Contractors Fight 3% Withholding
Tax
Contractors nationwide are preparing to fight back against a law* that will
require federal, state and local governments to withhold 3% from all
payments for goods and services. The 3% tax, slated to become operational in
2011, is intended to guard against possible tax evasion by businesses.
With certain exceptions, the law requires 3% withholding on all government
payments for products and services made by all branches of government and
their instrumentalities (including multi-state agencies). The law will
affect payments for goods and services under government contracts and
payments to any person for a service or product provided to a government
entity.
The New Law’s Ramifications
The construction industry argues that it would be particularly hard hit by
this new withholding tax and objects to its imposition on several grounds.
According to the Associated General Contractors of America:
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The government will essentially be withholding funds required to complete a project since the withholding applies to the total contract and not to the net revenue that a project generates.
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The amount of the withholding will be equal to or greater than the profit on many construction projects since general contractors, especially those working as construction managers, do not typically make 3% profit on a contract.
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Federal law requires construction contractors to carry several types of bonds. Typically, surety companies examine a contractor’s cash flow before opting to cover a contract. The new law will restrict cash flow for many contractors, which, in turn, will affect the ability of contractors to acquire bonding. Many contractors may end up paying higher-than-normal premiums simply to acquire bonding, while others may be denied coverage.
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Current laws require corporations to make quarterly estimated tax payments toward their income-tax liabilities. In view of this requirement, the imposition of an additional withholding tax is an unnecessary burden.
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S corporations and joint ventures would face additional reporting since withholdings need to be accounted for and reported to each shareholder or partner. This increased reporting burden may end up reducing the number of entities willing to take on large government projects.
We will keep you
updated on any further developments as they relate to this new law. If you
would like to discuss how it may affect your business, please
contact us.
*The Tax Increase Prevention and Reconciliation Act of 2005, Section
511, which amended Internal Revenue Code Section 3402(t).
Work-In-Process is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed,
please contact
Ken
Hedlund,
Jay Feller,
Steve George,
Chris
Mayfield or
Rebecca Ogle
of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
