Jesse Palmer

The American Recovery and Reinvestment Act of 2009 (the Act) has been in place for three-quarters of a year, and now is a good time to revisit some of the significant provisions within the federal stimulus package.

Delay in 3% Withholding Requirement on Government Payments

The Act contained a provision that delays the implementation of the 3% withholding requirement by one year to apply to payments after Dec. 31, 2011. Under pre-Act law, for payments made after 2010, federal and state governments would have been required to deduct and withhold tax of 3% for certain payments to a person providing any property or services to the government. The rule also imposed information reporting requirements.

Political subdivisions of states (or any instrumentality thereof) with less than $100 million of annual expenditures for property or services that would otherwise have been subject to withholding under this rule were exempt from the withholding requirement. In addition, the 3% withholding requirement did not apply to:

• Any payments made through a federal, state or local government public assistance or welfare program for which eligibility was determined by a needs or income test
• Payments to which mandatory, e.g., U.S. source income of foreign taxpayers or voluntary, e.g., unemployment benefits, withholding is applied
• Payments from which amounts were actually being withheld under backup withholding rules
• Payments of interest
• Payments for real property
• Payments to tax-exempt entities or foreign governments
• Intragovernmental payments
• Payments made under a classified or confidential contract
• Payments to government employees for their services as employees, which were not otherwise excludable from these withholding rules

While industry groups continue to actively advocate for the full repeal of the 3% withholding requirement, contractors would be wise to monitor legislative activity on this issue in the coming year. Without some form of legislative action, this requirement will impose potentially significant cash flow and administrative burdens on certain contactors.

Qualified School Construction Tax Credit Bonds

Taxpayers who hold “qualified tax credit bonds” on specified dates during the year are entitled to a nonrefundable credit equal to a portion of the bonds’ outstanding face amount. The credit is includible in gross income and is treated as interest income. Qualified tax credit bonds must meet certain requirements, including the requirement to spend 100% of the bond proceeds within three years of the bond issuance. Under pre-Act law, there were four different types of tax credit bonds:

• Qualified forestry conservation bonds
• New clean renewable energy bonds
• Qualified energy conservation bonds
• Qualified zone academy bonds

The Act creates a new category of tax credit bonds—qualified school construction bonds. The term “qualified school construction bond” means any bond issued as part of an issue if:

• 100% of the available project proceeds from the bond issue are to be used for construction, rehabilitation or repair of a public school facility or for acquisition of land on which a facility is to be constructed with part of the proceeds
• The bond is issued by a state or local government within the jurisdiction where the school is located and
• The issuer designates the bond as a qualified school construction bond

The creation of this new type of bond is meant to encourage construction, rehabilitation or repair of public school facilities and the acquisition of land on which these bond-financed facilities are to be constructed.
The national qualified school construction bond limitation is $11 billion for both 2009 and 2010 and $0 after 2010; however, authorized bond amounts may be carried forward by each state for up to one year. Therefore, states may carry forward unused bond allocation amounts from 2009 to 2010 and from 2010 to 2011.

Many states are actively pursuing projects under this spending initiative; however, there is still a substantial lead time. In many cases, plans must be completed or revised to meet program requirements, permits obtained, land or land rights acquired and bonds sold before construction can begin. Be on the lookout for projects coming online in 2010 that have been funded with qualified tax credit bonds.

Changes to Low-income Housing Credits

Taxpayers are normally allowed to claim a low-income housing tax credit for certain investments in low-income housing. Tax credits, however, have not been as effective under current economic conditions. As a result, the Act allows taxpayers to receive a grant from the Treasury Department in lieu of tax credits. The states’ housing credit agencies would receive a grant for up to 85% of 40% of the state’s low-income housing tax credit allocation in lieu of low-income housing tax credits they would have received. The grant program would apply to each state’s 2009 low-income housing tax credit allocation.

In addition, the Act provides $2.25 billion to state housing credit agencies to distribute to project owners who have received or will receive low-income housing tax credits. Fund recipients are required to expend 75% of the funds received by February 17, 2011, and 100% of the funds by February 17, 2012.

Tax credit financing has remained a challenging area throughout 2009 as investor demand for tax credits has been much lower than historical levels. Demand for tax credits will likely be linked to a return to taxable profitability for many traditional investors. While this may begin in 2010, it will more likely be 2011 or beyond before we see a significant uptick in investor demand for tax credits.

Various Spending Provisions

In addition to the tax provisions, the Act also contained a substantial amount of spending provisions. Here are a few spending items that may be of interest to the construction and real estate industries:

• $27.5 billion to the Department of Transportation for highway and bridge construction projects. Another $1.5 billion in competitive grants is available to state and local governments for transportation investments

• $53.6 billion to the Department of Education’s State Fiscal Stabilization Fund, 18.2% of which is to be used for the modernization, renovation or repair of schools facilities in a manner consistent with recognized green building standards

• $8 billion to the Department of Transportation to promote the development of inner-city high-speed rail service and improvements to passenger rail service

• $4.7 billion to the National Telecommunications and Information Administration’s Broadband Technology Opportunities Program. Grant funding is available to accelerate broadband deployment in unserved and underserved areas

• $4.6 billion to the U.S. Army Corps of Engineers for environmental restoration, flood protection, hydropower and navigation infrastructure

• $4.5 billion to the Federal Buildings Fund for renovations and repairs to federal buildings, with a focus on energy efficiency and conservation

• $4 billion to the Department of Housing and Urban Development to assist in rehabilitating and improving energy efficiency of public housing units

• $4 billion to the Clean Water State Revolving Funds to help communities upgrade wastewater treatment systems

• $2.5 billion to various Department of the Interior agencies for infrastructure projects on federal lands, including improvements to visitor facilities, road and trail restoration, preservation of buildings of cultural and historic importance, rehabilitation of abandoned mines and oil fields and environmental cleanup projects

• $2 billion to the Neighborhood Stabilization Program to help communities purchase and rehabilitate foreclosed, vacant properties to create more affordable housing and reduce neighborhood blight

• $2 billion to the Drinking Water State Revolving Fund for drinking water infrastructure

• $1.3 billion to the Department of Defense for construction of military medical facilities

• $1 billion to the Department of Veterans Affairs to repair veterans’ medical facilities and make them more energy-efficient

• $1.1 billion to the Federal Aviation Administration to provide discretionary grants to repair and improve airport infrastructure

While many contractors have benefited from these infrastructure and building funds, the reaction, by and large, has been that the quantity and type of projects have not changed so much as funding sources have changed. Despite the shift, competition remains fierce, margins are tight and, in many cases, backlog levels are trending downward. ARRA-funded projects alone will not sustain the construction industry. Instead, privately funded construction will need to return at some level for 2010 to show improvement over 2009.