NRCA issues a statement about how tax complexity hinders small business
Statement of Robert Kulp
On behalf of the
National Roofing Contractors Association
House Committee on Small Business
"How Tax Complexity Hinders Small Businesses:
The Impact on Job Creation and Economic Growth"
April 13, 2011
Chairman Graves, Ranking Member Velázquez, and distinguished members of the committee,
thank you for the opportunity to testify today on behalf of the National Roofing
Contractors Association (NRCA) to discuss how tax complexity hinders the ability
of small businesses to create jobs. I am Bob Kulp, founder and co-owner of Kulp's
Of Stratford LLC, a roofing contractor in Stratford, Wisconsin. I currently serve
on the NRCA board of directors and as chairman of the association's government relations
Established in 1886, NRCA is one of the nation's oldest trade associations and the
voice of professional roofing contractors worldwide. It is an association of roofing,
roof deck, and waterproofing contractors; industry-related associate members, including
manufacturers, distributors, architects, consultants, engineers, government agencies
and international members. NRCA has approximately 4,000 members from all 50 states
and 54 countries. NRCA contractors typically are small businesses, with the average
member employing 45 people in peak season and having sales of $4.5 million per year.
Kulp's Of Stratford is involved in both commercial and residential roofing and insulation
with an emphasis on metal and thermoplastic roofing systems and interior spray foam
installations. We have a specialty metals division that includes fabrication and
finishing of projects such as complete steeple structures as well as finials on
steeples for churches. We also are now involved with installing Building Integrated
Solar Photovoltaic roofing. Kulp's employs between 35-50 people depending on the
season and we have about $6 million in annual sales.
As the national unemployment situation continues to slowly improve, unemployment
in the construction industry remains at an alarming 20.0 percent, according to the
Bureau of Labor Statistics. There appears to be little relief in sight for our industry
during these difficult economic times. Clearly, the time is right to take steps
to improve this situation, and reducing complexity in the tax code is a good place
Given the continued highly difficult economic conditions in the construction industry,
NRCA urges Congress to take immediate action on tax policy measures that will remove
impediments and spur job growth within our industry. NRCA strongly supports depreciation
reform for commercial roofs, repeal of the three percent withholding tax on government
contracts, and the reform of the completed contract method (CCM) of accounting.
We believe enactment of these initiatives will reduce and simplify taxes, thus allowing
entrepreneurs to create jobs in construction and other industries, particularly
among small businesses.
Small businesses within the roofing industry are uniquely positioned to play a critical
role in creating jobs for American workers. Congress should facilitate the creation
of an estimated 40,000 jobs annually within our industry by passing legislation
to reduce the depreciation schedule for commercial roofs from 39 years to 20 years.
In addition to creating 40,000 jobs among contractors and manufacturers, such legislation
would also enhance the energy efficiency of our nation's commercial buildings and
simplify taxes for small businesses in many industries.
Depreciation reform is necessary because between 1981 and 1993 the depreciation
schedule for nonresidential property was increased from 15 years to 39 years. However,
the current 39-year depreciation schedule is not a realistic measure of the average
life span of a commercial roof. A study by Ducker Worldwide, a leading industrial
research firm, determined the average life expectancy of a commercial roof to be
The large disparity between the 39-year depreciation schedule and the average life
span of a commercial roof is a major incentive for building owners to delay the
replacement of failing roofs. This is slowing economic activity and the adoption
of more advanced energy-efficient roofs, because an owner who replaces a roof before
39 years have elapsed must continue to depreciate that roof for tax purposes even
though it no longer exists. A Treasury Department Report to Congress on Depreciation
Recovery Periods and Methods confirmed this problem by finding "…a 'cascading' effect,
where several roofs are being depreciated at the same time, even though only one
is physically present." Given this situation, many building owners choose to do
only piecemeal repairs, most often with older technology, rather than replace a
failing roof in its entirety with new, more energy-efficient materials.
In the 111th Congress, several bills (H.R. 426 and H.R. 5396) were introduced with
bipartisan support to rectify this situation. This legislation would reduce the
depreciation schedule from 39 to 20 years for commercial roofs that meet a benchmark
energy-efficiency standard. This would facilitate job creation in our industry by
accelerating demand for commercial roofs by eliminating the disincentive in the
tax code for building owners to delay replacement of failing roofs. Enactment of
this legislation would also benefit small businesses of all types by mitigating
the "cascading effect" of having to depreciate more than one roof in instances where
a roof must be replaced before the 39-year depreciation schedule has been completed.
According to the Ducker Worldwide study, depreciation reform would produce the following
benefits by accelerating demand for commercial roofs:
- Creatjobs within the roofing industry;
- Add $1 billion of taxable annual revenue to the economy;
- Provide savings to small businesses of all types through a simpler and more equitable
system of taxation and lower energy costs; and,
- Reduce U.S. energy consumption by 13.3 million kilowatt hours annually and cut care
40,000 new bon emissions by 20 million lbs. per year.
Depreciation reform for commercial roofs enjoys support of a diverse coalition of
businesses, manufacturers, and labor groups. The bill would create jobs not through
a special tax incentive, but by the removal of an obstacle in the tax code which
restricts economic growth in the construction industry. Additionally, it would help
improve property values, thus increasing resources for schools and local authorities.
NRCA is working with a wide array of members to explore opportunities for depreciation
reform in the 112th Congress. We welcome the opportunity to work with members of
the House Small Business Committee on this issue, which has great potential to create
jobs among small businesses in the construction industry.
Three Percent Withholding Tax on Government Contracts
NRCA calls for the immediate repeal of the three percent withholding on government
contracts mandated in Section 511 of the Tax Increase Prevention and Reconciliation
Act of 2005
(TIPRA) through the prompt passage of the Withholding Tax Relief
Act of 2011 (H.R. 674). Repeal of the withholding law, which adds a new layer of
complexity to a contractor's tax filing, is vital to job creation and economic growth
in the roofing industry.
If the withholding law is not repealed, roofing contractors performing government
work will face serious repercussions. The mandated three percent of the contract
that is withheld is taken off the total value of that contract, not the profit earned
on the project. Given that three percent or less of the total contract is the average
profit margin in our industry, withholding could eliminate contractors' profits
on many projects, thus severely limiting the ability of contractors to grow their
business and create jobs.
While the contractor may collect the three percent that is withheld at the end of
the year, cash-flow and operating capital disruptions caused by withholding will
be a tremendous burden, particularly for small businesses. The bookkeeping systems
of many small businesses are not set up to account for such large amounts withheld
from invoices. Withholdings will also complicate tax filings and the need to accurately
determine tax liability, especially since tax software has not been developed in
this area. This new complexity will create added compliance costs on businesses
and thus will further impair efforts to create jobs. Many roofing contractors will
be forced to stop bidding on government contracts in order to avoid these added
complexities. Also, contractors continuing to perform government work may be forced
to pass additional costs created by withholding along to the government and taxpayers.
The Government Withholding Relief Coalition, of which NRCA is a member, recently
released a cost impact study of the three percent withholding law. The study estimates
implementation costs for federal, state, and local governments to be about $20.2
billion over five years. Given that the Joint Committee on Taxation estimated in
2006 that the withholding tax will raise roughly $7 billion over five years, it
does not make good fiscal sense to allow the withholding requirement to take effect,
even from the point of view of the government.
urges Congress to quickly repeal this requirement, which further
complicates the tax filing of contractors and stifles job creation. Without immediate
action by Congress, the withholding will begin impacting contractors soon, as businesses
must begin tailoring their bookkeeping systems in anticipation of the provision
taking effect at the beginning of 2012.
Completed Contract Method Reform
NRCA supports bipartisan legislation (H.R. 6097) introduced in the 111th Congress
to modify the tax code to expand the number of construction contractors who may
utilize the completed contract method of accounting when dealing with long-term
Under current law, construction contractors cannot use the completed contract method
if average annual gross receipts exceed $10 million, a threshold that has not been
adjusted for inflation since 1986. Contractors who cannot utilize the completed
contract method must use the percentage of completion method of accounting, which
often does not accurately reflect results due to the required use of cost estimates.
The percentage of completion method is a major paperwork/compliance burden for small
and mid-sized contractors because they have to estimate the percentage of a completed
project and then retroactively amend those filings in subsequent years based on
the actual numbers. Like the three percent withholding tax, this system represents
an impediment to business growth and job creation, as increasingly more time and
resources must be devoted to tax compliance.
H.R. 6097 would increase the threshold for using the completed contract method,
index it for inflation, and also provide relief from the Alternative Minimum Tax
and "look-back" provisions in the tax code. This legislation would significantly
reduce the complexity of the tax code for many construction employers. NRCA looks
forward to working with Congress on this issue of importance to the construction
industry going forward.
Again, NRCA urges Congress to address the alarming 20 percent unemployment rate
in the construction industry by moving forward with these and other initiatives
to reduce tax complexity, which will help boost economic growth and create jobs.
NRCA looks forward to working with the members of the committee in this regard.
Thank you for your consideration of NRCA's views on these matters.