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US Accountants' Concern At Any Cash Accounting Limitation

by Mike Godfrey,, Washington

11 December 2013

In a letter to the United States Senate Finance Committee, the American Institute of Certified Public Accountants (AICPA) has expressed its opposition to any limits on the cash method of accounting, as is proposed in the tax reform discussion draft on cost recovery and accounting released recently by its Chairman Max Baucus (D – Montana).

Its opposition to Baucus's proposal reinforces its previous refusal to accept a similar measure limiting the use of the cash method of accounting for certain enterprises contained in the small business tax reform discussion draft, released in August this year by the House of Representatives Ways and Means Committee Chairman Dave Camp (R – Michigan).

Last month, Baucus proposed that all businesses with average annual gross receipts of USD10m or less, based upon the prior three years and indexed for inflation, would be able to elect to adopt either the cash method or accrual method of accounting. However, all businesses that did not meet the gross receipts threshold would have to adopt the accrual method of accounting, including those engaged in farming and personal service businesses.

In contrast, the AICPA contends that it would, instead, support the expansion of the number of taxpayers that may use the cash method of accounting. The cash method of accounting, it says, is simpler in application, has fewer compliance costs, and does not require taxpayers to pay tax before receiving the income being taxed – "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 rely on it."

It adds that Baucus's proposal "effectively eliminates exceptions that currently exist for all natural persons, certain pass-through entities (i.e. partnerships and S corporations), farmers, and personal service 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."

AICPA argues that switching to an accrual accounting method would add to the complexity and cost of compliance for businesses, and make it difficult to comply with the law by "requiring partners and shareholders of pass-through entities to pay tax on income they have not yet received since they would need to recognize accounts receivable and work-in-progress in income without a significant ability to manage accounts payable."

"Given that the cash method remains a far simpler method of accounting," it concludes, "we believe that simplicity justifies its continued use by natural persons, certain pass-through entities, personal service corporations, and farmers, regardless of their gross receipts."

TAGS: compliance | Finance | tax | small business | business | tax compliance | accounting | corporation tax | United States | tax reform | individual income tax

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