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Industry Insights
Government Contractor Withholding Delayed Until 2013
By: John Steffes
John Steffes
Partner
Tax
Construction & Real Estate, Energy & Natural Resources
Houston
713.499.4600
The IRS has issued final regulations further postponing implementation of a mandatory 3 percent withholding on payments from government entities to contractors. As we stated in our June 2009 Insight, this law could adversely impact contractor cash flows. The law requires federal or state governments, or their instrumentalities or subdivisions, to withhold 3 percent in federal income tax from payments to any person for services or property.
The withholding requirement was created by the Tax Increase Prevention and Reconciliation Act of 2005 and was first postponed by the American Recovery and Reinvestment Act of 2009. The final regulations delay implementation by another year, to apply to payments made after December 31, 2012. Interest and penalties, however, will not apply for failure to withhold on payments made before January 1, 2014.
Withholding will not be required from payments:
- To other governmental entities, tax-exempt entities and foreign governments
- By political subdivisions of states or instrumentalities of those subdivisions making less than $100 million of such payments annually
- To government employees for services as an employee
- For interest or real property
- Subject to withholding under other Internal Revenue Code provisions—with the additional requirement that those amounts must actually be withheld
In addition, until further notice, withholding will not apply to payments made by payment card transactions other than convenience checks connected with payment card accounts.
The final regulations clarify that the withholding requirement does not apply to payments made after December 31, 2012, if the payments are made under a written binding contract in effect on that date, although there are rules discussing limitations on contracts materially modified later.
The final regulations also clarify that when a government entity pays a prime contractor, only the payment to that contractor is subject to withholding, not contractor payments to subcontractors.
The final regulations went into effect May 9, 2011. For more on how these changes might affect your business, contact your BKD advisor.
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