Tax reform bill to affect many in the legal industry

By Thomas Franz
BridgeTower Media NewsWires

As federal officials passed the Tax Cuts and Jobs Act of 2017, attorneys in many areas of the law began preparing their clients for changes they may see in the near future.

Ramifications of the tax reform bill are due to take effect beginning at the end of 2018, and those changes could be vast for many industries.

Michael Huff, a business attorney for Mika Meyers PLC in Grand Rapids, said a change to the corporate tax rate will be one of the most significant impacts.

“The two biggest changes that have received most of the publicity are the reduction in the corporate tax rate to a flat rate of 21 percent. The design behind that is to create a tax rate that is roughly equivalent to what the international tax rate is on corporations, with the argument that it helps American businesses remain more competitive,” Huff said.

Huff added that one philosophy behind that tax cut is that it will leave more money to corporations to allow for investment, wage increase, and an assumption that it will probably lead to greater distributions to shareholders and the owners of businesses as well.

“The other provision that’s received substantial attention is that 20 percent deduction for pass through income, which will apply to small businesses,” Huff said. “Subject to certain caps, they’ll be able to deduct 20 percent of their income when determining their income for tax purposes.”

Huff said that in terms of tax lawyers working with their clients, the best preparation would be to keep it individualized to each business.

“A lot of this is fact-dependent. It depends on what sort of business and what sort of client you’re advising,” Huff said. “For a lot of companies, you’re going to have to sit and run the numbers.”

Huff said there could also be changes to the way businesses entertain clients, due to changes in deductions for entertainment expenses.

“There’s still going to be a food and beverage deduction, but a lot of the entertainment deductions are going to be rolled back and have limited deductibility moving forward,” Huff said. “For entertainment, recreation or membership dues, those sorts of things, under the new bill, they’re not going to be deductible. The question is going to be how do we classify some of these things moving forward.”

Jessica Woll, managing partner of Woll & Woll PC in Birmingham, detailed changes due to occur in family law.

Currently, alimony payments are deductible and also included in the recipient’s income. Starting at the end of this year, the payor won’t get a deduction any longer and the recipient won’t count the payments as income. “The current arrangement creates sort of a dichotomy currently where more money goes to the family because the person paying it gets to write it off, then the person receiving it would have to pay taxes on it but at a much lower rate,” Woll said. “Starting in 2018, that’s no longer going to exist. If a person is ordered to pay spousal support, they’re not going to get any kind of tax break for it, it’s going to be after-tax dollars.”

Woll said this change in the tax law will change negotiations in divorce proceedings. “I think this is going to make settlements harder because there’s less money in the pot. Creating settlements using alimony as a tool is going to end after this year, and that’s a shame because it’s less money to the family and it was a nice caveat in the tax code that helped keep more dollars in the family which helps children,” Woll said. “The incentive for the payor isn’t there anymore.”

Woll suggested that she and other family law attorneys should work to settle cases before the new tax bill takes effect. “Right now I’m trying to make sure cases settle before this goes into effect next year. It’s going to apply to cases that settle after Dec. 31, 2018, when the tax bill becomes law and there’s no alimony deduction,” Woll said.

“It’s important to note that cases settled prior to that time, it won’t affect people already paying alimony, but it will affect it if it’s modifiable and someone goes for a change after Dec. 31, 2018.”