Sample Letter From Law Firms To Their U.S. Senators

September __, 2014

Page 2

SAMPLE LETTER FROM LAW FIRMS TO THEIR U.S. SENATORS

OPPOSING LEGISLATION REQUIRING THE USE OF ACCRUAL ACCOUNTING AND PREPAYMENT OF TAXES ON PHANTOM INCOME NOT YET RECEIVED

(updated 9 / 4 /14)

[ LAW FIRM LETTERHEAD ]

September __, 2014

The Honorable [name of Senator]

United States Senate

Washington, D.C. 20510

Re: Draft Legislation Requiring Many Law Firms and Other Personal Service Businesses to Pay

Taxes Using the Accrual Method of Accounting

Dear Senator ______________:

On behalf of the [name of law firm ], a [name of firm’s home city]-based law firm with over ___ lawyers and other employees in [name of state] and around the country, I write to express our serious concerns regarding Section 51 of the discussion draft bill released by former Senate Finance Committee Chairman Max Baucus and the Committee’s staff last November. If enacted, this provision would require our firm and all other law firms and other personal service businesses with annual gross receipts over $10 million to use the accrual method of accounting rather than the traditional cash receipts and disbursement method. As a result, our firm—as well as many other law firms, accounting firms, medical firms, and other professional service providers—would be forced to pay taxes on “phantom” income long before it is actually received.

Under current law, individuals and most partnerships and other pass-through entities—as well as other types of businesses with annual gross receipts of $5 million or less—are permitted to use the simple cash method of accounting, in which income is not recognized until cash or other payment is actually received. In addition, all law firms and various other types of personal service businesses are allowed to use the cash method of accounting regardless of their annual revenue unless they have inventory. Most other businesses are required to use the more complicated accrual method of accounting, in which income is recognized when the right to receive the income arises, not when the income is actually received. Section 51 would dramatically change current law by raising the gross receipts cap to $10 million while eliminating the existing exemption for law firms and other personal service businesses, other individuals, partnerships and S corporations, and farmers.

Although we commend former Chairman Baucus’ efforts to simplify the tax laws, we are concerned that Section 51 of the draft bill would have the opposite effect and cause other negative unintended consequences. This far-reaching provision would create unnecessary complexity in the tax law and increased compliance costs by disallowing the use of the simple, straightforward cash method of accounting. In addition, the proposal would impose significant new financial burdens and hardships on our firm—and many thousands of other personal service businesses throughout the country—by requiring us to pay tax on phantom income that we have not yet received and may never receive.

To avoid these harmful consequences, [name of law firm ] strongly urges you to oppose the accrual accounting requirement contained in Section 51 of the draft bill and convey your opposition to the current Chairman of the Senate Finance Committee, Senator Ron Wyden, and to the Committee’s Ranking Member, Senator Orrin Hatch.

Thank you for considering our views on this issue, which is of critical importance to our firm, as well as to many other law firms and other types of personal service businesses throughout [name of state] and around the country.

Sincerely,

[name and title of law firm managing partner]