Monday, August 11, 2014

46 Senators Urge Retention of Cash Basis Accounting in New Tax Code

46 U.S. Senators want to keep the traditional cash basis accounting method for businesses in any overhaul of the federal tax code. In a bi-partisan letter to Finance Committee Chair Ron Wyden (D-OR), the Senators said that the cash method is currently available to C corporations with no more than $5 million in average annual gross receipts, and also for individuals, partnerships, S corporations, and professional services corporations. The letter was prompted by concerns that a draft discussion on tax reform legislation issued by former Finance Committee Chair Max Baucus (D-MT) would require many businesses to change to the accrual method of accounting. Indeed, the draft would require all businesses and individuals that exceed $10 million in annual gross receipts to use the accrual method of accounting.

In the view of the Senators, this change has not been fully vetted and would create unnecessary complexity in the tax code and substantially increase the cost of compliance. It would also create long-term financial hardships, not just a one-time cost. In addition to the substantial cost of changing accounting systems, these businesses would also have to pay tax on income before it is actually being received. The basic tenet of taxation is the ability to pay, noted the Senators, and forcing businesses to recognize income before they receive payment violates this basic tenet. Thus, they strongly encouraged the Finance Committee to maintain the current ability of pass-through entities, and personal service corporations to use the cash basis of accounting for tax purposes irrespective of annual gross receipts.