How the New Tax Bill Could Affect Trial Lawyers
Yesterday, the House of Representatives and the Senate passed the compromise version of the Republican tax bill. Now, it will go to the President for signature. There is no longer any question whether Congress will pass a tax bill. The only question now is, “How will the tax bill affect me?” This is a good time to discuss how the bill might affect trial lawyers. In this report, tax lawyer Rob Wood discusses what is known so far. He also discussed the law in his Forbes article, “House And Senate Tax Bills Bar Lawyer Tax Write-Offs For Costs.”
Wood says that the tax bill will make a big change for lawyers in the Ninth U.S. Circuit—Washington, Oregon, California, Montana, Idaho, Nevada, and Arizona—who have had favorable tax deductibility rule regarding client costs. The rule in the Ninth Circuit permitted lawyers who advanced money to cover client costs in litigation—such things as depositions and travel expenses—to deduct those costs when they were paid.
The new tax bill will apply the same rule to lawyers nationwide: costs may not be deducted until a case is resolved. Lawyers in the other U.S. Circuits were bound by this rule already, and “the IRS does care about it.” This change, in Wood’s opinion, is the biggest one for continency fee lawyers, and it is only a real change for lawyers in the western states.
Another provision in the new tax bill will favor pass-through businesses: sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations. The bill provides for a 20% business income deduction for pass-throughs, with some limitations. As to what effect this will have on lawyers, the answer is not clear. Wood says he favors the idea as a simplification of a “really complex” area of tax law. The provision will provide a tax break for small businesses in a tax law that seems largely to favor big businesses.
Wood says that, in theory, the bill’s idea sounds great, but the execution may be more of a challenge. Wood believes that lawyers will probably not benefit from this change in the law. The tax bill limits the kinds of pass-through businesses that can take advantage of the 20% deduction. Wood’s believes that the new law will not include providers of services such as legal representation. Perhaps lawyers will be able to combine their law business with some other activity to qualify for the pass-through deduction. If so, how much of the other activity will be required to qualify?
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.