Washington (July 22, 2004) -- U.S. Senator Olympia J. Snowe, R-Maine, chair of the Senate Committee on Small Business and Entrepreneurship, has introduced a bill aimed at simplifying the tax code for small businesses by permitting businesses that generally earn less than $10 million during the tax year to use cash accounting methods to report their income.
Under current law, only those taxpayers that earn less than $5 million per year are allowed by the Internal Revenue Service to use the cash method. Snowe’s bill, the Small Business Cash Accounting Act of 2004, provides a $10 million threshold that would allow small companies to use cash accounting, which should slash the costs associated with using accrual accounting methods.
Under accrual accounting rules, a small business is deemed to have income when its right to the income accrues, or when a sale is made, even though the business may not collect cash from the customer until some future date. As a result, a small business may be deemed to have taxable income well before it has any cash to pay the tax.
“By increasing the cash accounting threshold to $10 million, more small businesses will be relieved of the burdensome record-keeping requirements they currently must undertake in reporting their income,” Snowe said. The bill also changes current law to permit taxpayers with inventory to qualify for the cash method of accounting.
The bill won't reduce the amount of taxes a small business pays. Rather, Snowe said it will permit more taxpayers to report income and account for costs in the year of the receipt or expenditure. “Clearly, the cash accounting method is much easier and simpler for small business taxpayers to comply with,” Snowe added. “Raising the threshold will reduce both the time and money small business owners spend on complying with the tax code.”
-- WebCPA staff
