Law firms considering structural changes

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Many law firms are set up as partnerships today and are taxed as pass-throughs, so attorneys pay taxes as individuals. (MONTCO.Today file photo)

Philadelphia law firms are holding urgent meetings this week to decide whether to remain partnerships for tax purposes or to change into different corporate entities, attorneys and legal executives said Wednesday.

Why? The new Tax Cuts and Jobs Act. Pass-through companies — which include both mom-and-pop businesses and large partnerships such as law and accounting firms and hedge funds — may find tax filing more complicated starting next year, writes Erin Arvedlund for philly.com.

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Many law firms are set up as partnerships today and are taxed as pass-throughs, so attorneys pay taxes as individuals. Under the new law, partnerships may not be so attractive tax-wise.

The new law changes the way pass-throughs — companies that pass profits directly to their owners as personal income — are treated.

In 2018, many will be able to cut 20 percent off their taxable earnings. Someone earning $50,000, for example, may have to pay taxes on only $40,000.

 Owners of pass-through businesses such as sole proprietorships, LLCs and S corporations are entitled to a 20 percent deduction for business-related income, applied to tax years beginning after Dec. 31, 2017, and expiring for tax years beginning after Dec. 31, 2025. But personal-service businesses — such as law firms, accounting firms, investment-advisory businesses, consulting firms, or medical-service businesses — do not qualify for the deduction.

That 20 percent deduction for pass-through income is limited to the first $315,000 in income for couples filing jointly and  $157,500 for single filers. Still, it may incentivize some law firms to reclassify their tax status.

To read the complete story click here. 

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