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FYI

3% Withholding Rule Repealed
Was Set to Go into Effect in 2013

By Al Clark

President Obama signed the 3% Withholding Repeal and Job Creation Act (HR 674) on November 21, 2011, permanently repealing a previous law’s onerous provision requiring federal, state, and local governments to withhold 3% of all payments for goods and services exceeding $10,000 to all contractors and vendors. The original 2005 measure was never enacted due to repeated delays by Congress and regulators; recent bipartisan support merged with Washington’s current focus on jobs creation and the health of our economy to propel the repeal legislation forward.

The repeal was the result of a concerted effort of countless organizations representing myriad industries. CFMA, along with many other leading construction and industry organizations, is a member of the Government Withholding Relief Coalition, which sought to persuade Congress to permanently repeal the controversial provision, hidden in fine print within 2005’s Tax Increase Prevention and Reconciliation Act.

The provision mandated withholding 3% of billings which, combined with a typical 5-10% retainage in an economic climate marked by no or very low single-digit profits, would have had a devastating effect on the cash flow of every construction contractor doing business with federal, state, and local governmental entities. The industry also noted the detrimental effect of the law on construction employment in the current fragile economy. Governmental entities would have also been hurt by the likely increased costs of goods and services adjusted to offset the federal government’s mandated withholding.

The withholding requirement was opposed by virtually all industries doing business with the government. The law’s original intent was to assure that companies doing business with the government paid their taxes, but it applied across the board to all companies, including those already in compliance with their income tax payments and those that did not pay income taxes, such as partnerships and S corporations. The new legislation also includes the VOW to Hire Heroes Act, which establishes a number of new training programs and tax incentives for employers to hire American service veterans.

Alan K. Clark, CPA, is a Partner at Smith, Adcock and Company, CPAs, in Atlanta, GA. He has more than 38 years of experience in public accounting, with a specialty in the construction industry. He can be reached at 404-252-2208 or aclark@smithadcock.com.