In a July 10 hearing, Members of Congress heard from several groups about the importance of the cash method of accounting to small and even micro-businesses, farms and pass-through entities such as accounting firms. Although the hearing was focused on small businesses, several Members of Congress and witnesses noted that limiting cash accounting would have significant negative effects on growth to many other businesses as well.
The Small Business Subcommittee on Economic Growth, Tax and Capital Access, chaired by Representative Tom Rice (R-S.C.), who is also a CPA, hosted the hearing entitled, “Cash Accounting: A Simpler Method for Small Firms?” In their remarks, both Rice and Ranking Member Judy Chu (D-Calif.) stated that forcing small businesses to convert to the accrual method adds to complexity and could hurt business operations.
Chairman Rice said, “We are fortunate to have with us a group of leaders within the accounting community, both industry experts and small businesses that help other small firms with their accounting services. I look forward to learning first-hand how they perceive the utility of cash accounting for small businesses, and how we could make cash accounting even easier for small businesses to use.”
Representative Brad Schneider (D-Ill.) commented, “I bring my own personal experience to this. My father is a CPA, and had an accounting firm in Denver with 35 partners. I started my career in consulting at PwC thirty years ago this week. This is an issue for a lot of businesses.”
Testifying on behalf of the South Carolina Farm Bureau, CPA Sarah Windham of Dixon Hughes Goodman, answered Rep. Schneider about the cost to convert to accrual for an accounting firm, “One of the biggest potential challenges for an accounting firm, or a law firm, or a professional service firm, is transitioning partners in and out and then the massive amount of tax liability that may be experienced with no additional cash. It would take cash away from hiring new accountants or attorneys, from creating jobs, from giving back to communities, from those types of things.”
Stephen Mankowski, CPA and partner in EP Caine & Associates CPA, LLC, testified on behalf of the National Association of CPA Practitioners. During the hearing, he noted that under current law if the threshold were to be applied to CPA firms, it would negatively impact his business. He said, “I recently merged my accounting practice. We have been growing our practice daily with more and more clients. If we bring on additional partners, that may bring in additional revenues to our firm and expand our services. If we get to a point that we hit the $5 million threshold, then the firm will have to go through converting to the accrual basis. At that point is it really worth bringing on an additional partner who may kick you into having to go to accrual basis?”
The American Institute of CPAs submitted a written statement for the hearing record. In it, the Institute wrote, “We wholly support the expansion of the number of taxpayers that may use the cash method of accounting. The cash method of accounting is simpler in application, has fewer compliance costs, and does not require taxpayers to pay tax before receiving the income being taxed. For these same reasons, we are extremely concerned with, and oppose, any limitations on the use of the cash method for small and service businesses, including those businesses whose income is taxed directly on their owners’ individual returns, such as S corporations and partnerships. Requiring these businesses to switch to the accrual method upon reaching a gross receipts threshold would unnecessarily discourage small business growth.”