Tax Law

ABA urges federal lawmakers to nix draft provision requiring law firms to adopt accrual accounting

The American Bar Association is urging federal lawmakers to rethink a possible plan to require businesses to use the accrual method instead of traditional cash accounting in the discussion draft Tax Reform Act of 2013.

Accrual accounting would be more complex and expensive, the ABA’s president writes in letters to lawmakers, than the system currently used by many law firms, which recognizes income and expenses for tax purposes when money is actually received and paid out, respectively. A number of others also have objected to forcing businesses to adopt the accrual method, which could require companies and law firms to pay tax on income they not only haven’t received but may never receive, according to the ABA and The Hill’s On the Money blog.

“Although we commend you for your efforts to craft legislation aimed at simplifying the tax laws—an objective that the ABA and its Section of Taxation have long supported—we are concerned that Section 212 would have the opposite effect and cause other negative unintended consequences,” President James R. Silkenat wrote in Jan. 13 letters to leaders of the Senate Finance Committee (PDF) and the House Ways and Means Committee (PDF).

“This far-reaching provision would create unnecessary complexity in the tax law by disallowing the use of the cash method; increase compliance costs and corresponding risk of manipulation; and cause substantial hardship to many law firms and other personal service businesses by requiring them to pay tax on income they have not yet received and may never receive,” Silkenat continues. “Therefore, we urge you and your committee to remove this provision from the overall draft legislation.”

The potential law in its present form would apply to businesses with annual gross receipts above $10 million.

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