Following up on my previous posts (links below): Law.com, 4 Ways Law Firms Could Game the New Tax Law (But Probably Shouldn’t):
As businesses everywhere take stock of the new U.S. tax law, both law firms and individual lawyers are asking: What’s in it for us?
Despite the uncertainty that remains about the law, “the gains are just too large” not to explore tax-saving tricks, said New York University tax professor Daniel Shaviro.
Experts point to two potential benefits that stand out most clearly for law firms: a 20 percent deduction for pass-through entities such as partnerships, and a 21 percent tax on corporations—down sharply from the former 35 percent corporate rate.
“Anyone who can afford the legal advice and has enough money at stake would be insane not to give [the potential advantages] very serious thought,” Shaviro said.
With the top individual income tax rate now cut from 39.6 percent to 37 percent, this is the first time the corporate rate has been significantly lower than the individual rate since President Ronald Reagan’s 1986 tax overhaul.
Partners and associates both typically pay income tax at the individual rate, since most law firms are structured as pass-through entities—LLPs, LLCs, S corps or sole proprietorships—that distribute the profit to the owners.
The new law’s 20 percent deduction for pass-through income reduces the top individual rate to 29.6 percent, said Michael Gillen, a CPA who heads Duane Morris’ tax accounting group.
But there’s a big catch. Congress capped the income eligible for the 20 percent deduction on pass-through income from most types of professional services firms, including law firms, at $157,500 for single filers, and $315,000 for married, joint filers.
That means firms with high-income partners—pretty much the entire Am Law 100—likely won’t benefit, Gillen said.