Witnesses at a July 10 hearing before the House Small Business Subcommittee on Economic Growth, Tax, and Capital Access asked lawmakers to protect those who qualify to use the cash method of accounting and expand the option to more small businesses.
“Under this method of accounting, a small business would be able to look at its checkbook to determine its taxable income; it sounds simple, and it is,” Donald Williamson, executive director of the Kogod Tax Center at American University in Washington, said. “Permitting small businesses to elect a simplified cash method of accounting would reduce compliance costs, ease the burden of tax administration and clarify the measurement of taxable income.”
Using the cash method of accounting, taxpayers recognize income when received and expenses when paid. Taxpayers using the accrual method accrue income regardless of whether a cash transaction happens.
As part of a draft tax overhaul released by House Ways and Means Chairman Dave Camp (R-Mich.) earlier this year, the threshold that requires companies to use the accrual method of accounting would be raised from $5 million in annual gross receipts to $10 million. Williamson’s testimony made the point that, “Raising the threshold to $10 million would mean that almost 90 percent of all businesses in the United States could adopt the cash method of accounting,” Williamson said.
The legislation is expected to be considered by the full House Small Business Committee and may receive that Committee’s endorsement before it is handed off to the Ways and Means Committee, which has jurisdiction over tax matters.
