Impact of Recent Federal and State Tax Legislation on Professional Service Firms and Their Owners

by Taylor English Duma LLP
Contact

On December 22, 2017 President Trump signed into law the Tax Reform Reconciliation Act, also known as the Tax Cuts and Jobs Act (“the Act”). The Act is a major overhaul of the tax system and contains numerous revisions of tax laws applicable to both business and individual taxpayers, including professional service firms and their owners. Some states, including Georgia, have already enacted corresponding legislation.

Potential Tax Benefits – Parts of the Act that may provide tax benefits to professional service firms and their owners are:

  • Capital Expenditures - Immediate write-off of qualifying expenditures for equipment, building and leasehold improvements, and certain other expenditures for property placed in service before January 1, 2023;
  • Family and Medical Leave - New tax credits of 12.5 to 25 percent of wages paid to employees on employer-paid family and medical leave if the wages are at least 50 percent of normally paid wages to those employees effective only for tax years beginning in 2018 and 2019;
  • Corporate Tax Rate – Reduction in the corporate tax rate from 35 percent to 21 percent;
  • Individual Tax Rates – Temporary reduction in individual tax rates and brackets with a new top rate of 37 percent effective for tax years beginning before 2026; and
  • Pass-thru Deduction - New deduction for 20 percent of qualified business income, not including wages or guaranteed payments, from a pass-thru entity for individual taxpayers with taxable income below the threshold amount of $157,500 ($315,000 for married filing jointly). The good news for owners of architectural and engineering firms is that the taxable income ceilings do not apply to them.

Potential Tax Burdens – Other parts of the Act applicable to professional service firms that may increase taxes are:

  • Client Entertainment and Membership Dues - Disallowance of deductions for client entertainment, amusement or recreation and membership dues for clubs organized for business, pleasure, recreation or other social purposes;
  • Employee Meals and Transportation - Reduction in the deduction for meals provided to employees on the premises of the employer from 100 to 50 percent and disallowance of deduction for transportation fringe benefits provided to employees;
  • Net Operating Losses - Repeal of net operating loss (NOL) carrybacks and limitation of NOL deduction to 80 percent of taxable income with carryforward of disallowed amount;
  • Business Interest Expense - Limitation on deduction of net business interest to 30 percent of the business’s adjusted taxable income with carryforward of disallowed amount (disallowance not applicable to businesses with less than $25 million in annual gross receipts); and
  • Individual Income and Property Taxes – Limitation on itemized deductions for income and property taxes to $10,000 ($5,000 for married filing separately).

Responding to the Act - What, if anything, should professional service firms do in response to these changes?

Professional service firms should consider the following actions:

  • Capital Expenditures - Reevaluate mid and long-term plans for expansion or relocation to maximize benefit from expensing before January 1, 2023;
  • Entertainment, Meals, and Transportation - Begin tracking expenditures for non-deductible entertainment expenses and employee meals and transportation fringe benefit expenses, and evaluate the need for expenditure and/or reimbursement policy changes;
  • Family and Medical Leave - Consider adopting or changing an existing employer-paid family and medical leave plan to qualify for the new credits; and
  • Interest Expense - If the firm projects $25 million or more in gross receipts, calculate the net business interest expense to see if the 30 percent limit will apply and, if so, consider refinancing or changes to partner compensation in order to avoid to limit.

Professional service firms and their owners should also begin planning structural changes pending the issuance of definitive guidance from the IRS or technical corrections from Congress on those provisions in the 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-thru Entities. Professional service 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 partner compensation from guaranteed payments or wages to distributive shares. Owners who qualify for the 20 percent pass-thru 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 operating as partnerships or LLCs who do not qualify for the pass-thru 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. Professional service 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 which 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-thru 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, professional service 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.

Conclusion – All professional service firms should be reviewing the recent federal and state tax legislation to determine the impacts on the firm, its owners and employees, and, possibly, its clients.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Taylor English Duma LLP | Attorney Advertising

Written by:

Taylor English Duma LLP
Contact
more
less

Taylor English Duma LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.