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Tax talks in Congress

Cash accounting at issue again?

November 21, 2013

By Craig Palmer, ADA News staff

Washington—The business of dentistry has changed since the profession's five-year policy standoff with the Internal Revenue Service over dentists' use of the cash-based accounting method for tax purposes.

The IRS withdrew its challenge for tax year 2001 effectiveness, and the commissioner later said, “Lawyers at the Treasury Department were foiling our efforts by doggedly insisting on imposing a rule”¦requiring the IRS to waste resources on such silly matters as how much gold dentists were using to fill teeth.” The profession's leaders hailed a tripartite “advocacy success” generated by Peoria, Ill., dentists who took their case to the Illinois State Dental Society and, through ISDS, to the ADA and Congress, which leaned on the IRS to change course.

Fast forward to 113th Congress tax talks, specifically a discussion draft of “Proposed Tax Reform Act of 2013, Title II - Tax Reform for Businesses,” a feature of the tax-writing Ways and Means Committee's brain storming of ideas and recommendations for tax code reforms.

The committee chairman's draft “is an important step toward tax reform simplification,” the Association said in a Nov. 18 letter to Committee Chair Dave Camp, R-Mich., and Ranking Member Sander Levin, D-Mich. “However, we are concerned about the proposed limitations on the use of the cash method of accounting used by practicing dentists and how it might impact them.

“One of our members' highest priorities for tax reform includes continuing to permit firms with no more than $5 million in gross receipts to use existing cash basis accounting. The Proposal significantly expands the number of taxpayers that may use the cash accounting method. We support this expansion. However, the proposed limitation on certain business entities in the Proposal will adversely impact the practice of dentistry.”

An ADA survey “determined that the business of dentistry is changing,” said the letter signed by Association President Dr. Charles H. Norman and Executive Director Dr. Kathleen T. O'Loughlin.

“Today, only 34 percent of ADA members practice as sole proprietorships and this number is declining. Their businesses are taking on different forms. Nearly 40 percent of all ADA members are in partnerships and S-corporations, 13 percent of all dental practices are organized as Limited Liability Companies, and more than 11 percent are organized as C-corporations. These numbers are growing. The ADA survey also learned that in excess of 20 percent of ADA members self-identified as professional service corporations, an important change in how dental practices do business.

“With more than 53 percent of all dental practices being structured as pass-through entities, the Proposal raises serious concerns in practice management,” the Association told the Ways and Means Committee. “Under current law, most dentists are permitted to use the cash basis of accounting. Income, essentially, is recognized when it is received, and expenses are recognized when paid. Eliminating the safe harbor that currently exists for these pass-through entities creates tremendous administrative and accounting burdens.”

Currently, small businesses may use cash accounting when their average annual gross receipts do not exceed $5 million. C corporations with gross receipts above $5 million are required to use accrual accounting. Under the cash method, income is recognized when it is actually received and expenses are recorded when paid. The more complex accrual method is based on inventory and accounting for such “merchandise” as bridges, crowns and dentures.

The health care marketplace and the business of dentistry have changed since the last cash v. accrual kerfuffle. Dentists are looking for new ways to work together and create practice efficiencies, the Association told the Ways and Means Committee. The proposal as drafted for discussion “creates obstacles to using the cash method, which would prevent dentists from entering into beneficial business relationships.”