One issue that TSCPA and AICPA are currently focusing our advocacy efforts on is the possibility that Congress may enact tax reform legislation that would include a provision to mandate certain service-based businesses with $10 million or more of revenue to convert to an accrual basis of accounting and prohibit them from using the cash basis of accounting. This would have a significant effect on many CPA firms, as well as many other organizations that perform services in fields such as law, engineering, health care, architecture, farming and other areas.
Now we didn’t just wake up one day and assume this might be a problem. Our concerns were raised because a few years ago, this concept got imbedded into a tax reform proposal that ended up going nowhere. But the marker on this particular issue had been played at that point and like many things in Washington, DC, we now must be ever vigilant about it raising its head again. And that probability is not insignificant because if enacted, this particular proposal would raise an estimated $26 billion for the government’s coffers.
The idea to mandate the accrual method of accounting for certain pass through entities and personal service corporations isn’t based on any kind of sound tax policy. Pure and simple, it was viewed as a one-time revenue generator to help pay for other tax changes. Congress has to develop a favorable revenue score on any proposed legislation so it will work under the CBO budget model.
There was no in-depth thought about what effect mandating the accrual method of accounting might actually have on the businesses involved. Again, a typical scenario as the members of Congress and their staffs craft these kinds of bills. Rob Peter to pay Paul. Make the numbers work. Who cares about the real people who may be affected?
Such a proposal would have real-life consequences for the owners of these types of businesses. In many cases, they would end up paying taxes for services for which they have not been paid and/or may never be paid. It could also result in the only reason an owner is subject to a higher individual income tax rate for federal, state or both purposes. The increase in tax liability could have a significant impact on a new owner’s ability to finance the business and possibly result in the need to take out a personal bank loan for the sole purpose of paying their increased tax liability. And finally, these businesses will have to spend significant resources to convert their accounting systems in order to comply.
There is an old saying that you don’t want to see how sausage or our laws are made. This particular issue of eliminating the cash basis of accounting for service entities is a prime example of what they meant. We will continue our efforts with our members of Congress from Texas to fight this proposal from being implemented. We encourage our members to help communicate that message to their Congressional representatives.