(From left) R. Larson Frisby, ABA Associate Director of Governmental Affairs, joins Madison-based attorneys John Skilton and Michelle Behnke, along with State Bar Public Affairs Director Lisa Roys to meet with members of Congress to discuss the State Bar's opposition to proposed federal legislation changing the way law firms do business. Photo credit: American Bar Association.
April 22, 2014 – A component of the newly released federal “Tax Reform Act of 2014” and Section 51 of a similar Senate draft bill would make substantial changes to the way law firms conduct business. A provision within the proposals would require all law firms with annual gross receipts over $10 million to use the accrual method of accounting, prompting them to pay taxes on income long before it’s actually received.
This proposed legislative change was the primary focus of the American Bar Association Lobby Day 2014, an annual event that gives participants from all over the country an opportunity to lobby their members of congress on a whole host of issues.
This year, the State Bar of Wisconsin sent a team to Capitol Hill on April 9. Madison-based Attorneys Michelle Behnke and John Skilton, along with State Bar of Wisconsin Public Affairs Director Lisa Roys, spoke with members of the House Ways and Means Committee, as well as Senators Baldwin and Johnson, about the anticipated ramifications of the proposal on Wisconsin law firms.
The group laid out the State Bar’s official position on the matter, which was passed by the Board of Governors at its Dec. 6, 2013, meeting.
The State Bar Board of Governors opposes governmental measures, which would require law firms and other personal service businesses that now compute taxable income on the cash receipts and disbursements method of accounting to convert to the accrual method of accounting.
The following letter, expressing the State Bar’s concern over the Tax Reform Act of 2014, was sent to all Wisconsin members of the U.S. House of Representatives on March 10, 2014.
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March 10, 2014
U. S. House of Representatives
Washington, D.C. 20515
Re: Draft Legislation Requiring Many Law Firms and Other Personal Service Businesses to Pay Taxes Using the Accrual Method of Accounting
On behalf of the State Bar of Wisconsin and its more than 24,000 members, I write to express our concerns regarding Section 3301 of the discussion draft “Tax Reform Act of 2014” recently released by House Ways and Means Committee Chairman Dave Camp. If enacted, this provision would require all law firms and other personal service businesses with annual gross receipts over $10 million to use the accrual method of accounting rather than the traditional cash receipts and disbursement method of accounting. As a result, many law firms, accounting firms, medical firms, and other professional service providers would be forced to pay taxes on income long before it is actually received.
Under current law, individuals and most partnerships and other pass-through entities—as well as other types of businesses with annual gross receipts of $5 million or less—are permitted to use the simple cash method of accounting, in which income is not recognized until cash or other payment is actually received. In addition, all law firms and various other types of personal service businesses are allowed to use the cash method of accounting regardless of their annual revenue unless they have inventory. Most other businesses are required to use the more complicated accrual method of accounting, in which income is recognized when the right to receive the income arises, not when the income is actually received. Section 3301 would dramatically change current law by raising the gross receipts cap to $10 million while eliminating the existing exemption for law firms and other personal service businesses and for other partnerships and S corporations.
Although we commend Chairman Camp’s efforts to simplify the tax laws, we are concerned that Section 3301 of the draft bill would have the opposite effect and cause other negative unintended consequences. This far-reaching proposal would create unnecessary complexity in the tax law and increased compliance costs by disallowing the use of the simple, straightforward cash method of accounting. In addition, the proposal would impose significant new financial burdens and hardships on millions of personal service businesses throughout the country—including many law firms—by requiring them to pay tax on income they have not yet received and may never receive.
To avoid these harmful consequences, the State Bar of Wisconsin urges you to oppose the accrual accounting requirement contained in Section 3301 of the new draft bill and convey your opposition to House Ways and Means Committee Chairman Camp and to the Committee’s Ranking Member Sander Levin.
Thank you for considering our views on this issue, which is of critical importance to lawyers, law firms, and many other types of personal service businesses throughout Wisconsin and around the country.
Patrick J. Fiedler
State Bar of Wisconsin President