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US Accountants Urge Preservation Of Cash Accounting

by Mike Godfrey, Tax-News.com, Washington

27 April 2016


On April 26, the American Institute of Certified Public Accountants (AICPA) encouraged the US Senate Finance Committee, which was holding a hearing on business tax reform, to preserve the use of the cash method of accounting for tax purposes.

In a letter submitted for the record to the hearing, AICPA President and CEO Barry Melancon wrote: "We urge maintaining the current availability to use the cash method of accounting for pass-through entities and personal service corporations, such as accounting firms. Determining taxable income under the cash basis is simple in application, is a method of accounting which the service industry has used for decades, and must remain an option for these businesses."

In previous testimony, AICPA pointed out that, while under the cash method there are "straightforward and easily applied tests," in that income is recognized when it is actually or constructively received, and expenses are recorded when paid, determining taxable income under the accrual method is far more difficult in application, resulting in increases in the cost of compliance compared with the cash method.

The letter also explained that, under the accrual method, "many accounting and other service-type firms would need to accelerate a significant amount of income into the current taxable year, despite not receiving the actual payment from their clients. This increase in tax liability could have a significant negative impact.

"The AICPA has consistently supported tax reform efforts that promote simplicity and economic growth and do not create unnecessary administrative and financial burdens on taxpayers," Melancon added. "An accrual method mandate falls short in that regard. We strongly urge retaining use of the cash method of accounting."

Currently, sole proprietors; pass-through entities (e.g. partnerships and S corporations), whose income is taxed directly on their owners' individual tax returns; entities that engage in a farming business; entities that primarily perform services by their owners; and entities that satisfy a USD5m gross receipts test (and do not maintain inventory) are generally permitted to use the cash method of accounting in the United States.

On the other hand, C corporations are usually not allowed to use the cash method, and a taxpayer who purchases, produces, or sells merchandise must also use the accrual method of accounting.

TAGS: compliance | tax | business | proprietors | tax compliance | accounting | United States | tax reform | services

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