Late in December, many local attorneys and law firm administrators were following the Republican tax plan with great anticipation of bringing home fatter paychecks with all that was being negotiated between the House and Senate. A preliminary review by the CPA community tells a different story, and the American Institute of Certified Public Accountants is asking the IRS for immediate guidance with 39 separate areas included in the Tax Cuts and Jobs Act.

Today, most modern law firms are set up in various partnership and corporate structures that essentially let most of a firm's profits flow directly to the equity partners' or shareholders. Common partnership entities include PL, LLLP, PLLC and LP while corporate structures fall into either a C-corporation or subchapter S-corporations. With the exception of engineering and architecture firms, Congress decided not to offer the dramatic tax reductions provided to pass-through service businesses such as law, accounting, health, financial services, brokers, athletes, consulting firms, etc. unless certain maximum taxable income levels are not exceeded.

While some are thinking of converting to a new ownership structure, CPAs, in many cases, explain that the potential double taxation and miscellaneous deduction limitations, remove any incentive to make that change.  So what are the benefits and impacts of the new law on attorneys and law firms?

Beginning Sept. 27, 2017, firms purchasing office equipment such as computers, servers, software and furniture will now be able to expense these purchases under Section 179 to a million dollars with an increased phase out threshold of $2.5 million of purchases. The bill also expanded bonus depreciation to allow 100-percent depreciation for qualified property placed in service after Sept. 27, 2017 and before Jan. 1, 2023.

In the area of deductibility of entertainment and meals, there are several major impacts. The bill takes away deductibility for entertainment, or recreation activities, facilities, or membership dues related to such activities and also adds the “directly-related-to” and “associated-with” exceptions to the deduction disallowance. This means reevaluating expenditures such as sports and entertainment tickets and club memberships.

The deduction of meals for entertainment has been changed. The act states that the deductibility for meals consumed near an employer's premises for the convenience of an employer are reduced from 100 to 50 percent. Finally, meals incurred while on business travel are 50 percent deductible.  Questions remain as to whether regular business meals are still 50% deductible.

There is a benefit for some shareholders and partners of pass-through entities. There is a new section 199A deduction for taxpayers other than C-corporations to deduct the sum of:

• The lesser of (A) the taxpayer's “combined qualified business income amount” or (B) 20 percent of the excess of the taxpayer's taxable income over capital gain, plus qualified cooperative dividends, plus
• The lesser of (A) 20 percent of the aggregate amount of qualified cooperative dividends or (B) the taxpayer's taxable income (reduced by net capital gains)

This was Congress's way of lessening the tax rate of businesses other than large corporations, but the taxable income limitations will surely impact higher income earners, providing them with no measurable benefit.

There are several other factors for taking this 199A deduction for qualified business income (QBI) for service companies/firms that you should discuss with your tax adviser, but the major exception that will affect high wage earners are the business income deduction exceptions for specified service businesses:

• Where a taxpayer's taxable income does not exceed $315,000 (joint filer) or $157,500 (other filers), subject to full phase-in at $415,000 and $207,500, respectively
• For non-service businesses other than architects and engineers, the deduction attributable to 20 percent of the taxpayer's QBI cannot exceed the greater of (A) 50 percent of W-2 wages paid with respect to the QBI or (B) The sum of 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of qualified property
• The W-2 wages or W-2 wages plus capital limitation does not apply to taxpayers with taxable income not exceeding $315,000 (joint filers) or $157,500 (other filers). The limitation is phased-in for taxpayers with taxable income exceeding these amounts over ranges of $100,000 and $50,000

As you can see, the legislation is very complex and many areas of the new law are still being ironed out by the IRS. Stay tuned; there is no question things can change based on technical corrections of government officials and the possibility of congressional fixes to the act. Please make sure to consult your tax professional to determine your next steps.

Howard E. Hammer is a principal in the tax planning, compliance and accounting services group at Fiske & Co. in Miami.