Sen. Olympia Snowe (R-Maine) has introduced a bill that would “simplify the tax code and reduce compliance burdens placed on small businesses.”
The Small Business Cash Accounting Act of 2004 would permit businesses that generally earn less than $10 million during the tax year to use cash-accounting methods to report their income.
Cash accounting would substantially reduce the cost of hiring bookkeepers, accountants, and lawyers for thousands of small businesses now forced to use costlier accrual-accounting methods, according to a press release from the Senate Committee on Small Business and Entrepreneurship. Under current law, added the release, the Internal Revenue Service typically allows only taxpayers that earn less than $5 million per year to use the cash method.
“By increasing the cash accounting threshold to $10 million, more small businesses will be relieved of the burdensome record keeping requirements they currently must undertake in reporting their income,” said Snowe, the committee’s chair. “My bill also changes current law to permit taxpayers with inventory to qualify for the cash method of accounting.”
Snowe emphasized that the bill will not reduce the amount of taxes a small business pays even by one dollar. Rather, it will simply permit more taxpayers to report income and account for costs in the year of the receipt or expenditure.
Under accrual-accounting rules, a business is deemed to have income when its right to the income accrues, or when a sale is made, even though the business may not collect payment from the customer until some future date. As a result, a business may be deemed to have taxable income well before it has the cash to pay the tax.
Snowe’s cash accounting bill is the first in a series of bills she hopes to introduce that would simplify the tax code for small-business owners, according to the release.