In the spring of 2013, then Chairman Camp released his original draft tax reform bill known as the “Tax Reform Act of 2013,” which included many provisions such as the accrual accounting requirements contained in Section 212 of the legislation. The ABA Board of Governors subsequently adopted a Resolution in November 2013 opposing Section 212 of the original Camp draft bill and any other similar measures that would require law firms and other personal service businesses to switch from the cash method of accounting to the accrual method. Draft tax reform legislation was also prepared by then Senate Finance Committee Chairman Baucus in 2013, including similar mandatory accrual accounting language contained in Section 51 of that measure.
On January 13, 2014, the ABA sent a letter to the House Ways & Means Committee and a separate letter to the Senate Finance Committee opposing the accrual accounting provisions in the respective draft bills and urging the Committees to remove these provisions from the legislation. The ABA also sent a Legislative Action Alert to state and local bar leaders on January 31, 2014 urging them to adopt their own resolutions opposing the legislation and to send letters to their Members of Congress. Numerous state and local bars subsequently adopted resolutions or sent letters to their congressional delegations opposing the legislation. The ABA also sent letters to hundreds of law firm managing partners requesting their firms’ assistance in defeating the harmful legislation.
In addition to the concerns raised by the ABA, state and local bars, and various other associations and entities, many Members of Congress from both parties have voiced objections to the legislation. On November 25, 2013, 71 Representatives sent a letter to leaders of the House Ways and Means Committee expressing concerns over the accrual accounting provisions in the original draft House bill. Subsequently, 46 Senators sent a letter to the Senate Finance Committee leadership on August 6, 2014 supporting cash accounting and opposing mandatory accrual accounting legislation, and 233 Representatives (a majority) sent a similar letter to the House leadership on September 11, 2014. In addition, the House Small Business Subcommittee on Economic Growth, Tax and Capital Access held a hearing on July 10, 2014 on the benefits of cash accounting for small business, and the ABA submitted a written statement in support of preserving cash accounting for law firms and other personal service businesses.
Chairman Camp released an updated version of his comprehensive tax reform legislation on February 26, 2014, and then formally introduced the revised bill on December 10, 2014 at the end of the 113th Congress as H.R. 1. The accrual accounting provisions in the revised bill are almost identical to those contained in the original Camp bill, though the provisions were moved to Section 3301 of the new bill (from Section 212 of the previous bill). While the House and Senate bills generated extensive discussion, neither bill advanced during the 113thCongress.
Last year, the new chairmen of the House Ways & Means Committee and the Senate Finance Committee—Representative Kevin Brady (R-TX) and Senator Orrin Hatch (R-UT)—both announced plans to pursue comprehensive tax reform during the 114th Congress. In addition, Members and staff from both committees have said that the mandatory accrual accounting proposals may still be included in the new legislation.
In early 2015, the Senate Finance Committee created a series of tax reform working groups and requested written comments from interested stakeholders by April 15, 2015. In response to this outreach, the ABA sent new letters to the Senate Finance Committee and the House Ways & Means Committee on April 6, 2015. In the letters, the ABA urged both committees to protect the ability of law firms and other personal service businesses to use the cash method of accounting and not to support any proposals that would require these businesses to switch to the accrual method. The ABA also sent an updated Legislative Action Alert to state and local bars on April 7, 2015 urging them to send new letters to their Members of Congress.
After receiving input from many stakeholders, the Senate Finance Committee’s Business Income Tax Working Group issued its Report to the full Committee on July 7, 2015 discussing various tax proposals and options. Although the Report did not expressly advocate the previous Camp or Baucus mandatory accrual accounting proposals, it stated that “it would be difficult to achieve significant rate reduction in a revenue-neutral tax reform process without curtailing many of the most popular tax expenditures utilized by pass-through businesses, such as…cash accounting,” and the Report also listed the Baucus and Camp accrual accounting proposals as viable “Options” for the Committee to consider (See Report at page 27 and the Appendix at pages A-5 to A-8).
House leaders have also signaled their desire to pursue tax reform this year. Last December, Speaker Ryan and House Ways & Means Committee Chairman Brady said that tax reform will be a top priority in 2016, and both leaders endorsed simplification, closing loopholes, lowering rates, and encouraging the growth of small businesses. Towards that end, a new House Tax Reform Task Force, created by Speaker Ryan in February 2016 and chaired by Representative Brady, is now studying a variety of tax reform proposals suggested by House Republicans. For all these reasons outlined above, the mandatory accrual accounting proposals opposed by the ABA remain very much alive in the 114th Congress.
To address this continuing threat, the ABA sent a new letter to the House Ways and Means Subcommittee on Tax Policy on April 13, 2016 in connection with its hearing on "Fundamental Tax Reform Proposals." The ABA also sent similar letters to the full House Ways and Means Committee and the Senate Finance Committee.
Although the Obama Administration has not taken a formal position on the proposed legislation, the President’s Budget for Fiscal Year 2016 that was released on February 2, 2015 contains language that would expand the availability of cash accounting for many small businesses but would not force law firms and other personal service businesses that are currently allowed to use cash accounting to switch to the accrual method. The President’s FY2016 Budget would create a new uniform rule allowing small businesses with annual gross receipts under $25 million to use the cash method of accounting (up from the current $5 million threshold), but it also contains specific exceptions that would allow all personal service businesses and other pass-through entities regardless of their annual gross receipts to continue to use the cash method, except for partnerships with a C corporation partner and farm corporations. (See Treasury Department’s FY 2016 Greenbook at pages 41-42, and FY 2016 Analytical Perspectives of the U.S. Government at page 162). In addition, the President’s new proposed Budget for Fiscal Year 2017, released on February 9, 2016, contains an almost identical expanded cash accounting proposal for small businesses. (See FY 2017 Analytical Perspectives of the U.S. Government at page 171).