Will Big Law now have to pay even Bigger Taxes?

A tax reform proposal in Congress includes a fundamental change to the way BigLaw reports and pays their taxes.

Firms with greater than $10 million in gross receipts would have to use the accrual method of accounting, as opposed to the cash method of determining taxable income. Law firm partners will bear the brunt of such a change, with income being reported much earlier—even before cash is ever received (hello AR?)—and a Price Waterhouse Cooper Analysis concluded that this would likely

“generate an unexpected, front-loaded income tax liability that must be paid by law firm partners over a proposed four-year period,”  and that “firms would have to deal with the consequences, such as deciding whether and how to help partners with the additional taxes, and that “other business and culture issues could need adjustment, including partnership agreements, accounting processes and systems, or benefit programs for partners.”

When or if this bill will see the light of day is still very questionable, but it does put us all at the Bar on notice. Our government is seeking new sources of tax revenue, and we are a target. This law will impact other professional service providers, and all are voicing their opposition to the proposal. The ABA’s Board of Governors voted to oppose any such change and the American Institute of CPAs wrote a letter to Congress expressing their opposition.  

Thus far professional service providers who are opposed to the ban have done a relatively effective job in persuading members of Congress that this approach is ill-advised, and there appears to be momentum in eliminating it. However, as with so many things in this New Year, while we are waiting to see, we may want to begin to get prepared.

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