ABA President William C. Hubbard reiterated the ABA’s opposition this month to any tax reform proposals in Congress that would require law firms and other personal service businesses with annual gross receipts over $10 million to switch from the cash method of accounting to the accrual method.
In April 6 correspondence to the leaders of the Senate Finance Committee in response to the committee’s request for stakeholder input on improving the tax code, and in similar correspondence to the House Ways and Means Committee, Hubbard said the mandatory accrual proposal “would create unnecessary new complexity in the tax law and cause substantial hardship” for many lawyers, law firms and other personal service businesses.
Under current law, businesses are generally permitted to use the simple and straightforward cash receipts and disbursements method of accounting − in which income is not recognized until cash other payment is actually received − if their average annual gross receipts for a three-year period are $5 million or less. In addition, all individuals, partnerships, S corporations, law firms and other personal service businesses are permitted to use the cash method irrespective of their annual revenue unless they have inventory. Most other businesses must use the accrual method, in which income is recognized when the right to receive it arises, not when it is actually received.
During the 113th Congress, the mandatory accrual accounting provisions were included in legislation introduced in the House and in a draft Senate Finance Committee proposal. The ABA worked with a broad and diverse coalition of associations, law firms, other organizations, and over two dozen state and local bars to oppose the provisions. In addition, 46 senators and 233 representatives signed letters to the Senate Finance Committee and House Ways and Means Committees expressing support for cash accounting and concerns over the mandatory accrual accounting proposals.
Hubbard emphasized that the proposals, in addition to creating complexity and increasing compliance costs, would:
• impose new financial burdens on many law firms and personal service businesses by requiring them to pay taxes on income they have not yet received and may never receive;
• cause the legal professional to suffer particular financial hardships, as many lawyers and law firms are not paid by their clients until long after the work is performed; and
• impede economic growth by discouraging law firms and other professional service providers from expanding or merging with other providers because it could trigger costly accrual accounting requirements.
The committees will be weighing the comments and recommendations they receive from organizations and the public as they develop tax reform legislation for consideration during the 114th Congress.