Preserving the Cash Basis Method of Accounting for CPA Firms
The cash basis 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, the accrual basis method of accounting recognizes revenue when the services are provided and expenses when they are incurred.
As part of comprehensive tax reform efforts, in 2013 Chairman of the House Ways and Means Committee Dave Camp and Chairman of the Senate Finance Committee Max Baucus each released proposals which would have limited the availability of the cash basis method and would have required the use of the accrual basis method for certain taxpayers, including CPA firms. Because these legislative proposals were included in early tax reform drafts, and the Camp draft was scored by the Joint Committee on Taxation as raising revenue, the cash to accrual proposal may continue to be attractive to lawmakers as tax reform discussions continue.
The proposals would have required virtually all service companies currently using the cash basis method, such as CPA firms, with gross receipts greater than $10 million to change to the accrual basis method, which would increase administrative and recordkeeping burdens on such taxpayers. This creates both a timing element and a collection element that would disadvantage service providers. Restricting the use of cash accounting would significantly affect organizations that perform services in the fields of health, law, engineering, architecture, accounting, actuarial services, performing arts and consulting; as well as farming businesses.
Importance to CPAs
The accounting profession is unduly harmed because firms must be capitalized solely by the individual professionals, who together own their firm, and are unable to raise capital from outside investors.
The AICPA strongly supports the preservation of the cash basis method of accounting for pass-through entities and personal service corporations, such as accounting firms. The AICPA supports expanding the availability of the cash method for all other businesses from $5 million to $10 million in gross receipts.
Legislative or Regulatory Action
There are no current proposals in congress to make changes to the current availability of the cash basis method of accounting. However, the AICPA anticipates future efforts related to tax reform and will continue to oppose any proposal that would limit the availability of the cash basis method of accounting.
The proposals do, however raise the existing gross receipts threshold from small businesses from $5 to $10 million. While AICPA supports expanding the current threshold for all other businesses, it strongly opposes requiring service businesses, like accounting firms, law firms, doctor’s and dentist’s offices, and farms, to use the accrual method, because it would result in a barrier to growth.
June 2016, AICPA Vice President-Taxation, Edward Karl, authored a blog post on the importance of preserving the cash-basis method of accounting: "Keeping the Cash Method Promotes Simplicity and Economic Growth"
May 2016, AICPA sent a letter to Chairman Kevin Brady reminding him of the importance of maintaining the cash basis method of accounting during his leadership in developing a tax reform blueprint
April 2016, AICPA Letter to Senate Finance Committee
April 2015, Statement for the Record to House Small Business Committee in reference to April 15, 2015 Hearing on Tax Reform: Ensuring that Main Street Isn't Left Behind
April 2015, Letter to Senate Finance Committee Business Working Group from the AICPA and other cash coalition members, including the American Council of Engineering Companies, American Farm Bureau Federation, American Institute of Architects, American for Tax Reform, Farmers for Tax Fairness, Investment Adviser Association, and multiple law firms and bar associations
March 2015, AICPA letter to Senate Finance Committee Business Tax Reform Working Group
March 2015, AICPA letter offering to be a resource on Tax Reform in 114th Congress
January 2015, AICPA comments on Tax Reform Act of 2014, including comments on cash basis method of accounting
September 2014, Bipartisan letter from 233 Members of Congress to Leadership of the House of Representatives
January 2014, Letter to Senate Finance Committee from the AICPA and the American Council of Engineering Companies, American Dental Association, American Farm Bureau Federation and American Institute of Architects
May 2013, AICPA Written Statement for the Record to the House Ways and Means Subcommittee on Select Revenue Measures regarding the hearing entitled “Small Business and Pass-Through Entity Tax Reform Discussion Draft”
Tax Reform Proposals
December 2014, H.R. 1, "Tax Reform Act of 2014"
February 2014, House Ways and Means Committee Chairman Dave Camp's draft legislation, the "Tax Reform Act of 2014"
November 2013, Senate Finance Committee Chairman Max Baucus Discussion Draft Legislation on Cost Recovery and Accounting
March 2013, House Ways and Means Committee Chaiman Dave Camp's Discussion Draft Legislation, the "Tax Reform Act of 2013"
Diana Huntress Deem
Director, Congressional and Political Affairs
Director, Congressional and Political Affairs