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.
At the end of the 113th Congress in late 2014, Chairman Camp introduced a revised version of his comprehensive tax reform legislation as H.R. 1, and the mandatory accrual accounting provisions in Section 3301 of that legislation were almost identical to those contained in Section 212 of the original Camp bill. However, while H.R. 1 and the draft Senate bill generated extensive discussion, neither bill advanced during the 113th Congress.
During the 114th Congress, 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, and members and staff from both committees reiterated that the previous mandatory accrual accounting proposals remained viable options to help pay for tax rate reductions. After the Senate Finance Committee created a series of tax reform working groups and requested written comments from interested stakeholders, the ABA sent new letters to that committee and to the House Ways & Means Committee in April 2015 urging them to preserve cash accounting for law firms and other personal service businesses and to oppose any proposals requiring these businesses to switch to the accrual method. The ABA also sent an updated Legislative Action Alert to state and local bars in April 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 in July 2015 discussing various tax proposals and options. Although the Report did not expressly endorse the previous 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).
In February 2016, Speaker Ryan created a new House Tax Reform Task Force chaired by House Ways & Means Committee Chairman Brady to develop a new tax reform plan based on several key principles including tax simplification, closing loopholes, lowering rates, and encouraging the growth of small businesses. The House tax reform plan, known informally as the “Blueprint,” was released in June 2016 and included several major proposals such as lower corporate and individual tax rates, a new 25% tax rate for small pass-through businesses, and full expensing. To pay for these tax reductions, committee members and staff continue to examine other possible changes to the tax code, including the previous mandatory accrual accounting proposals.
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 in April 2017.
Although the Trump Administration has not taken a formal position on the mandatory accrual accounting proposals, there is still a significant risk that the proposals could be included in the new comprehensive tax reform legislation that is now being developed in the 115th Congress as one means for paying for lower tax rates. Therefore, the proposals remain an active and serious threat to law firms, accounting firms, and many other types of small businesses.