5 Tax Deductions Every Contractor Should Know About

The tax landscape has shifted again in 2025 with the passage of the One Big Beautiful Bill Act (OBBBA), bringing with it permanent extensions, expanded thresholds, and new temporary deductions for working professionals. If you’re a contractor—whether you’re laying pipe, wiring homes, or managing HVAC installations—these changes present important opportunities to lower your taxable income and improve your year-end cash flow.

Below are five powerful deductions that every trade contractor should understand—and leverage—as part of their tax strategy.

1. Qualified Business Income (QBI) Deduction – Made Permanent

The 20% QBI deduction, originally enacted under the Tax Cuts and Jobs Act (TCJA), was scheduled to expire after 2025. The OBBBA made it permanent, securing this key benefit for sole proprietors and S corporations who generate qualified pass-through income.

Contractors with net business profits from eligible trades can deduct 20% of their qualified business income, subject to wage and income thresholds. While the House version of the bill proposed increasing the deduction to 23%, the final version retained the original 20%—but removed the sunset provision, giving long-term certainty.

Tax Tip: If you’re operating as a sole proprietor, consider whether forming an S corporation could help you optimize the QBI deduction. Be mindful of reasonable compensation rules and the need to balance wages and profits to preserve the full benefit.

2. Expanded SALT Deduction Cap – Up to $40,000

For years, the State and Local Tax (SALT) deduction was capped at $10,000—severely limiting tax relief for high-property-tax regions like Washington and Oregon. The OBBBA raised the cap to $40,000 through 2030 for filers with adjusted gross income (AGI) under $500,000. This change offers meaningful relief to contractors who pay significant property tax on personal homes, equipment yards, or mixed-use real estate.

This deduction remains itemized, so its benefit depends on whether you surpass the standard deduction. However, in high-income years or for those who own multiple properties, it can substantially reduce your federal tax bill.

Tax Tip: Keep detailed records of property taxes and state income tax payments throughout the year. Contractors in states like Oregon and Idaho, where state income tax is significant, can now meaningfully benefit from this increased cap.

3. Bonus Depreciation & Section 179 Expensing for Equipment

One of the biggest planning tools for contractors remains accelerated depreciation. The OBBBA extended 100% bonus depreciation through 2028 for qualifying property placed in service. Additionally, Section 179 expensing thresholds were increased and indexed for inflation, allowing contractors to write off large equipment, tools, vehicles, and software in the year of purchase.

If you've invested in a new service truck, trailer, lift, or other substantial asset for your business, chances are you can deduct the entire cost this year rather than depreciating it over time.

Tax Tip: For vehicles with a GVWR (Gross Vehicle Weight Rating) over 6,000 lbs, such as many contractor trucks, bonus depreciation may apply fully. Be sure to separate business and personal use and maintain mileage logs to substantiate usage.

4. Auto Loan Interest Deduction – Personal Use Only (with a Strategic Twist)

One of the more unexpected changes introduced by the One Big Beautiful Bill Act is the temporary allowance for taxpayers to deduct up to $10,000 per year in interest paid on personal auto loans—provided the vehicle is U.S.-assembled. This deduction is available from 2025 through 2028, and importantly, only applies to vehicles used for personal purposes at the time of the loan.

This means contractors cannot deduct interest on a loan tied to a vehicle currently used in their business. However, there’s a clever strategy that may unlock the benefit: wait until the loan is paid off, then convert the vehicle to business use.

Strategic Tip: Place the Vehicle into Service After the Loan Is Paid Off

Once the auto loan is fully satisfied, you can reclassify the vehicle for business use. At that point:

• You may begin deducting actual vehicle expenses (gas, maintenance, insurance, depreciation), or opt for the standard mileage rate.

• Since the interest deduction is only available for personal-use vehicles, converting it to business use after payoff allows you to benefit from both deductions—interest now, and business use later.

This strategy may be especially effective for contractors who finance a personal truck or SUV now (enjoying the interest deduction for a few years), then formally convert it to a work vehicle once the loan is satisfied.

Tax Tip: If you're considering this approach, document the vehicle’s original personal use, track the loan interest separately, and maintain a log beginning the day you place it into service for business. This will help ensure compliance and maximize deductions without triggering audit red flags.

5. Tip & Overtime Income Deductions – Temporary but Powerful

For the first time, the IRS is allowing above-the-line deductions for certain types of earned income through 2028. Under the OBBBA:

• Up to $25,000 of qualified tips can be deducted annually.

• Up to $12,500 of overtime income (or $25,000 for joint filers) is deductible as well.

This provision primarily benefits industries with hourly or service-based income, but contractors with service divisions, emergency response work, or 24/7 availability may receive qualified tips or significant overtime.

Tax Tip: Properly categorize income and maintain timesheets or third-party payroll reports. These deductions can reduce AGI and open the door to additional tax credits or benefits phased out at higher income levels.

Planning Ahead: Strategy Beats Surprises

With the 2025 tax year already underway, now is the time to review your business structure, accounting method, and year-end purchasing plans. The changes introduced by the One Big Beautiful Bill Act—particularly the permanency of QBI and SALT relief—create a more stable landscape for long-term planning.

Contractors should work with a tax professional early to evaluate:

• Whether it’s time to form an S corporation

• How to time large equipment purchases

• Whether your current accounting system is capturing deductible costs

• How to document business vehicle use and qualify for new deductions

Final Thoughts

Tax laws aren’t just about compliance—they’re a tool for strategy. If you’re a contractor working hard in the field, let your financials work just as hard in the background. These five deductions, combined with the latest tax legislation, are the cornerstone of smart, proactive tax planning for 2025 and beyond.

Have questions about how these apply to your business? At Schissler & Co PLLC, we specialize in helping trade contractors across Washington, Oregon, and Idaho make sense of complex tax law—and turn it into savings.