Late last month, House Ways and Means Committee Chairman Dave Camp released new draft legislation to significantly reform the federal tax code. One key provision included in the draft would significantly impact CPA firms and other businesses that currently use the cash method of accounting by requiring that they use the accrual method for tax purposes.
A similar proposal was released last year by Chairman Camp; former Senate Finance Committee Chairman Max Baucus also included a provision requiring the accrual basis method for certain businesses in his discussion draft in November. Importantly, however, the provision was not included in President Obama’s FY 2015 budget, which was released at the beginning of March.
The cash method of accounting records revenue when cash is received, and records expenses when cash is paid. It is a longstanding method of accounting and the foundation upon which the service economy has built its business models for decades. By contrast, accrual accounting recognizes revenue when it is billed and expenses when they are incurred.
Both the House and Senate proposals eliminate the use of the cash basis method for businesses in the personal services sector, unless those businesses keep their average gross receipts at or under a $10 million threshold. The Senate proposal goes further by eliminating the use of the cash basis method for individuals with income above $10 million.
The acceleration of CPA firms’ tax liability combined with the inability to match revenues with cash receipts would result in a significantly higher tax burden for partners.
The American Institute of CPAs (AICPA), along with other affected professional associations and business organizations, has made clear its opposition to the accrual accounting requirement. Although the prospects for tax reform are uncertain, there remains the possibility that the provision could be taken out of the draft proposals to fund another tax bill or other government program. The AICPA continues to closely monitor the situation on Capitol Hill and strongly advocate against this harmful provision.