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Cash Accounting in Tax Reform

Posted By John Palatiello, Thursday, March 28, 2013

When Congress considered Tax Reform in 1986, MAPPS worked with a coalition in the A/E community to preserve cash based accounting for certain professional service firms.

We were successful. Language preserving cash (versus accrual) as an option was included in the 1986 Act. Congress even specified that architecture-engineering services (A/E) included surveying and mapping! Take a looks at the current tax regulations.

At that time, we did a study that found that as much as 1/3 of an A/E firm's revenue was in accounts receivable at any point in time. If that point in time was the end of the firm's tax year, and the firm was legally required to use accrual accounting, then the firm would have to pay tax on income – 1/3 of its annual revenue – not yet realized, and in some cases, income that would never be realized. This was viewed as a great burden on small A/E firms.

This argument helped us save the day for A/E firms' ability to continue to use cash accounting in the 1986 tax reform bill that became law.

The Ways and Means Committee of the U.S. House of Representatives has released a discussion draft for 2013 Tax Reform, part of its broader effort on comprehensive tax reform that significantly lowers rates while making the tax code simpler and fairer. This draft is specifically focused on tax provisions affecting small business.

The draft proposes to continue cash accounting for certain professional service firms, but limits it to firms with gross receipts of $10 million or less.

What are your thoughts? How frequent is use of cash accounting for geospatial (or broader architecture, engineering, surveying and mapping) among firms with income over $10 million? Should the $10 million cap be raised? What should MAPPS advocate?

Let us know.

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