Dear Chairman Camp and Ranking Member Levin:
On behalf of Associated Builders and Contractors (ABC), a national organization with 75 chapters representing 23,000 merit shop construction and construction-related firms with nearly 2 million employees, we appreciate the opportunity to provide our thoughts in response to the House Ways and Means Committee hearing regarding “Fundamental Tax Reform,” to examine the burdens imposed by the current federal income tax system and the need for reform.
Under the nation’s current tax system, rates are too high and laws are too complex, thus inhibiting the growth of small businesses. Currently, unemployment exceeds 20 percent in the construction industry, and adding increased taxes to an already burdened industry is not conducive to an expedient economic recovery. Therefore, tax relief is critical for businesses to spur reinvestment, create jobs, and grow.
During the 112th Congress, ABC urges Congress to provide immediate tax relief for small businesses, which includes the following:
- Increasing and indexing the threshold for small construction contractors for them to utilize the Completed Contract Method (CCM);
- Fully repealing the 3 percent withholding requirement, which is effective in 2012;
- Fully repealing the expanded Form 1099 reporting requirements under the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148); and
- Fully repealing the new Medicare Hospital Insurance (HI) tax on investment income, which is effective in 2013.
Research from a 2008 study released by the Small Business Administration’s (SBA) Office of Advocacy illustrates that the small business community is disproportionately affected by burdensome federal regulations. The study found that small businesses spend more than approximately $10,600 per employee annually to comply with federal regulations. In fact, the study concluded that small businesses spend three times as much per employee to comply with the federal tax code than larger firms. For the construction industry, excessive regulations translate into higher costs that are eventually passed on to the consumer.
Completed Contract Method (CCM)
The 1986 Tax Act failed to increase and index the threshold for small construction contractors, and as a result, they are unable to utilize the Completed Contract Method (CCM). Under current law, the threshold is approximately $10 million, and because of this, small construction contractors cannot use the CCM of accounting and are required to use the percentage of completion method (PCM), which does not accurately reflect results because of the required use of estimates.
However, to provide relief for small construction contractors and small businesses, in the 111thAmerican Job Builders Tax Reform Act of 2010 (H.R. 6097), a bipartisan tax bill that proposed to amend the 1986 Tax Act by increasing and indexing the threshold for small construction contractors and permitting them to utilize the CCM. The legislation also provided relief for small construction contractors from the Alternative Minimum Tax (AMT) and “look-back” accounting requirements. By increasing the threshold and eliminating the AMT adjustment, small construction contractors would no longer be subject to the burdensome “look-back” calculations for both regular and AMT purposes. ABC looks forward to working with Representatives Herger and Berkley in the 112th Congress for immediate reintroduction of this critical bill that will affect the construction industry and construction-related industries as a whole. Congress, Representatives Wally Herger (R-CA) and Shelley Berkley (D-NV) introduced the
Three Percent Withholding (Section 511)
Additionally, ABC supports fully repealing the 3 percent withholding requirement (also known as Section 511) on all government payments for products and services made by federal, state and local governments with total expenditures of $100 million or more, in accordance with Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005. Section 511 is effective in 2012, and to date, the Internal Revenue Service has yet to finalize regulations implementing this burdensome law and ultimately define how construction contractors will be repaid after the withholding. Construction contractors typically average a profit margin of 2.2 percent. Section 511 will undoubtedly deplete not only the construction contractor’s profit, but will also reduce sorely needed operating capital. Eventually, construction contractors will be forced to raise their proposal price to account for this shifting burden of financing and the taxpayer’s cost of construction will increase, or worse, drive small businesses out of the government contracting market.
Expanded Form 1099
A new mandate under the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148) expanded the Form 1099 reporting requirements to include two forms to be submitted for every business-to-business transaction of $600 or more for both property and services. In this current economy, small businesses do not need an increased paperwork burden. ABC strongly supports full repeal of this tax filing mandate to alleviate the increased reporting and paperwork requirements on small businesses.
Recently, an ABC member, who is the vice-president of a family-owned small business, indicated that the Form 1099 reporting requirements may force him to hire an additional full-time employee to work in his company’s accounting department—such department already employs two full-time employees. Because the ABC member works with 1,200 vendors, of which only 4 or 5 presently issue a Form 1099, the accounting department will be required to spend countless hours on the increased paperwork and filing.
Two years ago, the same ABC member employed 136 employees; however due to the current construction market, he was forced to lay off employees, reducing his staff to 66. Instead of investing in equipment or hiring employees to actually perform work in the field, he may be faced with a huge overhead expense of hiring a full-time employee to solely work on this new burdensome mandate.
ABC members have also expressed the following concerns regarding the expanded Form 1099 reporting requirements:
- Businesses would easily have a multitude to request/collect/follow on receipt of W-9’s (approximately double what they currently maintain);
- Businesses would have to incorporate a review process to ensure that a W-9 is on file prior to the release of payments (again at least double what is currently maintained);
- Businesses would have to “hold” payments from suppliers until they receive the W-9 which could delay payment, place holds on accounts, delay shipments, etc.;
- What is commonly known today as a “check request” would have to include a process of collecting a W-9 and vendor setup to track for 1099 purposes—which would cause a delay in the turnaround time;
- What are commonly known as “onetime vendors” would probably need to go away due to the inability to issue 1099’s or even be able to review for year-end purposes—multiple payments to the same company/person made under this vendor;
- Field personnel would become part of the process. Before calling someone out to perform a service, or making an over the counter purchases, businesses would need them to be proactive and either notify the office prior to placing the order or collect the W-9 themselves; and
- Additional forms and postage would be an increased cost as well.
New Medicare Hospital Insurance (HI) Tax
A new Medicare tax on non-wage income was also included in the PPACA. Starting in 2013, households with incomes above $200,000 for individuals and $250,000 for married couples will have a new 3.8 percent tax applied to their income from interest, dividends, capital gains, and some profits from investments in partnerships and S corporations. ABC opposes this new tax. Many of our members operate as S Corporations, partnerships, Limited Liability Companies, or LLC’s treated as partnerships, who file their income tax return as an individual. According to the National Federation of Independent Business, 75 percent of small businesses are organized as pass-through entities (sole proprietors, partnerships, S Corps, etc.) and pay taxes on their business income based on the individual tax rates.
We appreciate you taking the time to address tax reform in a meaningful way. Lessening the tax burden on small businesses will encourage small business owners and construction companies to reinvest in their businesses, thus expanding the economy and creating jobs. ABC strongly supports minimizing the tax burden and providing relief for small businesses, including home-based businesses and the self-employed. We look forward to working with you in the future on tax reform initiatives.
Vice President, Federal Affairs