Act which are ambiguous , require further explanation , and / or do not appear to accurately reflect Congressional intent . Structural changes that might be worthy of consideration are the following :
• Pass-through Entities – Law firms operating as pass-thru entities ( partnerships , LLCs , or S corporations ) should consider restructuring , if necessary and feasible , to take advantage of the 20 percent deduction for qualified business income by , for example , ( i ) moving into a separate entity any business activities not constituting the provision of professional services , and / or ( ii ) changing attorney compensation from guaranteed payments or wages to distributive shares . Law firm owners who qualify for the 20 percent passthrough deduction would enjoy a top tax rate of 19.26 percent ( 80 percent of 24 percent ) on their allocable shares of qualified business income if their taxable income is below the threshold amount . Owners of law firms operating as partnerships or LLCs who do not qualify for the pass-through deduction should explore the feasibility and tax benefits of holding their interests thru a C Corporation to capture the 21 percent tax rate on income that doesn ’ t need to be paid out to them as compensation or dividends and to avoid the $ 10,000 limit on individual itemized deductions for income and property taxes .
• C Corporations – Law firms operating as C Corporations with cash flow in excess of both their near-term capital needs and the cash flow needs of their shareholders should consider reasonably limiting the payment of compensation and dividends in order to accumulate funds for investment and future capital needs . Larger firms with capital needs should avoid debt that might either become subject to the limitations on interest deductions or create net operating losses or , if eligible , consider making an S election where a significant number of the shareholders could benefit from such losses . A firm operating as a C Corporation projecting positive taxable income should also explore an S election if the pass-through deduction would be available to a significant number of shareholders thereby reducing their tax rates on qualified business income distributed to them from 39.8 percent ( 21 percent corporate rate plus 18.8 percent individual rate on dividends ) to 19.26 percent .
Corresponding State Tax Legislation
In considering policy or structural changes , law firms and their owners should also review recent changes to state tax laws in those states where they practice . For example , tax law changes were passed by the Georgia General Assembly and signed into law in by Governor Deal on March 2 , 2018 . The new Georgia tax rules that may impact laws firms include :
• Reduction of both the top individual and corporate income tax rates to 5.75 percent , effective January 1 , 2019 ;
• Adoption of the federal changes to interest and net operating loss limitations ; and
• Adoption of some but not all of the federal changes to expensing and depreciation of amounts expended for property used in a trade or business .
Advice to Law Firm Clients
Law firms with tax lawyers should , of course , be advising their clients about how to react to the changes , but even those firms without tax lawyers should be making clients aware of certain provisions relevant to their practices . For example , family law practitioners should review and make their clients aware of the provisions of the Act applicable to the tax treatment of alimony payments and litigators should do the same with respect to the provisions applicable to the taxation of settlement payments , fines , penalties , attorney ’ s fees , and other amounts paid or received in employment , tort , and regulatory litigation .
Conclusion
All law firms should be reviewing the recent federal and state tax legislation to determine the impacts on the firm , its owners and employees , and its clients . Law firms without in-house tax capabilities should engage outside tax accountants and / or tax counsel . ▪
The Official News Publication of the Atlanta Bar Association THE ATLANTA LAWYER 21