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US lawmakers back cash accounting

30th September 2014

MGI World US lawmakers back cash accounting

Lawmakers in the US have said that making businesses switch to accrual accounting would have serious consequences.

In a letter to the leadership of the House of Representatives, a bipartisan majority of the house called for businesses to be allowed to keep cash accounting in place for tax purposes.

It comes in response to proposals for changes to the federal tax code that would require a large proportion of companies to convert to accrual accounting.

Congress is currently considering proposals to make accrual accounting compulsory for firms with annual gross receipts of over $10 million (£6.2 million).

But politicians and business groups have said that the proposed method, which recognises income when a service is performed regardless of when it is paid for, will become a drain on company finances and potentially have a negative impact on cash flow management.

With cash accounting, income is recognised when it is collected – and tax is only paid at that point as a result.

Expecting businesses to pay tax on income before it has even been received will take funds out of the hands of businesses, critics argue, which will in turn inhibit their growth ambitions and prevent them from creating much-needed jobs for the US economy.

Agriculture could be the biggest victim, the letter claims. Farmers often handle the fallout of changing commodity prices and conditions by deferring income or accelerating expenses, the lawmakers say, and this is facilitated by the flexibility that comes with cash accounting.

Yet a number of professional sectors such as accountants, architects, attorneys, engineers, doctors and financial services workers, also use cash accounting. Since many of them are subject to professional codes of conduct that impinge upon their approach to external finance, it may be harder for them to borrow to make up the shortfall from paying tax in some income too soon.

“While we believed reforms to the tax code should provide a simpler ad fairer tax system, requiring the use of the accrual method for entities currently using the cash method will not achieve these goals,” the letter states.

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