U.S. Senator Olympia J. Snowe (R-Maine), chair of the Senate Committee on Small Business and Entrepreneurship, has introduced the "Small Business Cash Accounting Act of 2004," a bill to simplify the tax code and reduce compliance burdens placed on small businesses by permitting businesses that generally earn less than $10 million during the tax year to use cash accounting methods to report their income.
Snowe's bill, S. 2675, will provide a straight-forward threshold that allows small companies to use cash accounting, which should substantially reduce the cost of hiring bookkeepers, accountants, and lawyers for thousands of small businesses now forced to use costly accrual accounting methods. Under current law, only those taxpayers that earn less than $5 million per year are typically allowed by the Internal Revenue Service 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," Snowe said. "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. "Clearly, the cash accounting method is much easier and simpler for small business taxpayers to comply with," Snowe added. "Raising the threshold will reduce both time and money small business owners spend on complying with the tax code."
Under accrual accounting rules, a small 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 cash from the customer until some future date. As a result, a small business may be deemed to have taxable income well before it has any 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.
"Despite the fact that small businesses are the real job- creators for our nation's economy, the current tax system is placing an entirely unreasonable burden on them when trying to satisfy their tax obligations. The current tax code imposes a large, and expensive burden on all taxpayers in terms of satisfying their reporting and recordkeeping obligations. The problem, though, is that small companies are disadvantaged most in terms of the money and time spent in satisfying their tax obligation compared to larger firms."
According to the Small Business Administration's Office of Advocacy, small businesses spend more than 8 billion hours each year filing-out government reports. More than 80 percent of that time is spent completing tax forms, Advocacy reports. Moreover, companies that employ fewer than 20 employees spend nearly $6,975 per employee in tax compliance costs -- nearly 60 percent more than companies with more than 500 employees.