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Friday, Feb 23, 2024

SMALL BUSINESS–U.S. Treasury Wants to Abolish Cash Accounting

Worker’s Compensation Meeting Scheduled Here

House Small Business Committee Chairman Jim Talent is on the warpath over a Treasury Department policy that has taken away from entrepreneurs one of the best case management tools allowing them to succeed , cash accounting.

Small businesses often choose cash accounting because it best reflects the way they run their businesses. Willing to forego deductions to use this simple method of accounting, small businesses can pay tax on income when they actually receive the income.

Current law allows small businesses to use the cash method of accounting, including corporations with average gross receipts of $5 million or less.

But Section 536 of the Ticket to Work and Work Incentives Improvement Act of 1999, originating as a revenue provision in the Clinton administration’s 2000 budget, repealed the installment method of accounting for accrual basis taxpayers.

This change in the law is chilling the sale of small businesses and is devaluing them over 8 percent on average, Talent said.

“Forcing small businesses to pay lump-sum capital gains taxes on the sale of their businesses is wrong. Similarly, forcing small businesses , especially small contractors and service providers , to switch to the complex accrual and inventory methods of accounting means they have to pay now and collect later on income they haven’t received,” said Talent.

“For Treasury and the IRS to go back to prior years and collect back taxes, interest, and penalties on small businesses for using a lawful accounting method is simply unfair.”

This affects farmers, personal service corporations, individual taxpayers, and small entities that are taxed like individuals, including sole proprietors, S corporations, and partnerships, he said.

Joe Mikrut, a tax legislative counsel with the Treasury Department, said the Treasury’s guidance has nothing to do with small businesses avoiding or manipulating their taxes, but still the possibility was there.

“Not only does the cash method fail to reflect economic income, the cash method is subject to manipulation that distorts taxable income,” he said.

Talent believes there is no logical policy reason for the new installment sales tax, and no statutory authority for the Treasury Department to impose a small business cash accounting threshold to $1 million.

“You are pulling it out of the air,” he said of the threshold.

The more businesses are pushed into the accrual method of accounting the more they will face the new installment sales tax, he warned.

“We need to repeal the new installment sales tax completely. In addition, small business should be allowed to freely and consistently use the cash method of accounting,” Talent said.

Pat Olson, chair-elect of the section of taxation of the American Bar Association, agreed.

“Requiring small businesses to compute year-end inventory balances and use the accrual method of accounting subjects them to complex rules and record-keeping and substantially increases the costs of tax compliance for these taxpayers,” she said.

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Worker’s Comp Meeting , Small businesses are facing a possible shock from a rate increase for worker’s compensation , an increase of at least 18 percent.

Bills before the Senate and Assembly currently call for wide-sweeping reforms of the insurance industry. This could have drastic effects, warned Elaine Stevens, publicist for the Calabasas-based law firm of Klein, Testan & Brundo, which has offices statewide.

“The possibility of an 18+ percent increase in workmen’s compensation benefits could negatively impact the entire compensation industry, from insurance companies which cannot remain competitive and take major losses, to business owners who have to shell out larger premiums. The burden (would be) $2.6 billion in additional benefits statewide,” Stevens said.

A panel of business leaders will be leading a discussion of the proposed changes to workers’ compensation benefits. They’ll be meeting at 1 p.m. April 14, at the Radisson Hotel in San Diego.

Stephen J. Smith, director of industrial relations for the state of California, will head the panel discussion which will feature several prominent leaders from government and business.

The Friday meeting will bring together people with many different viewpoints, all with a stake in the future of workers’ compensation. Whatever is decided, it could have long-reaching effects on the economy, said Jeff Adelson, managing partner of the Long Beach branch of Klein, Testan & Brundo.

The free Town Hall meeting is the third in a series of such events held throughout the state, following similar meetings in Sacramento and Fresno. Future events are scheduled for Los Angeles and San Francisco.

The Friday forum is sponsored by Klein, Testan & Brundo, in partnership with the San Diego Regional Chamber of Commerce.


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