CPAs Advocate Legislators Opposition to Tax Measure

Members of Congress and several preeminent organizations have a problem with measures included in a recent tax reform attempt, and at least two local accountants agree.

Reworking the country’s notoriously abstruse tax code has been a looming task for several years. Many politicians claim it as a top priority for lawmakers, but so far no comprehensive reform has gone through since 1986.

Rep. David Camp (R-OH) in February drafted legislation aimed at simplifying and “fixing” the tax code. However, the discussion draft has not left the House Ways and Means Committee, and if the American Institute of Certified Public Accountants, the American Bar Association and 233 House members have anything to say about it, the legislation will never make it to the Congress floor as-is.

The bipartisan group of legislators issued a letter to House Speaker John Boehner Sept. 9, stating it did not approve of a measure that would force personal service industries whose income is more than $10 million to use an accrual method of tax accounting. The letter stated the move “will have a severely detrimental impact on thousands of businesses in our districts.”

Current law allows personal service industries — including accounting, law, architecture, engineering and health care — to use the cash method of accounting, regardless of profits.

The authors of the Tax Reform Act of 2014 cite the fact that accrual accounting is seen as providing a more comprehensive look at what the company owes. And, according to the draft, the Joint Committee on Taxation found the new provision would raise $23.6 billion between 2014 and 2023. 

However, the change could pose a problem for some businesses, accountant industry sources say. 

The issue? Cash flow. For service industries, the biggest expense is labor, and employers can’t negotiate when they will pay labor, said Matt Baxter, owner at Matt Baxter CPA of Fayetteville. The paychecks have to be written. “People have to make a living,” he said.

Also, if companies have to pay taxes on income for which they have potentially not been paid, they might end up borrowing money to pay taxes. 

Baxter does not like that scenario, and he’s not alone.

“I have clients who are definitely concerned about this,” said Tony Uth, partner at HoganTaylor LLP in Fayetteville. “It will raise unnecessary burdens on service.”

Uth said he agrees with the points made in the legislators’ letter. The House effort is led by Brad Schneider (D-Ill), Richard Hudson (R-NC), Mike Quigley (D-Ill) and Blake Luetkemeyer (R-MO) and has seen support from many organizations, including some of the leading authorities on the accounting and legal industries.

Although the AICPA has voiced strong support for tax reform, the entity and many state-level accountant organizations have come out against the measure.

The AICPA voiced its opposition last August, when similar proposed legislation was being discussed. In a letter to some key legislators, the AICPA stated, “The cash method of accounting is simpler in application, has fewer compliance costs, and does not require taxpayers to pay tax on income they have not yet received.”

The ABA weighed in on the issue Sept. 12, with a press release that said the proposed measure “would have a dampening effect on business growth across industries and stifle job creation.”

Similar legislation now sitting in the Senate Finance Committee would require all companies making $10 million or more to use the accrual method. This would give a break to companies which make most of their money through inventory, as current law generally requires them to use the accrual method. The proposed House law would keep the inventory rules the same.