In 2006, Congress passed the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005. Unfortunately, for roofing contractors and other businesses that contract with government agencies, this law contains an onerous tax increase scheduled to take effect Jan. 1, 2012.
Section 511 of TIPRA mandates tax withholding at a 3 percent rate on payments to vendors for goods and services on all federal contracts, as well as those issued by state and local governments with expenditures of $100 million or more. The provision's objective, according to lawmakers who inserted it into the bill, is to increase vendor and contractor compliance, thus collecting underreported tax revenues.
Bad public policy
The 3 percent of payment to be withheld would be taken off a contract's total value, not the profit earned on the project. Therefore, the withholding law initially would eliminate contractors' profits on many projects. Although contractors may collect the 3 percent tax at the end of the year, disruptions in cash flow and operating capital caused by withholding would be a tremendous burden, particularly for small businesses.