April 24, 2017

ABA supports law firms’ use of cash accounting, warns of proposed tax on phantom income

WASHINGTON, April 24, 2017 — American Bar Association President Linda A. Klein sent letters to the leaders of the Senate Finance Committee and the House Ways and Means Committee urging them to reject any proposals that would require law firms and other personal service businesses to switch from the simple cash method of accounting to the more complex and costly accrual method. The ABA expressed concerns that, if enacted, the proposals would cause substantial financial hardship to many lawyers, law firms and other personal service businesses by forcing them to pay tax up front on “phantom” income they have not received and may never receive.  

Although the ABA commends Congress for its efforts to craft legislation aimed at simplifying the tax laws, the ABA opposes proposals that would require many personal services businesses including law firms to use the accrual method of accounting rather than the traditional cash receipts and disbursement method. The ABA cautioned that these mandatory accrual accounting would create unnecessary complexity in the tax law, increase compliance costs and kill jobs, and impede economic growth by discouraging law firms and other professional service providers from expanding or merging with other providers because it could trigger the costly accrual accounting requirement. These mandatory accrual accounting proposals are also strongly opposed by more than 30 state and local bars throughout the country.

A copy of the Senate Finance Committee letter can be read here. A copy of the House Ways and Means Committee letter can be read here.

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