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Preserving Cash Accounting

Cash-accountingHumorist Art Buchwald once described tax reform as taking the taxes off things that have been taxed in the past and putting taxes on things that haven’t been taxed before. Buchwald’s amusing analysis notwithstanding, tax reform is an arduous task. There are a lot of moving parts being studied on Capitol Hill at the moment. And one part in particular is of great concern to the nation’s CPAs.

As Congress considers the most significant attempt at tax reform in almost 30 years, the House Ways and Means Committee has produced a small business tax reform discussion draft that focuses on simplifying the tax codes for small businesses, including individuals and passthrough entities. While supportive of the Committee’s efforts to simplify the tax code and responsiveness to taxpayer concerns that the code is too complex, the AICPA strongly opposes a proposed limitation on the use of the cash basis method (for the non-CPAs among us, the cash method recognizes revenue and expenses when cash is received or disbursed rather than when earned or incurred. It is simpler in application, has lower compliance costs, and does not require taxpayers to pay tax before receiving the income being taxed). 

To help offset revenue reduction in tax reform, the proposal would accelerate revenue collection from CPA firms and thousands of other businesses through the use of the accrual method. But that is a timing shift, not a simplification of the tax code.

Restricting the use of the cash method would create a hardship for the partners of CPA firms and owners of other entities in the professional services sector, such as actuaries, architects, consultants, engineers, doctors and lawyers. In fact, it would force business owners operating in any form of organization other than sole proprietorships to pay tax in advance of collecting cash payment from their clients and customers if average gross receipts of the business exceed $10 million. The AICPA believes that this is unfair because it essentially treats these individuals differently than individual taxpayers.

In enacting the Tax Reform Act of 1986, Congress recognized that small businesses should be allowed to continue to use the cash method of accounting in order to avoid the higher costs of compliance which would result if they are forced to use the accrual method. Raising the cap on gross receipts to $10 million may also result in a barrier to growth because firms will want to avoid triggering the accrual method mandate.

The message that Congress should not restrict the use of the cash basis method is being delivered to members of the Ways and Means Committee, and other members of Congress, by CPAs across the nation. Working with state CPA societies, member CPA firms and CPAs who are AICPA Key Persons, the Institute is informing lawmakers about the negative consequences the provision would have on CPAs and other businesses. To date, 50 state CPA societies sent letters to more than 400 members of Congress. Additionally, more than 150 members of Congress received letters from CPA firms that would be directly impacted by the proposal.

The profession’s congressional allies, including members of the Congressional Caucus on CPAs and Accountants, are also calling attention to the issue in letters to their colleagues and Ways and Means’ leadership.

The Ways and Means Committee’s desire to reform the tax code is laudable. Throughout the process, Chairman Dave Camp (R-Mich.) has expressed the belief that tax reform should be about making the code simpler and fairer (two of the AICPA’s principles of good tax policy). But requiring the use of accrual accounting will do neither. Given that the cash method remains a far simpler method of accounting, simplicity justifies its continued use by passthrough entities, professional service corporations and farmers – regardless of their gross receipts. 

Jay Hyde, Director - Media Relations, American Institute of CPAs.

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