A coalition of a half dozen business organizations, including the American Institute of CPAs, have banded together to express their opposition to a proposal from the Senate Finance Committee to require businesses to use the accrual method of accounting for tax purposes.
Along with CPAs, other groups signing the letter include organizations representing engineers, architects, dentists, farmers and S corporations. The proposed change in the taxation of businesses was included in the Senate Finance Committee’s Cost Recovery and Accounting Discussion Draft of Nov. 21, 2013 (see Baucus Proposes Changes to Tax Accounting and Cost Recovery Rules).
The proposal would require many of the groups’ members to change the method of accounting used for tax purposes from the cash basis method to accrual method. Together with the AICPA, the other groups signing the letter include the American Council of Engineering Companies, the American Dental Association, the American Institute of Architects, the Farm Bureau and the S Corporation Association.
“Most significantly, a change from the cash basis method for tax purposes would result in those who own and operate these businesses to pay tax before cash is received,” they wrote in a January 17 letter to Senate Finance Committee chairman Max Baucus, D-Mont., and ranking member Orrin Hatch, R-Utah. “They would be required to recognize revenue in advance of actually getting paid. Because the expenses of such organizations would essentially remain the same, this requirement would result in higher net taxable income for federal tax purposes. In addition, switching from the cash method to the accrual method of accounting will lead to significant cash-flow problems. For example, among professional services firms, the primary cost is labor, and businesses must regularly pay their employees even if they are not paid by their clients for several months. The use of cash accounting helps to mitigate this challenge by allowing the business’s owners to make tax payments after receiving payment for their services.
“We believe that tax reform is a laudable goal and that simplification of the tax code is very important,” the organizations added. “However, converting from the cash method to accrual basis would not be simpler and may actually create a significant burden on those professional services sector businesses and farms.”