Less Taxing

• Author: Rhonda McMillion
• Pages: 68-68

68 || ABA JOURNAL MARCH 2018

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ILLUSTRATION BY SARA WADFORD, SHUTTERSTOCK

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REPORT FROM GOVERNMENTAL AFFAIRS

Less Taxing

Final version of federal legislation refl ects ABA victories on key issues

By Rhonda McMillion

The tax overhaul package signed

into law in late December by

President Donald Trump includes

key provisions advocated by the ABA

that benefi t lawyers and law fi rms.

The Tax Cuts and Jobs Act of 2017

marked the fi rst major reform of the

nation’s tax system in more than

30 years. The sweeping new law

lowers the corporate tax rate from

35 to 21 percent and cuts income tax

rates for most individuals while

also eliminating or reducing many

existing corporate and individual

deductions.

The ABA was particularly

interested in the passage of the

following provisions:

Pass-through entities. These

entities—businesses such as sole

proprietorships, partnerships, LLCs

and S corporations—do not pay

federal income tax directly but

instead pass profi ts through to the

owners of the businesses who report

that income on their individual

tax returns. Under the new law,

individual owners of pass-through

entities—including law fi rms and

other professional services busi-

nesses—may deduct 20 percent of

the “qualifi ed business income” they

receive from the entities.

The deduction phases out, how-

ever, for owners of most professional

services businesses (including law

fi rms) that earn more than $315,000

for married taxpayers fi ling jointly

or $157,000 for single taxpayers.

Nevertheless, many high-income

law fi rm partners may still receive

substantial tax reductions because

the law also lowers the top individ-

ual income tax rate from 39.6 to

37 percent. It also increases income

thresholds for taxpayers in the

highest income brackets.

The new tax law follows the Senate

approach for pass-through entities

that the ABA supported in a Dec. 13

letter to the House-Senate conferees

crafting the fi nal version of the

legislation. In her correspondence to

the conferees, ABA President Hilarie

Bass urged them to apply the same

deduction to all pass-through

entities—including law fi rms and

other professional services busi-

nesses—on an equal, nondiscrimi-

natory basis to create “a more level

playing fi eld” for all such business

entities.

Student loan interest tax

deduction. Congress decided to

preserve the existing student loan

interest deduction in the fi nal legisla-

tion after the ABA and other groups

emphasized the importance of the

deduction to students who wish to

enter public service as a career.

“The deduction of interest on law

school loans helps recent graduates

to accept lower-paying public service

jobs that they might not otherwise be

able to a ord,” Thomas M. Susman,

ABA Governmental A airs O ce

director, wrote to the leaders of the

House Ways and Means Committee

and the Senate Finance Committee.

ON THE CUTTING ROOM FLOOR

The legislation is also notable

for the measures it did not contain,

including:

Mandatory accrual accounting

for law fi rms. The ABA opposed

such provisions, previously under

consideration, because they would

have required many law fi rms to

switch from cash to accrual account-

ing and, as a result, pay taxes on their

work in progress, accounts receiv-

ables and other “phantom income”

long before it is received from clients.

The ABA worked with 30 state

and local bar associations, dozens

of law fi rms and other coalition

allies for over four years to protect

the legal profession from the severe

fi nancial hardships that would have

resulted had these provisions been

enacted.

Ending the deduction of

litigation expenses. Consistent

with ABA policy opposing legisla-

tion requiring law fi rms to switch

from cash to accrual accounting,

Congress dropped a provision

contained in an earlier version of

the bill that would have eliminated

the current ability of plainti s

lawyers with contingency fee cases

in the 9th U.S. Circuit Court of

Appeals at San Francisco to deduct

their litigation-related expenses at

the time they are incurred.

Bass celebrated the ABA achieve-

ments in an email to ABA members.

“The American Bar Association

won hard-fought victories on key

issues a ecting the legal profession,”

she wrote, and “while not all ABA

recommendations were incorporated

into the fi nal legislation, these issues

were favorable for lawyers and law

fi rms.” Q

This report is written by the ABA

Governmental Affairs Of ce and

discusses advocacy efforts relating to

issues being addressed by Congress

and the executive branch of the federal

government. Rhonda McMillion is

editor of ABA Washington Letter, a

Governmental Affairs Of ce publication.

PASS-THROUGH

ENTITIES

STUDENT LOAN

INTEREST TAX

DEDUCTION

MANDATORY

ACCRUAL

ACCOUNTING

FOR LAW FIRMS

ENDING THE

DEDUCTION

OF LITIGATION

EXPENSES