By Albert B. Crenshaw

In an announcement that was celebrated by small-business groups, the Internal Revenue Service said last week that it would allow many more businesses to use cash accounting.

The policy shift, though some said it could have gone further, is something small businesses have wanted for many years.

The issue is cash accounting versus accrual accounting. Cash accounting is far more familiar to most people. It's what individual taxpayers use. Under it, income is taxable when you receive it, and expenses are deductible when you pay them. It's simple and easy to understand.

But cash accounting can create sharp ups and down in a business's profits and losses, and the IRS regards it as susceptible to manipulation. It therefore requires larger businesses to use accrual accounting, under which income and expenses are recognized according to complicated rules related to when the business becomes entitled to them (rather than actually receive or pay them), and other factors.

Accrual accounting may present a more accurate picture of a business's condition, but it is complex and typically requires professional help to use. It can also result in a business owing taxes on income it has not yet received, which is a major headache for a cash-strapped enterprise.

"The accrual method of accounting is so confusing that it makes college football's Bowl Championship Series formula look like simple, logical first-grade arithmetic," said Dan Danner, senior vice president of the National Federation of Independent Business.

Under the new rules, many service-related businesses with annual average gross receipts of $ 10 million or less will be free to drop accrual accounting and switch to cash. Previously, the IRS had allowed only those businesses with gross receipts of $ 1 million or less to use the cash method.

The rule applies primarily to service businesses, not to retailers, wholesalers and others who sell goods. But it exempts those who sell things incidental to their businesses.

The new rules are effective for the 2001 tax year.

Sen. Christopher S. Bond (R-Mo.), ranking minority member of the Senate Small Business and Entrepreneurship Committee, called the change "a momentous step forward" and "a home run for small business."

"In the real world, this will free the independent home builder or repairman from having to account for every nail, board, can of paint or shingle used over the course of a year. And it will significantly simplify the lives of other service providers, like dentists and veterinarians, who must use some merchandise as part of the service they provide," Bond said.

John Satagaj, president of the Small Business Legislative Council, said the $ 1 million limit "excluded over 1.75 million small businesses. By raising it to $ 10 million, more small businesses will rightfully be allowed to use cash accounting."

The dispute between Senate Small Business and Entrepreneurship Committee Chairman John F. Kerry (D-Mass.), the Bush administration and some Senate Republicans over a small-business assistance bill sponsored by Kerry and Bond is getting testier.

The bill, backed by 63 senators and hundreds of small-business groups, had been stalled by a hold placed on it by Sen. Jon Kyl (R-Ariz.). Kyl has said the bill is expensive and the administration can accomplish much of its intent by executive action.

So last week Kerry told Majority Leader Thomas A. Daschle (D-S.D.) that he would put a hold of his own on every non-judicial executive nomination.

"Senator Bond and I have attempted to negotiate with Senator Kyl and the administration so that an agreement could be reached to move this legislation. However, it has become increasingly clear that Senator Kyl and the administration are not interested in negotiating our differences. Rather, they are interested in delaying consideration of this important relief interminably -- 'running out the legislative clock' at the expense of the thousands of small businesses," Kerry wrote to Daschle.

Kyl subsequently released his hold, but it was immediately replaced by eight other anonymous holds, Kerry aides said.

Kerry said he is "prepared to keep this hold in place until the Senate considers our bill. A simple yes or no vote on this important relief for small businesses is not too much to ask."

Small businesses that try to sell to the government have a variety of problems, not the least of which is competition.

However, competition from free enterprise is one thing; competition from imprisoned enterprise is another.

Currently, according to the National Federation of Independent Business, a number of government contracts go automatically to Federal Prison Industries, a government program that employs federal inmates. The arrangement helps cut costs and perhaps teaches prisoners job skills.

A Defense Department authorization bill approved by the Senate last week would change that, allowing small businesses to compete for defense contracts that go to Federal Prison Industries.

"It's absolutely ridiculous that our federal government was penalizing small-business owners who obey the law by giving their business to convicted criminals who don't," federation President Jack Faris said.

Self-employed workers and sole proprietors take note: The new tax bill makes Keogh retirement plans more attractive, especially next year.

This year, owners can contribute up to 25 percent of their compensation, up to $ 35,000, to retirement savings and deduct it from current taxable income. Beginning next year, the law increases the annual contribution limit to $ 40,000.

But to get a deduction for this year, a plan must be set up by Dec. 31.