United States: US Accountants Oppose Any Limitation To Cash Accounting
21 August 2013
Posted by: Author: Leroy Baker
Author: Leroy Baker
In a letter to the House of Representatives Ways and Means Committee, the American Institute of Certified Public Accountants (AICPA) has expressed its opposition to a proposed limitation on the use of the cash method of accounting for certain enterprises that is contained in the Committee Chairman Dave Camp's (R – Michigan) small business tax reform discussion draft.
It is noted that Camp's draft proposal provides that the cash method of accounting is available for individuals, and any other taxpayer who meets the gross receipts test and is otherwise eligible to use the cash method. A sole proprietor, for example, satisfies the gross receipts test if the taxpayer's average annual gross receipts for a three taxable-year period are USD10m or less.
However, the AICPA points out that this effectively eliminates exceptions that currently exist for certain pass-through entities (i.e., partnerships and S corporations). Under current law, these businesses are permitted to use the cash basis method of accounting, regardless of their gross receipts, unless they have inventory.
"We 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 on income they have not yet received," the AICPA explained in a letter to Camp and the Committee's Ranking Member Sander Levin (D – Michigan).
"For these same reasons," it is added, "we are extremely concerned with and oppose certain limitations included in the proposal. We believe that Congress should not further restrict the use of the long-standing cash method of accounting for the thousands of US businesses that use it."
The AICPA is urging the Committee to consider the financial burden the proposal, if enacted, would place on businesses. "The proposal would require these companies to change to the accrual method, force their owners to pay tax before they have the cash to pay it, and add to complexity and costs," the letter stated.
The AICPA concludes that it "would require partners and shareholders of pass-through entities to pay tax on income they have not yet received. In order to cover this accelerated need to pay taxes, some businesses would be forced to make cash distributions to their owners from other sources, potentially threatening their operations due to a tightening of cash flow. Other businesses would force their owners to deal with the financial burden regardless of their ability to pay. We believe either scenario would result in an unjustifiable burden."
It also believes that Camp's proposal would also discourage natural business growth from a sole proprietorship to a partnership or other pass-through entity, because exceeding USD10m in annual receipts would trigger an accounting change. In other words, "a business's inability to use the cash method of accounting would create an artificial obstacle to joint ventures or the joining of two or more owners."