NJSBA urges Congress to reject proposed tax rule changes that would stifle law firms

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For Immediate Release

Kate Coscarelli
Sr. Director, Communications

New Brunswick: The New Jersey State Bar Association is urging Congress to reconsider a proposal that would change the accounting methods law firms use.

At issue is Section 212 of the draft legislation titled the Tax Reform Act of 2013. This provision would require all partnerships, S corporations, personal service corporations and certain other entities with annual gross receipts over $10 million to use the accrual method of accounting, rather than the traditional cash receipts and disbursements method.

“The proposed change in accounting methods would cause a substantial hardship for many law firms, accounting firms, engineering firms and many other small businesses. It would require these businesses to pay tax on income that they have not yet received and may never receive, an unfortunate and illogical result,” New Jersey State Bar Association President Ralph J. Lamparello wrote in a letter to the House Ways and Means Committee and the Senate Committee on Finance, which are considering the measures. Click here (PDF) to read the letter to the House Ways and Means Committee. Click here (PDF) to read the letter to the Senate Committee on Finance.

Partnerships, S corporations, and personal service corporations favor the cash method of accounting because it is simpler to use and fosters compliance with tax laws. It also recognizes that the cash received for services is a true reflection of income and tax liability. The accrual method of accounting, on the other hand, is more complex and will increase administrative and compliance costs. More importantly, it does not reflect current income or an ability to pay taxes on that income, the association warned.

In addition to the tax law implications, the association argued the proposal would make it harder for law firms to raise capital and would stifle law firm expansion.