The ABA Board of Governors adopted a resolution Nov. 16 that opposes proposed legislation in Congress that would require all law firms and other personal service businesses with annual gross receipts over $10 million to use the accrual method of accounting rather than the traditional cash receipts and disbursement method.
The proposed requirement, contained in Section 212 of a House Ways and Means Committee discussion bill known as the “Tax Reform Act of 2013,” would cause significant financial hardship to many law firms, accounting firms and other personal service businesses by forcing them to pay tax on income they have not yet received and may never receive, according to the ABA. The ABA also is concerned that the proposal could create unnecessary complexity in the tax laws while increasing compliance costs.
Under current law, businesses are permitted to use the simple, straightforward cash receipts and disbursement method of accounting – in which income is not recognized until cash or other payment is actually received and expenses are not taken into account until they are actually paid – if their average annual gross receipts for a three-year period are $5 million or less. However, an exemption currently applies to all law firms and other personal service businesses which allows them to use the cash method of accounting irrespective of their annual revenue unless they have inventory.
The more complicated accrual method that would be required by the proposal recognizes income when the right to receive the income exists rather than when payment is received.
Ways and Means Committee Chairman Dave Camp (R-Mich.) is expected to introduce the comprehensive tax reform legislation sometime in the near future.