Impact of the Tax Cuts and Jobs Act on Law Firms

Presenters: Jessica Mastropietro, CPA – Tax Partner at Baker Tilly James K. Green, CPA – Shareholder at Dembo Jones

Objectives * Examine and discuss how tax reform impacts law firms * Discuss issues and planning opportunities that may exist under the act * Learn about changes that may impact individual partners * Share insights regarding sourcing of revenue changes related to service income

Tax Reform Numerous drafting issues with this Act Many more ambiguities and uncertainties Expect Congress will attempt to pass technical correction bills Expect IRS to issue numerous regulations

Tax Reform

Tax Reform Depreciation Changes: 100% cost recovery of qualifying business assets Increased expensing of qualified property under Code Section 179

Tax Reform Entertainment Expenses Meals Employee Fringe Benefits New Credit for Employer-Paid Family and Medical Leave

Tax Reform C corporation specific items: Reduction in tax rate Corporate AMT Net Operating Loss (NOL) carryback Limitation of business interest (could impact partnerships)

Tax Reform IRC Section 199A In general, owners of pass-through entities are eligible to receive a deduction of up to 20% of qualified business income (“QBI”), subject to limitations Deduction generally is not available to specified service businesses Taxable income limitation exception ($315,000 MFJ, $157,500 others) List out the 3 items

Tax Reform Deduction for pass-through income - Example

Tax Reform Other Planning Considerations Conversion to a C corporation? Making a S election? Separate profit centers? List out the 3 items

Tax Reform Individual tax changes Tax rate changes Standard Deduction/Personal Exemptions Itemized Deductions Moving Expenses AMT

Nexus Nexus is the quality and quantity of business connections that must exist between a political jurisdiction and a taxpayer before the jurisdiction can impose a filing requirement for either sales or income tax. …In simpler terms, Nexus = Presence. Two tests that establish nexus: Physical presence Economic presence

Sourcing of Revenues Two Methods: Cost of Performance Market Based Sourcing

All or nothing approach Sourcing of Revenues Cost of Performance Method: Where the work is performed Cost of Performance All or nothing approach Pro rata approach

Where is the benefit received? Sourcing of Revenues Market Based Approach Where is the benefit received? At the corporate headquarters At the manufacturing site At the research facility At the location of person who hired the service provider In multiple locations

Questions?