If you run a construction company, you already know tax planning means more than scrambling for deductions in December. The decisions you make about compensation, equipment purchases, retirement contributions, and even how your business is structured all add up—and they can make a real difference in what you owe.
Colorado adds another layer on top of that, with its own set of rules that construction companies need to watch. As you think through your 2026 tax strategy, here are a few areas worth a closer look.
Review reasonable compensation for S corporation owners
If you’ve structured your construction company as an S corporation and you’re actively working in the business, the IRS expects you to pay yourself reasonable compensation before taking any non-wage distributions.
There’s no magic number here. “Reasonable” compensation depends on a mix of factors:
- Your day-to-day responsibilities
- Your experience level
- Hours worked
- Company size
- What similar roles pay elsewhere
Setting your salary too low to save on payroll taxes is a common shortcut, but it’s one the IRS watches closely. It’s worth revisiting your compensation every year or two, especially if your company has grown or your role has shifted.
Evaluate the QBI deduction and Colorado addback
The qualified business income (QBI) deduction lets eligible owners of pass-through businesses deduct up to 20% of their qualified business income on their federal individual 1040 returns. Federal legislation passed in 2025 made this deduction permanent, which is good news. That said, income limits and other rules still affect how much you can actually claim.
Here’s where it gets more complicated for Colorado owners: the state has its own QBI addback rules, and they don’t apply to everyone who claims the federal deduction.
Outside of the SALT Parity context, the addback generally kicks in for single filers with adjusted gross income above $500,000 and joint filers above $1,000,000.
But if you’re a partner or shareholder in a partnership or S corporation that makes Colorado’s SALT Parity election, this threshold doesn’t matter. You’ll need to add back the full amount of your federal QBI deduction when calculating Colorado taxable income, no matter your income level. A few other addback requirements can apply too, depending on your situation.
The bottom line: federal and Colorado tax consequences need to be weighed together, not separately.
| Quick check: The general Colorado QBI addback applies above $500,000 (single) or $1,000,000 (joint) AGI. If your entity makes the SALT Parity election, the full addback applies no matter your income. |
Consider Colorado’s SALT Parity election
Colorado’s SALT Parity Act gives qualifying partnerships and S corporations the option to pay Colorado income tax at the entity level instead of passing it through to owners. Keep in mind that for 2026, this is an annual election. Once you make it, it’s binding on the entity and its owners, with no take-backs for the tax year.
Making the election can pay off federally in certain situations, but that benefit needs to be weighed against Colorado’s QBI addback and other tax consequences. Before you commit, it’s worth sitting down with your tax advisor to model out how it would actually play out for your company and its owners.
Maximize retirement-plan contributions
A well-chosen retirement plan does double duty: it lowers your taxable income today while building savings for down the road.
Depending on your company and workforce, this might mean:
- A 401(k)
- A profit-sharing plan
- A cash balance plan
The plan that makes the most sense for you comes down to things like employee participation, owner compensation, cash flow, and where you want the company headed long-term.
A year-end review of your plan is a good way to catch opportunities to increase tax-advantaged contributions, and it doubles as a benefit your employees will appreciate.
Plan equipment purchases with depreciation in mind
Given the equipment-intensive nature of the construction industry, businesses often need to invest heavily in trucks, machinery, tools, and other equipment. The timing of equipment acquisitions can be just as important as the purchase itself.
Federal law now allows permanent 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025, and Section 179 may let you expense qualifying equipment immediately as well, subject to the usual rules and limits.
That said, tax savings shouldn’t be the only reason to buy. Before you pull the trigger, weigh:
- Operational needs
- Financing
- Cash flow
- The timing of when the asset will actually be placed in service
| 100% bonus depreciation is back for good: it applies to qualifying property acquired and placed in service after January 19, 2025. |
Stay ahead of estimated tax payments
Construction income rarely moves in a straight line. Project schedules, margins, and change orders can all swing your numbers. That means estimated tax payments based on last year’s results might not come close to what you actually owe at the end of the year.
Update your tax projections throughout the year, especially after a particularly profitable quarter, a major project completion, or another significant change. Doing so can help you manage cash flow and reduce the risk of an unexpected tax bill.
Revisit your entity structure
The entity structure that made sense when you first started your construction company might not fit the business you’ve built since.
As your company grows, it’s worth periodically checking whether your structure still matches your tax and business goals. Your entity choice touches a lot, including:
- Payroll taxes
- Reasonable compensation
- The QBI deduction
- SALT Parity eligibility
- How ownership transitions down the road
Changing entities isn’t a small decision; it carries real tax and legal implications. So, think about the long-term picture rather than chasing a short-term tax win.
Incorporate succession planning into your tax strategy
Even if selling or stepping back isn’t on your radar in the short term, succession planning still belongs in your broader tax strategy.
Whether you eventually hand the business to family, sell to key employees, or bring in an outside buyer, how and when you make that transition affects:
- Capital gains
- Business valuation
- Estate planning
- Cash flow
- What you ultimately walk away with after taxes
The earlier you start, the more options you have—and the easier it is to coordinate succession planning with your entity structure, retirement goals, and personal financial plans.
Build a coordinated 2026 tax strategy
None of these decisions happen in a vacuum. Adjust your compensation, and it can ripple into QBI. Buy a piece of equipment, and it can shift your taxable income and estimated payments. Change your entity structure, and it can open—or close—several other planning opportunities.
At John A. Knutson & Co., we help construction company owners work through these decisions together, weighing both federal and Colorado tax implications along the way. A year-end review of your strategy gives you more room to manage your 2026 tax liability while still supporting where you want the company to go.
Frequently Asked Questions
What tax deductions are available to construction companies in Colorado?
Colorado-based construction companies may qualify for numerous federal and state tax deductions depending on their operations. Common deductible expenses can include:
- Employee wages
- Subcontractor costs
- Insurance
- Supplies
- Vehicle expenses
- Professional fees
- Certain equipment purchases
Retirement-plan contributions may also provide tax benefits.
Construction companies that purchase qualifying equipment may be able to use Section 179 expensing or 100% bonus depreciation.
Because eligibility and limitations vary, business owners should review deductions as part of an overall tax strategy rather than assuming every business expense receives the same tax treatment.
How much should an S corporation owner pay themselves in salary?
An S corporation owner who provides services to the company generally must receive reasonable compensation before taking non-wage distributions. The IRS does not prescribe one salary or percentage that works for every business. Instead, reasonable compensation depends on factors such as the owner’s duties, experience, hours worked, company size, and prevailing compensation for comparable positions.
Construction company owners should periodically review their compensation as the business grows and their responsibilities change. Documentation supporting how compensation was determined can also be valuable if the IRS questions whether an owner’s salary was reasonable.
How does the QBI deduction work for Colorado business owners?
Eligible owners of pass-through businesses may qualify for a federal deduction of up to 20% of qualified business income, subject to income thresholds and other limitations. For 2026, the QBI deduction remains available under federal law.
Colorado taxpayers should also consider the state’s QBI addback requirements. Generally, the addback applies to single filers with adjusted gross income above $500,000 and joint filers above $1,000,000. An owner of a partnership or S corporation making Colorado’s SALT Parity election, however, generally must add back the full federal QBI deduction regardless of income level. As a result, federal and state impacts should be evaluated together.
What is Colorado’s SALT Parity election?
Colorado’s SALT Parity election allows qualifying partnerships and S corporations to elect to pay Colorado income tax at the entity level rather than having the tax paid solely at the individual owner level. The election was designed to provide pass-through business owners with a potential federal tax benefit related to the federal limitation on individual state and local tax deductions.
For tax year 2026, the election is annual, binding on the entity and its owners, and irrevocable. Its value depends on the company’s and owners’ specific circumstances, including Colorado’s QBI addback rules.
Can a construction company deduct equipment purchased in 2026?
Potentially. Construction companies purchasing qualifying trucks, machinery, tools, and other equipment may be able to deduct some or all of the cost using Section 179 or bonus depreciation.
Current federal law generally allows 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. However, the applicable rules can vary depending on the asset and transaction.
Owners should also consider whether accelerating a deduction makes sense based on current and expected future taxable income rather than purchasing or expensing equipment solely to reduce the current year’s tax bill.