TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, August 17, 2018

Law Firms Looking To Game The New Tax Law? Think Again, Law Firms Looking to Game the New Tax Law? Think Again:

To the chagrin of creative tax lawyers who saw promising loopholes in the Trump administration’s sweeping tax reform legislation, the Internal Revenue Service has shut down avenues for high-earning lawyers to take advantage of a hefty new 20 percent deduction on pass-through partnership income.

In proposed regulations released Aug. 8, the IRS and Treasury Department addressed questions that have been raised about the new deduction for income from pass-through entities—and pointedly blocked the two main gambits for lawyers with law firm-specific examples.

“They did a pretty good job,” said Alex Raskolnikov, a tax law professor at Columbia University. “They went so far as to specifically address in examples two work-around strategies, one for partners and one for associates.”

For most types of professional services firms—including law firms—Congress capped the new 20 percent deduction on pass-through business income at $157,500 for single filers and $315,000 for married joint filers in its December tax overhaul legislation.

But some pass-through entities, such as real estate partnerships, are eligible for the tax break with no income cap. “This is such blatant favoritism,” Raskolnikov said. “Why is it that lawyers and doctors do not get this deduction, but architects, engineers and real estate owners do?” ...

While high-earning partners in New York firms will not benefit from the 20 percent income deduction, lower-earning lawyers still can, Raskolnikov said. “A three- to five-lawyer firm in Topeka may be below the income threshold.”

The IRS, for now at least, has blocked ways that law firms could reorganize to take advantage of the 20 percent tax break, but some enterprising tax minds have not given up entirely. New York University tax professor Daniel Shaviro, for one, thinks there is still room for creative tax thinking regarding the sweeping tax overhaul legislation—which he deemed “a huge and arbitrarily designed giveaway.”

“So far as aggressive tax planning is considered, I think that in general [the IRS] will have more success in blocking the reorganization of pre-existing businesses and employment relationships to garner extra tax benefits, than the upfront design of creative new ones in light of the (perhaps in some cases unintended) planning opportunities that the provision offers,” he said in an email.

The bottom line? Gaming the new tax regime may be tough for professional services firms. But with legislation as extensive and complicated as this, never underestimate a tax lawyer’s gifts.

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