As businesses everywhere take stock of the new U.S. tax law, both law firms and individual lawyers are asking: What's in it for us?

Despite the uncertainty that remains about the law, “the gains are just too large” not to explore tax-saving tricks, said New York University tax professor Daniel Shaviro.

David Shaviro

Experts point to two potential benefits that stand out most clearly for law firms: a 20 percent deduction for pass-through entities such as partnerships, and a 21 percent tax on corporations—down sharply from the former 35 percent corporate rate.

“Anyone who can afford the legal advice and has enough money at stake would be insane not to give [the potential advantages] very serious thought,” Shaviro said.

With the top individual income tax rate now cut from 39.6 percent to 37 percent, this is the first time the corporate rate has been significantly lower than the individual rate since President Ronald Reagan's 1986 tax overhaul.

Partners and associates both typically pay income tax at the individual rate, since most law firms are structured as pass-through entities—LLPs, LLCs, S corps or sole proprietorships—that distribute the profit to the owners.

The new law's 20 percent deduction for pass-through income reduces the top individual rate to 29.6 percent, said Michael Gillen, a CPA who heads Duane Morris' tax accounting group.

But there's a big catch. Congress capped the income eligible for the 20 percent deduction on pass-through income from most types of professional services firms, including law firms, at $157,500 for single filers, and $315,000 for married, joint filers.

That means firms with high-income partners—pretty much the entire Am Law 100—likely won't benefit, Gillen said.

“This is a costly problem and lawyers are paying careful attention to any solutions,” he said.

Law Firm Inc.?

The new 21 percent C-corp rate looks attractive. “It would almost be negligence not to consider,” Shaviro said. But, again, it comes with a catch: a double tax. Shareholder dividends are taxed at 20 percent, for a total tax of 36.8 percent.

“The only problem is getting the money out,” Shaviro acknowledged.

He and other tax experts agreed that a C-corp is likely not feasible for a big national firm. Too many operational problems arise: How does a firm handle profit distributions? And how does it deal with shareholders who come and go, in some cases frequently?

What's more, there are state law issues—and it's not clear whether state bars allow law firms to be corporations.

“This is not to say it can't be done, but there is a lot to work out,” Shaviro said.

You Inc.!

David Miller

Forming an individual C-corp to capture the 21 percent tax rate could work for lawyers who don't need to live on their annual compensation, said David Miller, a tax partner at Proskauer Rose in New York.

The idea is to reinvest the money to avoid getting taxed on dividends.

“The corporation becomes an incorporated pocketbook,” said Alex Raskolnikov, a tax law professor at Columbia University. He suggested that lawyers could use their C-corp to buy a second home or invest in real estate and commodities.

What's more, C-corps can deduct state and local taxes, a particular attraction in high-tax parts of the northeast and the West Coast. Congress has capped those deductions at $10,000 for individual income.

Still, individual C-corps must be wary of anti-abuse rules in the federal tax code.

The corporation must pay its employees—in this case, the lawyer—a “reasonable salary,” Miller said, which is taxed at the individual rate. “I think it could be less than what the partner receives from the firm,” he added. “That would have to be developed.”

A C-corp is also subject to a 20 percent penalty under the Personal Holding Company Rule if 60 percent of its income is passive, for instance from dividends or interest.

There are other obstacles as well, such as a “principal purpose” test for personal services corporations.