The cash method of accounting is one that is commonly used by small and medium size business of all types. The simplicity of record keeping and reporting makes the cash method an attractive alternative.
However, a broad reaching tax reform plan recently introduced in the U.S. House of Representatives would make significant changes in which businesses would be allowed to utilize the cash method of accounting. The proposal from Representative David Camp, which is designed to simplify the rules on the cash method, would modify the gross receipts threshold that currently precludes some companies from using the cash method.
Camp’s plan would generally require any business with average gross receipts exceeding $10 million per year to use the accrual method of accounting. At the same time, the proposed new rules would open up the cash method of accounting for certain businesses that are currently ineligible for the cash method, such as C corporations with more than $5 million in annual receipts.
If enacted, who will be impacted by this change? Drawing the line at $10 million in annual receipts will push many service businesses and fee-based professional corporations out of the cash method and into the accrual method of accounting. This includes attorneys, accountants, physicians, engineers, and architects who may now be using the cash method of accounting.
On the other hand, some smaller C corporations (with receipts of under $10 million annually) may benefit by being allowed to switch to the cash method.
Please keep in mind that this potential change is early in the proposal stage and is likely to encounter many obstacles and adjustments along the way. But it is important to note that Congress is looking at new ideas and modifications of existing regulations aimed at simplifying the tax code.
We will continue to monitor this and other tax proposals and report changes/potential changes as they occur. For questions about this or any other tax issue, please contact us.