IRS Delays 3% Withholding Requirement to 2013

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Hearing Scheduled in House Small Business Committee
The Internal Revenue Service (IRS) issued final rules last week that delay the 3% withholding requirement on government contracts until 2013. Under this arrangement, the withholding and reporting requirements will apply to payments made after December 31, 2012.

Additionally, the House Small Business Committee will hold a hearing on May 26 in order to more thoroughly address the 3% requirement. A repeal bill in the House, H.R. 674, originally introduced by Rep. Wally Herger (R-CA), has also garnered more than 100 cosponsors.

The delay drew cheers from prominent lawmakers, who were encouraged by the IRS' decision, but are still hopeful for a full repeal. "This decision couldn't come at a better time. Small businesses are pinching pennies and cannot afford to receive reduced payments for government contracts," said Sen. Mary Landrieu (D-LA), chair of the Senate Committee on Small Business and Entrepreneurship. "Many small businesses are already suffering, trying to make payroll and expand their businesses, and this rule would close the book on too many small businesses. While the delay is a move in the right direction, I am also committed to working with the Finance Committee to repeal this requirement that harms small businesses."

Previous attempts to delay the provision have also been supported by industry and other congressional and executive leaders. In March, President Barack Obama called for a three-year delay, echoing the requests of other industry observers who hope that a delay will give lawmakers more time to enact a full repeal.

The delay is welcome news to the many companies doing business with the government that have remained largely unaware of the provision, and its potential effect on cash flow. According to NACM's April 2011 Monthly Survey, only 9% of respondents were sure that their companies were taking steps to prepare for the withholding requirement. Twenty-five percent of participants said that their company had taken no steps to prepare, and 44% of participants weren't sure.

The 3% withholding requirement was originally enacted in Section 511 of the Tax Increase Prevention and Reconciliation Act (TIPRA), which was signed into law in 2006. It was originally scheduled to go into effect on Jan. 1, 2011, but was delayed to Jan. 1, 2012 in 2009 by the American Recovery and Reinvestment Act (ARRA), and delayed to 2013 by last week's IRS rulemaking. Should the requirement go into effect, most transactions for goods and services with a government entity would be subject to a 3% withholding tax, to be kept by the governmental entity in question.

NACM has fought the enactment of this provision, which will fall disproportionately on smaller businesses, since its introduction. As a member of the Government Withholding Relief Commission (GWRC), NACM has lobbied for a full repeal and encourages Congress to act quickly to remove this unfair and potentially harmful provision from the tax code.

Stay tuned to NACM's Credit Real-Time blog, NACM's eNews and Business Credit magazine for future updates.

Jacob Barron, NACM staff writer


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