Nearly half the members of the U.S. Senate have signed a letter expressing concern about a tax reform proposal to require the use of accrual accounting and are urging the leaders of the Senate Finance Committee to preserve the option of the cash method of accounting for tax purposes.
The American Institute of CPAs and other accounting organizations, such as the National Conference of CPA Practitioners, have been urging Congress to preserve the cash method of accounting, particularly for small businesses, including testifying or submitting written testimony on the benefits of cash accounting at a congressional hearing last month (see House Hearing Considers Cash Accounting for Small Biz and Cash Accounting: A Simpler Method for Small Firms).
The AICPA said an August 6 letter to Senate Finance Committee chairman Ron Wyden, D-Ore., and ranking member Orrin Hatch, R-Utah, was signed by 46 senators from 32 states.
“As the Finance Committee develops its comprehensive tax reform package, we ask that you consider the negative impact that this proposal would have on the professional services sector as well as farming and ranching businesses,” the senators wrote. “We believe that such a change has not been fully vetted and many of the concerns raised by these businesses have not been addressed.”
The AICPA noted that it is a leading opponent of tax reform proposals to mandate the use of accrual accounting for businesses and individuals who exceed $10 million in annual gross receipts. The AICPA has partnered with state CPA societies and CPA firms to voice the profession’s concerns about the accrual accounting requirement.
The letter noted that currently the cash method is generally available to C corporations with less than $5 million in average annual gross receipts, along with individuals, partnerships, S corporations, professional services corporations, and most farming and ranching businesses, regardless of their revenue, unless they have inventory. The Cost Recovery and Accounting Discussion Draft that was released late last year by the former chairman of the Senate Finance Committee, Max Baucus, D-Mont., would require all of these businesses and individuals who exceed $10 million in annual gross receipts to use the accrual method of accounting.
The senators’ letter pointed to the impact of having to convert to the accrual basis for previously exempt businesses, including CPA, medical, dental, architectural, engineering and law firms. “[T]he acceleration of the business’ tax liability combined with the inability to match revenues with expenses would force businesses to borrow money to meet their tax liability. The basic tenet of taxation is ability to pay.’ Forcing businesses to recognize income before they receive payment violates this basic tenet.”
The letter explained that the proposal “would cause numerous adverse unintended consequences and as a result is opposed by many members of both parties. Therefore, we strongly encourage you to maintain the current ability of pass-through entities, personal services corporations, and farming and ranching businesses to use the cash basis for tax purposes irrespective of annual gross receipts.”
The letter argued against the notion that the reform would level the playing field. “While some may believe that subjecting all taxpayers with more than $10 million in annual gross receipts to the same threshold is simpler, we disagree,” said the letter. “Requiring more businesses to use the accrual method of accounting would create unnecessary complexity in the tax law and substantially increase compliance costs.”
The AICPA commended Senators Sherrod Brown, D-Ohio, Pat Roberts, R-Kan., Angus King, I-Maine, and Ron Johnson, R-Wis., for leading the effort to continue the cash method of accounting.