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September 01, 2014

Support builds in Congress for preserving cash accounting method for law firms

Majority of House members submit letter to House leadership

A majority of U.S. House of Representatives members urged the House leadership in a Sept. 11 letter to reject proposals opposed by the ABA that would force many small businesses, including law firms, to shift from the traditional cash accounting method to accrual accounting.

The proposed legislation, prepared by the House Ways and Means and Senate Finance Committees, would require all law firms and other personal services businesses with annual gross receipts over $10 million to use the accrual method of accounting. As a result, many firms would be forced to pay taxes on income long before it is actually received. Law firms and other personal service businesses favor the cash method of accounting – where income is not recognized until payment has been received − because it is simple and generally reflects the way they operate their businesses, i.e., on a cash basis.

The bipartisan group of 233 representatives agreed with the ABA, more than 25 state, local and specialty bars, the American Institute of CPAs and numerous other organizations that the proposals would impose severe financial hardships on the affected businesses, have a dampening effect on business growth across industries, and stifle job creation. The House letter, which is similar to an Aug. 6 letter that 46 senators sent to the Senate Finance Committee, reflects widespread congressional support for the cash method of accounting and growing opposition to the harsh mandatory accrual accounting proposals.

The letters echo concerns that ABA President William C.  Hubbard raised earlier this year in a written statement submitted to a key House Small Business subcommittee. In his July 10 statement, Hubbard expressed the ABA’s strong support for preserving cash accounting for law firms and explained in detail how the legislation would create unnecessary new complexity in the tax law, increase compliance costs, reduce economic growth, and harm law firms and their clients. Hubbard also emphasized that the mandatory accrual accounting proposals have become one of the most important issues to ABA members and many state and local bars throughout the country.

“If the tax rules are changed to disconnect cash collection from how income is taxed,” Hubbard warned, “the very business mode upon which may law firms and other personal service businesses operate will be turned on its head.” He also expressed concerns that the proposals would discourage individual professional service providers from joining with other providers to create or expand a firm, even if it makes economic sense and would benefit clients, because it could trigger the costly accrual accounting requirement. “Sound tax policy should encourage − not discourage − the growth of small and medium-sized businesses, including those providing personal services such as law firms, especially in today’s difficult economic environment,” Hubbard emphasized.

“Now that a clear majority of House members—and nearly half of all Senators—have signed letters in support of preserving cash accounting and in opposition to forced accrual accounting, the ABA urges the House Ways and Means and Senate Finance committees to withdraw these harmful proposals,” he said after the House letter was sent.

Additional information and resources on this issue are available here on the ABA’s website.


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