The summer 2007 AGC Tax and Fiscal Affairs Committee Meeting was held in Charleston, South Carolina. Guest speakers included the IRS's Construction Tax Advisor and a staff member from the Financial Accounting Standards Board (FASB). The main topics discussed were:

• Three percent federal income tax withholding on government contracts payments
  The 3 percent federal income tax withholding is currently set to begin in 2011 and would require most federal, state, and local governments to withhold 3 percent on all government payments for products and services. The committee is aggressively working with the U.S. House and Senate to have the 3 percent withholding repealed.

• Domestic production deduction in IRC Section 199
  The IRS is currently performing cursory evaluations of the deduction calculations. They are reviewing the qualifying gross receipts used in the calculation to determine if the non-qualifying receipts were treated properly. However, as this deduction increases from 3-6 percent in 2007 and then 9 percent in 2010 the IRS scrutiny of the calculation will likely become more detailed due to the increase in the potential benefit for the taxpayer.

• Who is a homebuilder?
  The IRS is currently reviewing its interpretation of who qualifies as a homebuilder. It is determining what portion of a housing development a contractor must perform in order to treat the job as a homebuilding contract. For example, must the contractor work on the house itself or does the excavation contractor that puts in the roads and sewers for the housing development qualify as a homebuilder? The qualification as a homebuilding contract is important as it enables the contractor to use preferential tax accounting methods. The IRS has been working on an industry issue resolution (IIR) on this issue since 2006. It expects to have some type of correspondence published before the end of the year.

• Other tax topics
  The committee also continues to consider important changes to look back interest and the IRS's definition of a small contractor. The look back changes would exempt contracts less than three years in length and allow pass-through entities to calculate look back at the entity level. The small contractor exemption change would increase the $10 million revenue test for the small contractors. This exemption has not been adjusted for inflation since it was first introduced in 1986.

• Pension reform
  The FASB is currently working on a pension plan project related to financial reporting and disclosure of unfunded pension liabilities. The committee discussed how this project could impact the construction industry and multi-employer plans.

• Accounting lease standards
  The FASB is currently contemplating the establishment of new lease standards based on financial statement user needs and to reduce complexity. The new accounting lease standards could be based on a "right to use" model and impact the characterization for operating leases (off balance sheet) vs. capital leases. This is expected to be a joint project with the International Accounting Standards Board (IASB).

   Contact us for more information.