Timing of Profits Spurs Debate on Accounting in IRS Code

For companies concerned about changes to the US tax code, the issue may not be how much money they make but when they make it.                                                            

Two approaches to corporate accounting are squaring off in Congress’s plans to change the Internal Revenue Code, and the outcome may have a big impact on some types of businesses, Bloomberg BNA reports.

Farms and professional services businesses such as engineering and accounting firms are pushing for greater use of the cash method of accounting, which counts income when it is actually received and expenses when they are actually paid. Accrual accounting, by contrast, counts income when an order is made and an expense when goods are received.

Congress is weighing the biggest changes to the tax code since 1986, looking to cut rates, eliminate deductions and simplify the rules. Lobbyists have been pushing to save breaks for everything from retirement savings to credit unions, and representatives from industries from engineering to steel have been weighing in.

The House Ways and Means Committee proposed new rules in March for when businesses can use cash accounting. After a plan to expand its use and impose new limits on which companies can use this method, the committee signaled more adjustments may be on the way when a bill is introduced in coming weeks.

The annual cost of cash accounting for corporations, in terms of revenue lost to the government, is less than $50 million per year, the congressional Joint Committee on Taxation said in an annual report in 2012. The cost on the individual side of the tax code is between $1 billion and $1.5 billion annually from 2012 to 2017, the group estimated.

Ways and Means Committee Chairman Dave Camp touted his proposal as a simpler, more common-sense approach that would ease the cost of compliance for small businesses. His proposal would allow all sole proprietorships, as well as firms with less than $10 million in gross receipts, to use cash accounting, which the committee said would expand and simplify cash accounting for small businesses.

The American Institute of CPAs said the proposal would impose accrual accounting on some partnerships, S corporations, farms and personal services corporations -- most of which have been allowed to use cash accounting regardless of gross receipts as long as they don’t hold inventory.

Source:  Bloomberg News