ABA Legislative Action Alert
Wednesday, April 8, 2015
Posted by: Lauren Kolzow
ABA Legislative Action Alert
Urge Congress to Reject Harmful Tax Proposals that Adversely Affects Many Lawyers and Law Firms
We need your help to convince leaders of the Senate Finance and House Ways & Means Committees to protect the ability of law firms and other personal service businesses to use the simple cash method of accounting and not to include provisions in their new tax reform bills that would require many of these firms to switch to the more complex and costly accrual method. If these provisions are enacted, many law firms and other personal service providers would be forced to pay taxes on “phantom” income long before it is received.
Current law allows individuals and most partnerships and other pass-through entities—as well as other types of businesses with annual gross receipts of $5 million or less—to use the simple cash method of accounting, in which income is not recognized until cash or other payment is actually received. In addition, all law firms and various other types of personal service businesses are allowed to use the cash method of accounting regardless of their annual revenue unless they have inventory. Most other businesses are required to use the more complex accrual method of accounting, in which income is recognized when the right to receive it arises, not when it is actually received.
During the 113th Congress, the Senate Finance and House Ways & Means Committees prepared separate comprehensive tax reform bills that included similar mandatory accrual accounting provisions. In particular, both Section 3301 of H.R. 1, introduced last December, and Section 51 of the similar Senate draft bill would dramatically change current law by raising the gross receipts cap to $10 million while eliminating the existing exemption for law firms and other personal service businesses and pass-through entities.
Last year, the ABA wrote to both committees strongly opposing these mandatory accrual accounting proposals and expressing concerns that the proposals would create unnecessary new complexity in the tax law; increase compliance costs; 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. The ABA’s concerns are more fully explained in the ABA Fact Sheet and on the ABA's Mandatory Accrual Accounting for Law Firms web page. In addition, many state and local bars have also expressed strong opposition to the proposals.
Although the ABA and its allies have been successful in preventing these proposals from advancing so far, we learned during recent meetings with Senate Finance and House Ways & Means Committee staff that last year’s mandatory accrual accounting proposals remain “on the table” and could be included in the new comprehensive tax reform bills that the committees are now developing. The Senate Finance Committee recently set up a series of tax reform working groups and has requested written comments from interested stakeholders by April 15, 2015. The House Ways & Means Committee is also seeking input from stakeholders on how best to reform the tax code.
In response to the committees’ outreach, the ABA submitted a new letter to the Senate Finance Committee and a new letter to the House Ways & Means Committee on April 6, 2015 reiterating the ABA’s support for preserving cash accounting for law firms and its strong opposition to the mandatory accrual accounting proposals.
URGENT ACTION REQUESTED
The ABA needs your bar’s help to persuade leaders of the Senate Finance and House Ways & Means Committees not to include the mandatory accrual accounting provisions in the new tax reform bills they are now developing.
Please email or fax letters to your Members of Congress urging them to oppose any tax reform proposals that would require law firms and other personal service businesses to use accrual accounting and urging them to convey their views to the relevant tax committee leaders. (See sample bar letter to House and sample bar letter to Senate.)
If you have any questions or need information regarding the names and email addresses of the key congressional staff to whom your letters should be sent, please contact Larson Frisby, Associate Director of the ABA Governmental Affairs Office, at (202) 662-1098 or firstname.lastname@example.org. Please also let us know if you send new letters to Congress, as this will help us to coordinate and follow-up on your efforts. Thank you for your assistance.