Tax Impacts for Government Contractors
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Tax Impacts for Government Contractors 
government contractor and technology  tax 

 

By: Chris Whitehead
Abstract:
The IRS recently released another announcement through final regulation TD 9524 about the upcoming mandatory 3 percent withholding on payments that governmental entities make to government contractors.  It applies to all payments made by federal or state governments that have yearly expenditures of more than $100 million dollars, and their related subdivisions, to any contractor for goods or services rendered.  The principal purpose of the law is to reduce the chance that contractors leave their income unreported.  It had an original effective date of January 2, 2012, but this recent legislation will push the implementation to January 1, 2013.

 

The final regulation also enabled a new provision that will cap the amount of withholding at $10,000.  The $10,000 limit applies to each individual payment that someone receives regardless of the amount of services that payment covers.  The payment is subject to withholding on the date the payment is made, and not the date for which the services that were given in exchange for the payment were accepted.  It does not apply to payments that government contractors subsequently make to subcontractors.  Exceptions to the withholding law apply if the remittances are given to other domestic governmental or foreign governmental organizations, if they are provided to tax-exempt businesses, if the payments are made to employed government workers who provide labor and services to the government under an employment contract (it includes employer fringe benefits), for payments that are made in exchange for real estate interests, or if the payment was already subject to withholding through some other legislative measure.  The exclusion for real property includes purchase or lease of standalone real property, but does not include public works projects such as the construction of bridges, roads, and tunnels.  Another big exception is that the payments wouldn’t be subject to the new statute after December 31, 2012, if they were governed by a pre-existing contract between the parties.  If the original binding agreement is materially altered in any way, the exemption would no longer apply.  The original statute was added to the tax code as Section 511 and Section 3402(t) of the Internal Revenue Code by the Tax Increase Prevention and Reconciliation Act of 2005, but was later postponed by the American Recovery and Reinvestment Act of 2009.
It’s going to take at least eighteen months from when the measure will be employed for governments to be able to update their systems and be able to absorb the changes.  This new measure is not viewed very favorably in the eyes of many.

 

 

It’s going to take at least eighteen months from when the measure will be employed for governments to be able to update their systems and be able to absorb the changes.  This new measure is not viewed very favorably in the eyes of many, as the funds that would be withheld would hamper a contractor’s ability to otherwise pay for direct costs or other operating expenses.  The AICPA has argued that it would place an undeserved hardship on both governments and contractors, as they strongly believe there are already several other methods to ensure those government contractors are abiding by federal tax compliance.  The measure is also very strongly opposed by several government contracting coalitions, including The Government Withholding Relief Coalition.  Congress has even gotten itself involved, as the H.R. 674, S.89, and S.164 bills are already making their way onto the House and Senate floors in an attempt to repeal this decision.  Furthermore, according to the Department of Defense, in April 2008, it estimated that the new initiative would incur costs of more than $17 billion dollars in the first five years of its implementation.