Law firms aren’t jumping for joy in the same way many other small businesses are because of the recent passage of a new tax bill. The Tax Cuts and Jobs Act includes plenty of deductions and changes that could benefit small businesses in various industries. But it also imposes some new limits on deductions that may be especially relevant for law firms.
For example, the 20 percent deduction for qualified income can certainly help pass-through entities like those structured as partnerships, S corporations, or certain LLCs. And law firms often do fall into this category. However, this deduction is limited based on income. So the typical salary level for lawyers could negate any potential benefits businesses can gain from this deduction.
Tax Cuts and Jobs Act Impact on Lawyers Limited
Evan S. Morgan, director of tax services in the Miami office of accounting firm Kaufman Rossin explained in an email interview with Small Business Trends, “This deduction is limited for lawyers and other professionals who make over $157,500 (single filer) or $315,000 filing jointly. For individuals with more than $207,500 for individuals and $415,000 for joint filers, the qualified business income deduction starts to phase out.”
There are also a few other limits or changes to the rules that could impact some common deductions for law firms. For example, business entertainment was previously available as a 50 percent deduction. But now any entertainment that would distract from business discussions can no longer be considered a business expense. So lawyers would not be able to take clients to the theater, but could still deduct some business dinners.
Additionally, businesses are now able to deduct only 50 percent of meals provided in the office to employees. And there are also immediate limits on interest expense deductions. Both of these changes apply to all businesses, but they happen to be especially relevant to law firms, according to Morgan.
The changes might seem small but for law firms courting new clients and regularly providing meals to keep employees productive throughout the day, those little things can add up. It can also make it necessary for those business owners to make some changes to their bookkeeping and expense tracking systems.
Morgan explains, “When the 50 percent limitations on meals and entertainment was first enacted in the 1980s, many companies were in the habit of lumping together all their travel-related expenses in a single account, making it difficult to determine which expenses were only partially deductible. With this new change related to business entertainment and meals, firms will need to require employees and partners taking clients to events to separate the cost of admission from the cost of meals purchased at the venue.”
As with many other types of businesses, the exact impact of the new tax bill will take some time to decipher. However, the small details like the ones Morgan has outlined can add up to be a big deal for certain types of businesses. So if your business is only looking at the major pass-through deductions and tax bracket shifts, it may be worth taking a closer look at some of the finer points.