The U.S. Senate may vote as early as Thursday, July 18, on a bill to limit the cash accounting method only to firms of $10 million gross receipts or less.
Architecture firms, which often have high levels of accounts receivable, would be harmed because they would be required to pay taxes on payments not yet received. If this affects your firm adversely, the AIA recommends you contact Sen. Tim Kaine and Sen. Mark Warner immediately.
AIA Position: The American Institute of Architects (AIA) supports firms’ use of the cash basis method of tax accounting and opposes any accounting method changes that would penalize larger architecture practices.
Background
Under current law, professional services firms, including architecture firms, can generally use cash accounting for tax purposes. This method allows firms to do their tax accounting based on payments actually received as opposed to payments accrued.
Some tax reform proposals would limit the use of cash accounting to sole proprietorships and firms with less than $10 million in gross receipts.
A significant number of architecture firms with revenues over $10 million currently use the cash method of accounting, either under the professional service provider exception, or because they are organized as S corporations or partnerships. These firms would no longer be able to use the cash accounting method, which would create significant cash flow and other business problems.
Architecture firms normally carry large balances of accounts receivable and work in progress, representing work performed for clients for which they have not yet been paid. While this situation can create cash flow challenges for firms, the use of cash accounting helps to mitigate those challenges by allowing firms to make tax payments after receiving payment for their services. Forcing firms to use the accrual method (a method that taxes firms based on billings, rather than when they receive payments) would result in an effective tax increase to the owners because they will be taxed on income that they have not received and will impair business growth and job creation by tying up funds otherwise available for expansion.
The AIA has raised serious concerns over this effort, noting that it would create significant cash flow problems for architecture firms, potentially leading to downsizing and delayed expansion plans.
Please tell your Senators to oppose these changes to the cash accounting method and sign on to the letter by July 18.
The deadline for Senators to sign on is tomorrow – make sure they hear from you before then!