Pushing for Tax Reform – Cash Method of Accounting

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The American Institute of Certified Public Accountants (AICPA) has recently been participating in U.S. House of Representatives, Committee on Small Business hearings on tax reform with the goal of ensuring that main street isn’t left behind. One area of focus in this regard has to do with rules relative to the cash method of accounting and proposals to either expand its use or further restrict who may use the cash method of accounting including service businesses.

The cash method of accounting is simpler in application than the accrual method, has fewer compliance costs, and does not require taxpayers to pay tax before receiving the income. These characteristics make it a popular method for taxpayers to use when allowed by IRS rules. Conversely, when it comes to accelerating tax revenues, further restrictions on the use of the cash method of accounting is a known tool in lawmakers’ tool chest to at least accelerate government revenues.

However, the AICPA reminded lawmakers in their belief that limiting the use of the cash method of accounting for service businesses would:

  1. Discourage their natural business growth;
  2. Impose an undue financial burden on their individual owners;
  3. Impose complexities and increase their compliance burden; and
  4. Treat similarly situated taxpayers differently (because income is taxed directly on
    their owners’ individual returns).

As the AICPA has previously stated to Congress, further restricting the long-standing use of the cash method of accounting by thousands of U.S. businesses (e.g. sole proprietors, personal service corporations, and pass-through entities) that currently utilize it, would be detrimental and work on the side of discouraging business growth in the U.S economy.

By Dale F. Jensen, CPA