The Jobs and Tax Act of 2017 is likely the most comprehensive tax legislation in 30 years.1 All taxpayers will likely feel ramifications of this legislation. However, there is still quite a bit of uncertainty in its application. There will be plenty of Attorneys and CPAs that opine on how the Jobs and Tax Act will be interpreted and applied. While some states have already enacted legislation that would allow taxpayers to circumvent some of the harsher limitations, the Journal of Accountancy, recently published an article stating that the IRS plans on issuing regulations in response to these new and proposed regulations.2 We have yet to see how it will all shake out in the wash. The air of uncertainty will likely clear in the next couple of years as the IRS tries to enforce and apply the new regulation. This will either lead to additional guidance and/or changes to the regulations, once the IRS begins to process returns for Tax Years 2018 and 2019.
Thus, this legislation provides a wealth of opportunity for the tax attorney whose talent lies in the numbers. Tax planning is necessary to ensure taxpayers are paying the right-share. The right share is the amount of tax the taxpayer should pay based on how the IRS applies exclusions, credits, and deductions available for a specifically defined taxpayer. The big-ticket item in the new tax law for contract attorneys is the Qualified Business Income Deduction. However, understanding a few key concepts will help taxpayers understand how it applies to his/her specific situation.
What does this mean for the world of contract attorneys? Here are three important concepts every contract attorney should be aware of:
- Definition of the Taxpayer. Understanding how the taxpayer is defined, allows the tax planner and/or tax preparer to apply the appropriate rules and regulations to support the right share tax, including the Qualified Business Deduction for pass-through entities. Do you know how you should be properly defined? Are you a disregarded entity, a S-Corporation, a Sole Proprietorship, or a Partner in a Partnership?
- Reported Earnings. Understanding how your earnings are reported to the IRS can actually help you narrow which definition of a taxpayer you fit in to, as well as, provide additional options for deductions and exclusions.
- Know Your Contract Terms. It is always appropriate to understand the terms of an agreement and their impact on income and expenses from a tax perspective. In the tax world, a contract can define how profits and losses are shared or how expenses will be allocated. For some taxpayers, specific terms must be included in the operating agreement in order to apply certain tax benefits. A contract can also specify the total income the parties can potentially earn.
How do these concepts affect you specifically? Here is a checklist of ten questions that will help identify how the Jobs and Tax Act of 2017 may affect you as a contract attorney:
- Have you established an entity through which to allocate your income?
- Are you defined as a pass-through entity for tax purposes?
- Is the trade or business defined as a Specified Service Trade or Business? I will give you a freebie: all practicing attorneys are defined as a Specified Trade or Business. However, this definition may not apply depending on how your income is being reported to the IRS.
- Will your total household taxable income be more than $157,500 ($315,000 if married filing jointly)?
- Will your total household taxable income be more than $207,500 ($415,000 if married filing jointly)?
- Do you have passive income?
- Do you have capital gains or dividend income?
- Is your income reported on a 1099 or W-2?
- Do you receive Guaranteed Payments?
- If so, how does the contract define Guaranteed Payments?
- Does your contract allow for accelerating or deferring income/expenses?
If you can answer three or more of the questions above in the affirmative, you should speak with your tax professional to ensure you are setup to maximize the tax benefits of the Qualified Business Income Deduction or you can connect with me via LinkedIn www.linkedin.com/in.mccalloplaw.
- Graves, Rick E. and Dembowiak, Brandon. Panel on New and Pending Federal Tax Legislation. 17th Annual North Carolina/South Carolina/Georgia Tax Section Workshop. May 27, 2018.
- Schreiber, Sally P. Journal of Accountancy. May 23, 2018, retrieved June 8, 2018, https://www.journalofaccountancy.com/news/2018/may/irs-rules-payments-in-lieu-of-state-local-taxes-201819049.html Con