Bar News - March 19, 2014
ABA: Tax Law Change Would Hurt Large Law Firms
American Bar Association President James Silkenat is leading an effort by the American Bar Association to oppose proposed federal legislation that would affect professional services firms, including law firms. Last month, the Bar Association Board of Governors voted to join the effort by sending a letter of concern to NH’s congressional delegation.
Section 212 of draft House legislation titled the “Tax Reform Act of 2013” and Section 51 of similar draft Senate legislation would require all law firms and other personal service businesses with annual gross receipts of more than $10 million to use the accrual method of accounting rather than the traditional cash receipts and disbursement method.
The change would require these law firms and other professional service providers to pay taxes on income long before it is actually received.
Under current law, sole proprietors and most partnerships — as well as other types of businesses with annual gross receipts of $5 million or less — are permitted to use the simple cash method of accounting, in which income is not recognized until cash or other payment is actually received, and expenses are not taken into account until they are actually paid.
In addition, all personal service businesses, including those engaged in the fields of law, are exempt from the revenue cap and can use the cash method of accounting, irrespective of their annual revenues, unless they have inventory. Most other businesses are required to use the more complicated accrual method of accounting, in which income is recognized when the right to receive the income is present, not when the income is actually received by the business.
The ABA contends that the mandatory accrual accounting provisions in the draft House and Senate bills would create unnecessary complexity in the tax law, increased compliance costs and significant new financial burdens and hardships for many law firms and other personal service businesses throughout the country by requiring them to pay tax on income not yet received and that may never be received.
The ABA helped to defeat a similar proposal in the mid-1980s. Visit www.americanbar.org for a fact sheet that provides more detail on this issue, as well as links to the proposed bills, ABA’s recent letters to Congress, and other background information.