The American Institute of CPAs (AICPA), in its most recent action to inform Congress about the negative impacts of limiting the use of the cash basis method of accounting for CPAs and other businesses, has formed a coalition with five other organizations representing the nation’s engineers, architects, dentists, farmers and S corporations. The coalition wrote a letter to Senators on January 17 opposing a proposal in the Senate Finance Committee’s November 21, 2013 “Cost Recovery and Accounting Discussion Draft” that would require many businesses to switch from the cash basis method of accounting for tax purposes to the accrual basis.
In November 2013, Senate Finance Committee Chairman Max Baucus (D-Mont.) released the discussion draft, which included a provision similar to House Ways and Means Committee Dave Camp’s (R-Mich.) March 2013 tax reform proposal to restrict the use of the cash method of accounting if gross receipts exceed $10 million. The two proposals would require many of the coalition’s members, including CPAs, to change the method of accounting used for tax purposes from the cash basis method to the accrual method.
The AICPA strongly opposes the proposed change, which would place an undue financial and administrative burden on thousands of professionals, including CPAs, lawyers, doctors, engineers, dentists, and farmers. In response to Chairman Baucus’ discussion draft, the AICPA sent a letter to Chairman Baucus on December 5, 2013 voicing its opposition to the proposed restriction on thousands of businesses’ ability to use the long-standing cash method of accounting.
The state CPA societies have actively voiced their opposition to the proposal sending letters to 92 Senators. In addition, to date, CPA firms have sent 198 letters to the Senate.
Joining the AICPA in the coalition are the American Council of Engineering Companies, the American Dental Association, the American Farm Bureau Federation, the American Institute of Architects, and the S Corporation Association.
The January 17, 2014 coalition letter opposing the proposed change in accounting stated:
“Most significantly, a change from the cash basis method for tax purposes would result in those who own and operate these businesses to pay tax before cash is received. They would be required to recognize revenue in advance of actually getting paid. Because the expenses of such organizations would essentially remain the same, this requirement would result in higher net taxable income for Federal tax purposes. In addition, switching from the cash method to the accrual method of accounting will lead to significant cash-flow problems. For example, among professional services firms, the primary cost is labor, and businesses must regularly pay their employees even if they are not paid by their clients for several months. The use of cash accounting helps to mitigate this challenge by allowing the business’s owners to make tax payments after receiving payment for their services.
“We believe that tax reform is a laudable goal and that simplification of the tax code is very important. However, converting from the cash method to accrual basis would not be simpler and may actually create a significant burden on these professional services sector businesses and farms.”
Regarding Chairman Camp’s proposal, the AICPA provided comments to the Ways and Means Committee in May 2013 through written testimony and in August 2013 the Institute sent a letter further outlining its opposition.