07/20/2004
Contact Michelle Dimarob, 202.554.9000
The NFIB Legal Foundation submitted a petition to the Internal Revenue Service (IRS) today asking the agency to make permanent a rule that allows many small businesses to use the simpler cash method of accounting when determining their tax liability, as opposed to the more complex accrual method.
“The simpler cash method of accounting has enabled Main Street to spend less time pouring over confusing accounting regulations and more time creating jobs and jump-starting the national economy,” said NFIB Legal Foundation Executive Director Karen Harned. “And while this has been a significant step toward a simpler, fairer tax code for all small-business owners, there is still a long way to go. We must ensure this practice remains available to small business by making it a formal regulation.”
Most small-business owners use either cash or accrual accounting for their businesses. Small-business owners have complained the accrual basis accounting has been a curse for them because they were being taxed on sales before their customers paid them. The IRS created Revenue Procedure 2002-28 in 2002 to allow small-business taxpayers with gross receipts of less than $10 million to use the simpler cash receipt and disbursement method of accounting when filing their taxes. The IRS action relieved small businesses from the more confusing accrual method.
“While NFIB applauds the steps taken by this administration to make it easier for hundreds of thousands of small-business owners to file their taxes, the rule lacks permanency because it is currently defined as a revenue procedure,” Harned said. “Without action to redefine Revenue Procedure 2002-28 as a formal regulation to make it a more permanent fixture in the tax code, there is nothing preventing a subsequent administration from changing it or withdrawing the rule completely.”
In its petition, the Legal Foundation also highlighted three components of Revenue Procedure 2002-28 it hopes to see incorporated into a final regulation:
1. Provide a One-Year Grace Period to Adjust Income Ratio or Change Accounting Method
NFIB supports inclusion of the three-year average test in Revenue Procedure 2002-28 for determining if a business qualifies for use of cash accounting methods. In today’s filing, the Legal Foundation also requested that a business should not be forced to immediately switch from cash accounting to accrual accounting when the business’ principal business activity income ratio falls below the 60/40 threshold percentage provided in the Revenue Procedure examples. Instead, businesses should be provided a one-year grace period to either adjust their income ratios or to change accounting methods. Allowing such a grace period would enhance stability and certainty for small-business taxpayers by providing them with an opportunity to avoid having to switch from cash to accrual accounting from one year to the next.
2. Provide Notice of Changes to NAICS
Revenue Procedure 2002-28 applies to qualifying taxpayers who fit within the $1 million to $10 million gross receipts threshold. Businesses qualify if they derived their largest percentage of gross receipts in the prior tax year from activities other than one in certain North American Industry Classification System (NAICS) codes.
Changes made to NAICS codes could obviously impact the ability of a business to qualify for the cash accounting method under Revenue Procedure 2002-28. Therefore, the Legal Foundation requested that the IRS provide some form of notification to affected businesses when NAICS codes are changed. If adopted, the practice would ensure that business taxpayers remain aware of the impact on their accounting procedures.
3. Provide a One-Year Grace Period to Businesses Affected by Changes to NAICS
Finally, the Legal Foundation asked that the IRS provide businesses affected by changes to the NAICS codes a one-year grace period to switch their accounting systems from cash accounting to accrual accounting. A grace period would provide business taxpayers time to adjust their business practices and change their accounting procedures.
Harned concluded, “Main Street entrepreneurs take risks every day, but even they know that trying to guess about their tax liability isn’t a risk worth taking. We strongly encourage the IRS to accept these recommendations and take immediate steps to adopt practices that bring about the certainty and consistency in a tax code that is necessary for small-business owners to make the best possible business decisions.”
The NFIB Legal Foundation is a 501(c)(3) public interest law firm created to protect the rights of America’s small-business owners by providing advisory material on legal issues and by ensuring that the voice of small business is heard in the nation’s courts. The National Federation of Independent Business (NFIB) represents the consensus views of its 600,000 members in Washington and all 50 state capitals.
