Senate Tax Change Proposal Has Coalition Concerned

Proposal would change the method of accounting used for tax purposes from the cash basis method to accrual method, impacting farmers

Published on: Jan 27, 2014

A coalition of groups opposed to a proposed accounting change in the Senate Finance Committee's Cost Recovery and Accounting Discussion Draft released in November have submitted a letter to the leaders of the committee outlining their position.

The groups represent engineers, architects, dentists, CPAs, farmers and S corporations who say the proposal, which would require many of the groups' members to change the method of accounting used for tax purposes from the cash basis method to accrual method, is harmful.

The letter was sent in mid-January to the chairman and ranking member of the Senate Finance Committee, Sens. Max Baucus, D-Mont., and Orrin Hatch, R-Utah.

The groups say a change from the cash basis method for tax purposes would result in those who own and operate these businesses to pay tax before cash is received, therefore recognizing revenue in advance of actually getting paid.

Proposal would change the method of accounting used for tax purposes from the cash basis method to accrual method, impacting farmers
Proposal would change the method of accounting used for tax purposes from the cash basis method to accrual method, impacting farmers

Because the expenses of such organizations would essentially remain the same, this requirement would result in higher net taxable income for Federal tax purposes, they said. In addition, it could lead to cash-flow problems.

"For example, among professional services firms, the primary cost is labor, and businesses must regularly pay their employees even if they are not paid by their clients for several months," the letter said.

The use of cash accounting helps to mitigate this challenge by allowing the business' owners to make tax payments after receiving payment for their services, they added.

"We believe that tax reform is a laudable goal and that simplification of the tax code is very important," the organizations added. "However, converting from the cash method to accrual basis would not be simpler and may actually create a significant burden on those professional services sector businesses and farms."

Signatories on the letter include the American Council of Engineering Companies, the American Dental Association, the American Institute of Architects, the American Institute of CPAs, the American Farm Bureau Federation and the S Corporation Association.

Related: U.S. Senate Committee Tax Proposal Would Harm Farmers

According to Kennedy and Coe, a national agricultural accounting and consulting firm, a similar proposal was released by the U.S. House Ways and Means Committee in March, 2013.

Kennedy and Coe said both the Senate and House committee proposals would require businesses with more than $10 million in gross receipts to use accrual accounting.

Both proposals, they added, would affect smaller operations by aggregating related businesses to determine whether the businesses collectively have more than $10 million in gross receipts. If they do, then each related business would be required to use accrual accounting.

Feed yards, hog farms, dairies and row crop operations could be affected, they said.