Bill allows small firms to utilize cash method

Small businesses in Missouri and across the nation keep telling me that we have to simplify the Tax Code. In March, I offered a major down payment to begin that process by introducing a bill that will permit small-business taxpayers with average annual gross receipts of $5 million or less to use the cash method of accounting, instead of costly accrual accounting rules.

The bill, the Small Business Tax Accounting Simplification Act of 2000, S 2246, offers relief for small-business service providers faced with onerous inventory accounting requirements.

The legislation starts the process with a straightforward threshold that allows small companies to use cash accounting, which can substantially reduce the cost of hiring bookkeepers, accountants and lawyers for thousands of small businesses.

For most independent, family-owned enterprises, it has seemed like the Internal Revenue Service has been on a mission to force as many small-business taxpayers as possible into using costly accrual and inventory accounting rules.

Under accrual accounting rules, a business is deemed to have income when its right to the income accrues, 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.

In addition, the business often has to hire outside professionals to ensure that it stays in compliance with the complex accrual and inventory accounting rules. By some estimates, the additional professional help can increase a business's accounting costs by as much as 50 percent, excluding the cost of high-tech, computerized accounting systems that some businesses must install.

The Small Business Tax Accounting Simplification Act provides a clear threshold for small businesses to use the cash receipts and disbursements method of accounting if they have $5 million or less in average annual gross receipts, based on the preceding three years.

The bill also provides a small-service-provider exception to the inventory accounting rules.

Under the provision, if the amount spent on merchandise by a service provider is less than half of its gross receipts, inventory accounting would not be required. This test is based on the service provider's purchases and gross receipts in the preceding taxable year. It's time for the IRS to stop targeting small businesses for using the cash method of accounting and small service providers on inventories.

In the end, it's just a matter of timing. The government still collects the same amount of tax revenues, only small firms are left bearing the burden of unnecessary compliance costs.

(U.S. Sen. Kit Bond, of Missouri, is chairman of the Senate Committee on Small Business.)