The most recent discussion draft from House Ways and Means Committee Chair Dave Camp (R-MI) still includes proposals that would restrict the ability of pass-through businesses to continue using the cash method of accounting.

The effects of this proposal would be far reaching. Engineering firms, some of the most dynamic businesses in the U.S. and part of the driving force behind economic expansion and job growth, would particularly be impacted. The proposal would require engineering firms to change to the accrual method, forcing their owners to pay tax before they have the cash to pay it and adding to complexity and costs.

The cash method is currently available to individuals, partnerships, and S corporations, unless the business has inventory. A C corporation, or a partnership with a C corporation as a partner, generally cannot use the cash method unless it is a personal service corporation, is in the business of farming, or has annual gross receipts of $5 million or less.

Under the House and Senate discussion drafts, the cash method would be generally restricted to (1) individuals, (2) businesses with under $10 million in annual gross receipts, and (3) farming businesses. Under the proposals, all S corporations, partnerships, and personal service corporations with more than $10 million in annual gross receipts could no longer use the cash method, while some C corporations with annual gross receipts between $5 million and $10 million would become eligible to use it.

Under the cash method, income is recognized when it is actually received and expenses are recorded when paid. Under the accrual method, income is recognized when the right to receive the income exists and expenses are recorded when they are fixed, determinable, and economically performed. These tests are more complex and increase compliance costs.

The American Council of Engineering Companies (ACEC) is asking members to contact their Senators to express concerns about the impact of this proposal on engineering firms and their employees, and is asking them to sign the cash accounting letter authored by Senators Sherrod Brown (D-OH), Pat Roberts (R-KS), Angus King (I-ME), and Ron Johnson (R-WI).

Below is a sample letter you can use to contact your Senators. ACEC encourages members to personalize their letters by specifying how the proposed limit on the use of cash accounting would affect their firm and employees. ACEC member action is needed by July 18, so please act quickly.


Dear Senator:

On behalf of my firm and our employees, I am writing to express our serious concerns about a tax reform proposal under consideration in Congress that would limit the use of the cash method of accounting to businesses with less than $10 million in gross receipts. We respectfully ask you to sign the bipartisan letter authored by Senators Sherrod Brown (D-OH), Pat Roberts (R-KS), Angus King (I-ME), and Ron Johnson (R-WI) that opposes these limits on cash accounting.

Engineering firms often use the cash method of accounting because it allows the firm to manage cash flow while waiting to be paid for work it has completed. There is typically a gap of at least 120 days between when a firm bills for work and when it is paid by its clients. At the same time, firms must pay their employees every two weeks. The primary cost for engineering firms is labor, and approximately 85 percent of a typical firm's expenses can be attributed to payroll, benefits, and similar regular expenses. The use of cash accounting helps to mitigate these cash-flow challenges by allowing firms to make tax payments after receiving payment for their services.

By contrast, forcing firms to switch to accrual accounting would create a number of problems. Firms would need to use debt financing to cover the difference between expenses and receipts, which is much harder for small and mid-size firms to access today. Forcing cash firms to switch to accrual would create additional negative consequences, including the potential for workforce downsizing, delayed expansion plans, and decreased shareholder distributions. All of these outcomes would take money out of the productive economy, jeopardize well-paying jobs, and burden firms that continue to struggle in the soft economy.

My firm is a member of the American Council of Engineering Companies. On behalf of ACEC and its 5,000 member firms across the country, we appreciate your consideration of our concerns and hope you will add your name to the bipartisan Senate letter.


If you have any questions or comments about these topics, please contact David E. Shaffer, Director, Architectural & Engineering Group, at Email or 215-441-4600.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.