This article is Part 1 of a two-part series that discusses provisions of the new tax law (Tax Cut and Jobs Act) that most impact small to mid-market professional services firms, including lawyers, architects, engineers, financial service providers, insurance brokers, etc.

Part 1

  1. 20% deduction for qualified business income
  2. 21% C corporation tax rate
  3. Meals & entertainment

Part 2

  1. Employee qualified transportation fringes
  2. Fixed assets & depreciation
  3. Domestic production deduction (for architects and engineers)

The comments below are high level summaries and do not constitute tax advice.  Please consult your tax adviser.  If you have questions, do not hesitate to give us a call or an email.  This information is subject to change due to ongoing release of guidance from Congress and Treasury.

  1. 20% deduction for qualified business income

Owners of firms structured as pass-through entities—including partnerships and S corporations—and sole proprietorships are eligible for a new deduction under tax code Section 199A.  This deduction, claimed on owners’ personal tax returns, is generally equal to 20% of qualified business income for the year.

While a powerful new tax benefit, the 20% deduction is subject to multiple limitations and restrictions.  Among them is that income from many professional service businesses (including attorneys, financial service providers, etc.) does not qualify when the owner’s personal taxable income is above certain thresholds.  Under current law architectural, engineering, and insurance brokerage firms are notably exempted from this “specified service trade or business” designation.  Shareholder wages and partner guaranteed payments do not qualify.

Action item

  • For firms structured as partnerships, S corporations, or sole proprietorships, evaluate strategies to maximize your tax benefit from the new Sec. 199A deduction, including a review of entity choice and compensation structure.
  1. 21% C corporation tax rate

The tax rate on C corporation income has been reduced from a 35% top rate—35% flat rate for personal service corporations—to a flat 21% rate for all C corporations.  While this substantial rate decrease will rightfully generate discussion about converting from another entity type to a C corporation, professional service firms must perform careful analysis before making the switch.  One reason, for example, is that the effective C corporation tax rate may still be higher than that of other entity types.  Nevertheless, under certain circumstances conversion may be appropriate.

Action item

  • For firms structured as C corporations, evaluate your multiyear financial plans to consider whether the new 21% tax rate provides opportunities not previously considered. For example, if the business is not well capitalized, now may be a suitable time to recapitalize in a tax favorable environment.
  • For firms not currently structured as C corporations, consider whether it makes sense to convert. While in many cases it will not, circumstances specific to your situation may warrant a comprehensive analysis.
  1. Meals & entertainment

Significant changes to tax deductibility of meals and entertainment expenses took effect January 1, 2018.

What changed?

  • Entertainment (tickets to sporting/theater events, etc.) – Changed from 50% tax deductible to 0% deductible
  • Office coffee, water, and snacks – Changed from 100% deductible to 50% deductible
  • Occasional employee meals, overtime employee meals – Changed from 100% deductible to 50% deductible

What stayed the same?

  • Business meals with clients, prospects, referral sources (no entertainment) – Remains 50% deductible
  • Office parties and picnics – Remains 100% deductible
  • Employee travel meals – Remains 50% deductible
  • Staff meeting meals – Remains 50% deductible
  • Meals at a business conference or seminar – Remains 50% deductible

Action items

  • Change ledger account coding to match the new tax treatment of certain meals and entertainment expenses
  • Re-evaluate your meals and entertainment budget given the tax increase that may result from reduced deductions

For more information, please contact Tax Manager, Matt Spencer.

Our Firm
Peterson Sullivan is a Seattle-based CPA and advisory firm known for the expertise we bring to publicly traded and closely held middle-market companies, nonprofit organizations, and high-net-worth individuals throughout the Pacific Northwest and around the world.
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