60,000, and prior-year adjusted gross income was above $150,000. This year’s projected tax is $95,000.
| Amount | |
|---|---|
| 90% of this year’s projected tax | $85,500 |
| 110% of last year’s tax | $66,000 |
| Required annual payment (the lesser) | $66,000 |
| Each installment (25%) | $16,500 |
Suppose the owner paid $10,000 in each of April, June, and September ($30,000). In October the owner is behind the required cumulative payment at every installment date so far:
| Installment date | Cumulative required | Cumulative paid | Behind by |
|---|---|---|---|
| April 15 | $16,500 | $10,000 | $6,500 |
| June 15 | $33,000 | $20,000 | $13,000 |
| September 15 | $49,500 | $30,000 | $19,500 |
In this simplified example, a single payment of $36,000 by January 15 brings the owner’s total payments to the $66,000 annual safe-harbor amount. It does not erase the penalty for the earlier dates: the underpayment is figured installment by installment, and each shortfall runs until it is paid, so waiting until January is not an advantage. Two points follow.
- Withholding from wages is treated differently from estimated payments. An owner who receives wages can request additional federal income tax withholding through Form W-4, Step 4(c). For estimated-tax penalty calculations, withholding is generally treated as paid equally across the installment dates unless the taxpayer establishes the actual withholding dates. Additional withholding must come from actual wage payments; it cannot simply be assigned to an ordinary shareholder distribution. A sole proprietor or partner does not receive employee wages from that same business, but withholding from another job, or a spouse’s wages on a joint return, may help cover the household’s tax. Confirm the remaining payroll dates and processing cutoff before relying on a year-end adjustment. A replacement Form W-4 does not change withholding for earlier payroll periods.
- Annualized income can help in a year when income arrives late. A taxpayer who establishes that income was earned late in the year may be able to use the annualized income installment method. It requires its own computation.
C corporations are on a different schedule and a different set of rules. For a calendar-year corporation, the installments are due April 15, June 15, September 15, and December 15, and a “large corporation” (taxable income of $1,000,000 or more in any of the three preceding years) generally cannot use the prior-year safe harbor, except that it may use the prior year’s tax to figure the first installment. Any reduction in the first installment from doing so must be made up by increasing the second installment (26 U.S.C. § 6655(d)(2)).
The cash question. The tax is due whether or not the cash has arrived. Retainage and receivables that will not be collected until after year-end do not fund a December payment. Plan the payment against a cash forecast, not against profit. See Fractional CFO for that work.
Decision 2: Equipment, whether to buy, lease, or finance
Two provisions drive most equipment planning.
- Section 179 expensing. A taxpayer may elect to treat the cost of qualifying property as an expense in the year it is placed in service. For tax years beginning in 2026, the limit is $2,560,000, reduced dollar for dollar once the cost of qualifying property placed in service in the year exceeds $4,090,000. The deduction cannot exceed the taxpayer’s aggregate taxable income from the active conduct of its trades or businesses for the year, with disallowed amounts carried forward. Certain improvements to nonresidential buildings a business owns, such as roofs, HVAC, fire protection and alarm systems, and security systems, can also qualify.
- Bonus depreciation. For qualified property acquired after January 19, 2025, the additional first-year allowance is 100 percent of the adjusted basis. Qualified property generally includes depreciable property with a recovery period of 20 years or less that meets the original-use or acquisition requirements. The allowance applies automatically unless the taxpayer elects out for a class of property.
Both apply to the business that owns the property, and the entity type matters. For a partnership or an S corporation, the § 179 limits are applied at the entity level and again at the owner level (§ 179(d)(8)), so an owner’s own limit and income can matter. For section 179, property generally must be acquired by purchase for use in the active conduct of a trade or business. Section 179 also generally requires more than 50 percent business use, and expensing is limited to the business share (Treas. Reg. § 1.179-1(d)). Property acquired from certain related persons does not qualify as a purchase. Eligibility for the restored 100 percent allowance depends on the applicable acquisition-date rules, not simply the order, payment or delivery date. Written contracts, cancellation periods, contingencies and self-constructed property can affect that analysis; review Notice 2026-11, section 3.03, which applies the acquisition-date rules of Treas. Reg. § 1.168(k)-2(b)(5) with the January 2025 dates, when determining whether the property qualifies.
Both also depend on when the property is placed in service, which generally means ready and available for its specifically assigned function (Treas. Reg. § 1.167(a)-11(e)(1)), not when it is ordered or paid for. For a calendar-year taxpayer, a 2026 deduction requires the property to be placed in service by December 31, 2026. A December order alone does not establish that the property was placed in service in 2026, and delivery alone is not the complete test either: the equipment must also be ready and available for its assigned use by December 31, 2026. A truck first ready and available for its assigned use in January generally belongs to the following tax year. Vehicles carry additional limits. For example, the cost of certain sport utility vehicles that can be expensed under section 179 is limited to $32,000 for 2026, so confirm the vehicle’s classification before the purchase.
What the deduction is worth. Accelerating an equipment deduction can reduce current-year tax while leaving less depreciation to deduct later. If the total deductions and applicable tax rates are unchanged, the benefit is primarily timing. Actual savings can differ because of deduction limits, tax rates, other tax benefits and a later sale. A deduction reduces taxable income; it does not reimburse the purchase price.
A hypothetical example. A contractor buys a $120,000 truck and upfit. The example assumes a marginal tax rate of 30 percent in every year, that the full $120,000 is deductible in year 1 if expensed, and that no vehicle deduction cap applies. The comparison below treats the alternative as spreading the same $120,000 evenly over five years, which is for illustration only and is not how depreciation tables work.
| Expensed in year 1 | Spread over 5 years | |
|---|---|---|
| Deduction in year 1 | $120,000 | $24,000 |
| Tax reduced in year 1 (at 30%) | $36,000 | $7,200 |
| Difference in year 1 | $28,800 earlier |
If the truck was financed with $24,000 down and a $96,000 loan, the first-year cash paid is the down payment plus the payments made, whatever the deduction is. Under these assumptions, $28,800 of the tax reduction arrives in year 1 instead of years 2 through 5, in exchange for committing $120,000 to a truck. The value of that earlier reduction is the value of having the cash sooner. If the truck is needed, the timing is a bonus. If it is not needed, it is a poor reason to buy.
Three more points belong in the decision.
- A large deduction can also reduce other tax benefits that depend on income, such as the qualified business income deduction under section 199A, so the savings can be less than the spend times the rate.
- Gain on a later sale of the equipment is taxed as ordinary income to the extent of the depreciation and section 179 deductions taken (section 1245), so a quick resale is a different calculation.
- Financing cost, capacity, and the lender’s or surety’s view of debt belong in the decision alongside the tax.
Decision 3: What moving a billing or a completion does
Many owners ask whether pushing an invoice into January, or collecting early, changes the year’s taxable income. The answer depends on the method of accounting that applies to that contract.
- Under a cash method, income generally is recognized when actually or constructively received; delaying collection does not necessarily defer income already available to the taxpayer.
- Under an accrual method, income generally is recognized when the right to receive it is fixed and the amount can be determined with reasonable accuracy, subject to special rules. Delaying an invoice does not necessarily defer that income.
- For a long-term contract, the general rule is that income is determined under the percentage-of-completion method, which follows progress on the job rather than billing. Exceptions exist, including for certain residential and small contracts. Which rule applies to a given contract is a separate question, and this article does not decide it.
Before moving anything, answer these:
- Which method applies to this contract, and is it the method on the filed returns?
- Does delaying the invoice change the cash forecast, a payment to a subcontractor, or what the lender or surety will see?
- Is the invoice for work already performed? Holding back a legitimate billing to manage income can be a poor business trade.
- Would the change look different if the contract terms, not the invoice date, drive the right to payment?
Changing a method of accounting is not a year-end adjustment. A taxpayer generally must secure the IRS’s consent before computing taxable income under a new method. A method change is a separate project with its own procedures, not something to improvise in December.
Decision 4: Owner pay and distributions, which depend on the entity type
How an owner is paid is not the same for every business, so the first question is which entity type applies.
| Entity type | How the owner is generally paid | Year-end points |
|---|---|---|
| Sole proprietorship | Draws, not wages | Draws are not a deduction. The owner receives no wages from the business; tax is generally paid through estimated payments (Decision 1), or through withholding on other wages the taxpayer or a spouse receives. |
| Partnership | Distributions, and sometimes fixed payments for services | Payments to a partner without regard to partnership income are not subject to income tax withholding, so estimated payments carry the tax. |
| S corporation | Wages for work performed, plus distributions | An S corporation must pay reasonable compensation to a shareholder-employee for services provided before making non-wage distributions to that shareholder-employee. Payroll is involved, which is what makes wage withholding possible. |
| C corporation | Wages to owner-employees, plus dividends if paid | The corporation pays its own tax and its own estimated tax (Decision 1). |
For an S corporation owner, the IRS can reclassify payments treated as distributions as wages, which brings payroll tax consequences. What counts as reasonable depends on facts such as the owner’s duties, time devoted, and what comparable businesses pay. Year-end is a natural time to check the year’s wages and distributions against the projection.
The business questions come first. Higher wages mean higher payroll taxes. Distributions must be funded by cash the business can spare after payroll, estimated taxes, and any bonding or lender requirements. Raising wages only to increase withholding is not a planning strategy; wages need to match the work performed. The numbers should be settled by projection, not by a rule of thumb.
Decision 5: If this is a loss year
A projected loss changes the questions. Owners should understand three things.
- Limits can apply before a loss reduces other income. Depending on the facts, an owner’s basis in the business, at-risk amounts, and passive-activity rules can restrict how much of a loss can be used.
- Excess business loss limit. For tax years beginning in 2026, section 461(l) disallows a noncorporate taxpayer’s excess business loss for the year. Broadly, this is the amount by which aggregate business deductions exceed aggregate business income and gains plus $256,000, or $512,000 on a joint return, subject to the calculation’s exclusions and adjustments. The calculation excludes employee wage income and related deductions, excludes capital losses, and limits the capital gains taken into account. Apply applicable basis, at-risk and passive-activity limits first. For partnerships and S corporations, the excess-business-loss limitation applies at the owner level. A disallowed excess business loss is treated as a net operating loss carryover to the following year, where separate NOL limitations apply.
- A loss can be good information. Whether it came from growth, a few jobs with losses, or fading margins matters more to the business than to the return. See Construction Profit Fade.
What a tax deduction does to the financial statements and the surety
A tax decision may or may not change the financial statements a surety or lender receives. Statements are prepared on the basis that those readers ask for, which is often not the basis of the tax return. Equipment deducted in one year for tax may be depreciated differently in statements prepared on another basis, and a surety reading a WIP schedule is looking at job-level numbers the tax deduction does not change. Ask how the statements are prepared before assuming a tax move will, or will not, show up. See What Sureties Look At in Contractor Financial Statements.
A year-end calendar
| When | What to settle | Notes |
|---|---|---|
| Now through mid-November | Close the latest month. Reconcile job costs to the ledger. Update the WIP schedule. Build the taxable-income projection. | Everything after this depends on the projection. |
| Mid-November through early December | Decide on equipment purchases, estimated tax and any wage-withholding change, owner pay, and the method question behind any timing change. | Order lead times can push delivery into January. |
| Early December | Confirm payroll’s implementation deadline early; submitting a replacement Form W-4 in December does not guarantee additional withholding before year-end. | Ask payroll for the last processing date. |
| December 15, 2026 (Tuesday) | Fourth estimated installment for calendar-year C corporations | Individuals are on a different date. |
| December 31, 2026 (Thursday) | For calendar-year taxpayers, equipment must be placed in service to count for 2026. For an owner who receives wages, a withholding change affects only pay dates after the employer puts it into effect. | Confirm cutoff with the equipment vendor and payroll. |
| January 15, 2027 (Friday) | Fourth estimated installment for calendar-year individuals | Confirm the date against the current IRS calendar. |
Questions to answer before December
- Which entity type am I, and which parts of this guide apply to me?
- What is the projected taxable income, and when was it last updated?
- How much estimated tax has been paid, and what is still due and when?
- Is any equipment needed in 2027 that would be placed in service this year only to capture the deduction?
- For every contract affected by a billing or completion change, which method applies?
- What will the lender or surety see from each decision?
- Where will the cash for each payment come from, and when does it leave?
Where this connects
Business tax planning is the work of understanding the tax result of a decision before it is made; see Business Tax Strategy. The cash side of it, forecasting the tax payments against retainage and progress billings, is Fractional CFO work. For the accounting records that the projection depends on, see Outsourced Accounting, and for the wider picture of contractor accounting, see Construction & Contractor Accounting.
A planning conversation before December 31 is a reasonable step. Start a conversation and tell us the decision in front of you, such as an equipment purchase, a year-end payment, or a change in how the owner is paid. We can identify which records are needed when defining the scope.
Sources
Source note. The figures, dates and rules stated in this article were checked against the primary sources listed below (the Cornell Legal Information Institute copy of the U.S. Code, the eCFR, and irs.gov documents). Not every listed authority was read in full. The article’s summary of how the loss limits are ordered (basis, then at-risk, then passive activity, then excess business loss) rests on IRS Publication 925, the Instructions for Form 461 and section 461(l); the statutory text of sections 704(d), 1366(d), 465 and 469 was not read in full and is listed for reference. The IRS Instructions for Form 461 shown here are the 2025 edition and carry 2025 amounts; this article uses the 2026 amounts in Rev. Proc. 2025-32.
- 26 U.S.C. § 6654 (estimated tax, individuals): law.cornell.edu/uscode/text/26/6654
- 26 U.S.C. § 6655 (estimated tax, corporations; large-corporation rule in § 6655(d)(2)): law.cornell.edu/uscode/text/26/6655
- 26 U.S.C. § 179 (election to expense): law.cornell.edu/uscode/text/26/179
- 26 U.S.C. § 168(k) (additional first-year depreciation): law.cornell.edu/uscode/text/26/168
- IRS Notice 2026-11, interim guidance on § 168(k) (§ 3.03, acquisition date): irs.gov/pub/irs-drop/n-26-11.pdf
- Treas. Reg. § 1.168(k)-2(b)(5) (acquisition date), as applied by Notice 2026-11 § 3.03: ecfr.gov/current/title-26/section-1.168(k)-2
- IRS Rev. Proc. 2025-32, 2026 inflation adjustments (§ 4.24 for § 179, § 4.31 for § 461(l)): irs.gov/pub/irs-drop/rp-25-32.pdf
- 26 U.S.C. § 461(l) (excess business losses): law.cornell.edu/uscode/text/26/461
- IRS Instructions for Form 461 (definitions and ordering rules): irs.gov/instructions/i461
- IRS Publication 925 (order of the basis, at-risk and passive-activity limits): irs.gov/publications/p925
- 26 U.S.C. § 199A (qualified business income deduction): law.cornell.edu/uscode/text/26/199A
- 26 U.S.C. § 446 (general rule for methods of accounting): law.cornell.edu/uscode/text/26/446
- Treas. Reg. § 1.451-1(a) (when income is included; cash method and the accrual all-events test): law.cornell.edu/cfr/text/26/1.451-1
- Treas. Reg. § 1.451-2(a) (constructive receipt): law.cornell.edu/cfr/text/26/1.451-2
- Loss limits: 26 U.S.C. § 704(d) (partnership basis): law.cornell.edu/uscode/text/26/704; § 1366(d) (S corporation basis): law.cornell.edu/uscode/text/26/1366; § 465 (at-risk): law.cornell.edu/uscode/text/26/465; § 469 (passive activity): law.cornell.edu/uscode/text/26/469
- 26 U.S.C. § 460 (long-term contracts): law.cornell.edu/uscode/text/26/460
- 26 U.S.C. § 1245 (recapture on dispositions of depreciable property): law.cornell.edu/uscode/text/26/1245
- Treas. Reg. § 1.179-1 (election to expense; business-use rule): law.cornell.edu/cfr/text/26/1.179-1
- Treas. Reg. § 1.167(a)-11 (placed in service): law.cornell.edu/cfr/text/26/1.167(a)-11
- IRS Form W-4 (2026), Step 4(c) (extra withholding): irs.gov/pub/irs-pdf/fw4.pdf
- IRS Publication 15 (2026), Circular E (when a replacement Form W-4 takes effect): irs.gov/publications/p15
- IRS Publication 541, Partnerships (payments to partners are not subject to income tax withholding): irs.gov/publications/p541
- IRS, S corporation compensation and medical insurance issues: irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues
Corey Roder, CPA is the founder of Corey Roder, CPA PLLC. He is a licensed CPA who founded a construction company and served as its COO and CFO, managing the financial and operational decisions of that business. Earlier in his career he worked as an auditor at Grant Thornton. More about the firm: Company & People.
Corey Roder, CPA PLLC does not itself perform audits, reviews, or other assurance engagements. Need an audit, review, or other assurance engagement? We can help coordinate it. Corey Roder, CPA PLLC maintains referral relationships with independent CPA firms that provide these services. The assurance engagement is separately contracted with and performed by the independent CPA firm.