Congress is currently considering proposals to require certain professional service firms—including law firms—with revenues in excess of $10 million to move from the cash basis of accounting to the accrual method. This may sound like a dry and irrelevant subject for most lawyers, but it will have fundamental implications as to how law firms fund themselves and calculate and distribute their taxable profits, and it could require their partners to pay significantly higher tax bills over a number of years.

Two proposals now exist: One, by Chairman Dave Camp of the House Committee on Ways and Means, has a proposed effective date of the tax year commencing in 2014. The other, by Senate Finance Chairman Max Baucus, would take effect in the tax year commencing in 2015. Whether the legislation will be passed and, if it is, what the effective date will be is still uncertain. But if the change is implemented, law firms will be faced with major financial and managerial challenges both in the transition period and thereafter.

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