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August 8, 2014

Many in US senate oppose accrual accounting for tax purposes

By Vincent Huck

Nearly half of the US senators, 46 out of a 100, have signed a letter to the chairman and ranking member of the Senate Finance Committee opposing a switch to accrual accounting for tax purposes.

The letter responds to the proposals of The Cost Recovery and Accounting Discussion Draft published by the US Senate Finance Committee in November 2013, which forms part of a broader tax reform under consideration by the US Congress.

The discussion draft suggest that all businesses with average annual revenues of $10m or less will be allowed to choose to adopt either a cash or accrual accounting method. While businesses with average annual revenues of over $10m will be required to adopt accrual accounting.

"As the Finance Committee develops its comprehensive tax reform package, we ask that you consider the negative impact that this proposal would have on the professional services sectors as well as farming and ranching businesses," the senators wrote. "Requiring more businesses to use the accrual method of accounting would create unnecessary complexity in the tax law and substantially increase compliance costs."

In addition to the substantial cost of changing accounting systems, businesses would also be burdened by having to pay tax on income before it is actually received, the senators argues. In their letter, they take the examples of professional services businesses, which include CPA firms, who must pay their employees and fixed operating expenses regardless of when their clients pay them.

They also took the example of farms and ranches which they say would face additional complications because under accrual accounting, "growing crops and raising livestock are considered production activities that would have to be accumulated as inventory and deducted when the commodity is sold".

The senators wrote that in both the case of professional services businesses and farms and ranches, the acceleration of the business’ tax liability combined with the inability to match revenues with expenses would force businesses to borrow money to meet their tax liability.

"The basic tenet of taxation is ‘ability to pay’," they wrote. "Forcing businesses to recognise income before they receive payment violates this basic tenet."

A spokesperson from the American Institute of Certified Public Accountants (AICPA) told The Accountant: "The AICPA’s view is that any tax reform should meet two tests: simplicity and fairness. The accrual requirement fails on both counts. It is under consideration only because it would allow the government to collect revenue from affected businesses sooner – although it would put those businesses at a serious economic disadvantage by doing so."

The US Senate Finance Committee was not available for comment at the time of publication.

 

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