ABA Urges Lawmakers to Rethink Accrual Accounting for Law Firms
The American Bar Association has sent letters to federal lawmakers urging them to rethink the accrual accounting for law firms as included in the draft Tax Reform Act of 2013. The letters point out that accrual accounting would be more complex and expensive for law firms, and the current method of recognizing income and expenses when money is actually received and paid out should be followed for tax purposes.
ABA's actions are not without merit for there is a significant possibility of accrual accounting being applied to law firms, and though this may not hurt big law so much, it is definitely going to be a problem for small law firms. Considering that both House Ways and Means Chairman Dave Camp (R-Mich) and Senate Finance Chairman Max Baucus (D-Mont) have launched plans to bring certain businesses under the accrual method, the problem is imminent and the ABA is required to act.
In a letter sent to the Committee on Ways and Means, James R. Silkenat, the President of ABA points out: "Although Section 212 would allow certain small business taxpayers with annual gross receipts in the $5 million to $10 million range to switch to-and thereby enjoy the benefits of-the cash method of accounting (a concept that the ABA does not oppose), the proposal would significantly complicate tax compliance for a far greater number of small business taxpayers, including many law firms and other personal service businesses, by forcing them to use the accrual method."
For a starter, the ABA points out that Section 212 of the Ways and Means Committee's discussion draft "Tax Reform Act of 2013" would require all law firms and other personal service businesses with annual gross receipt over $10 million to use the accrual method of accounting rather than the traditional cash receipts and disbursement method of accounting.
The ABA's letter to the Ways and Means Committee mentions, "Therefore, if this proposal is enacted into law, all law firms and other personal service businesses with annual gross receipts over $10 million would be required to use the accrual method of accounting, in which income is recognized when the right to receive the income is present and expenses are recorded when they are fixed, determinable and economically performed, both aspects of which present complications."
The letter to the Senate Finance Committee is more succinct, and the ABA says, "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 51 would have the opposite effect and cause other negative unintended consequences. 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 lawyers, 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 American Bar Association urges federal lawmakers to rethink the accrual accounting for law firms as included in the draft Tax Reform Act of 2013. While the accrual accounting would be more complex and expensive for law firms, it won't hurt the big law firms much but can pose problems to smaller firms.