A Lawyer’s Guide to 199A
The following post entitled A Lawyer’s Guide to 199A was provided as a courtesy to this blog by Ryan Ragano CPA, the founding member of Ragano, CPA PLLC in New York.
When reading through the new proposed regulations under Section 199A, the tax rate disparities between different professions become apparent. After the IRS Regulation Rules release on August 8th, many professional services firms are crying foul as to what they perceive as unfair treatment for their profession. The new statutes address who will qualify as a Specified Service Trade or Business, or SSTB. Professions such as medicine, law, accounting, consulting, athletes, performers, and financial service companies are not able to take the 199A deduction if their personal Adjusted Gross Income, or AGI, exceeds $207,500 and filing single, or $415,000 and filing jointly.
If you are a self-employed lawyer with an annual of $150,000 in income and filing single, you will receive the full 20% passthrough-deduction. If you are a lawyer who files jointly, and your combined household AGI is at or below $315,000, you will receive the full 20% passthrough-deduction. The occupational discrimination does not occur unless your AGI exceeds these amounts. Every self-employed individual receiving passthrough income will qualify for the full 20% passthrough-deduction if their AGI falls below $157,500 filing single or $357,500 filing jointly. Self-employed lawyers frequently report income above these thresholds, and they will be at a significant occupational advantage as a result. Section 199A explicitly lists the following legal-related occupations as SSTBs: lawyers, paralegals, legal arbitrators, and mediators. In most states mediators do not need to be licensed lawyers. They will still be deemed SSTB due to the nature of their work.
One must understand that the determination of what qualifies as SSTB income is based upon whether unique and specialized skills are leveraged in order to perform a particular service. Some individuals who work within the legal field but are not considered to be leveraging specialized skills include printing, delivery services, and stenography services. Individuals who are self-employed and generate income from these activities would potentially be able to take advantage of the full 20% passthrough deduction regardless of their AGI. If a law firm provides both specialized legal services and non-specialized services, it may be in their interest to separately structure these parts of their businesses.
For example, Robert Lawyer may wish to establish a separate management company that provides stenography, billing, and printing services, for his legal firm. This income-generating management company can be owned by separate trusts for his two children, who each earn under $157,500. “Section 678” trusts, which are treated as being owned by the children for income tax purposes may be an optimal tax setup given the circumstances. There is no mention within the released rules as to whether trustee, executor, title insurance, and other services that do not usually require a legal license are classified as SSTB.
Many are curious as to why the government would provide professions such as engineering and architecture with far greater opportunity to take advantage of the pass-through deduction than lawyers, doctors, and other professional services. I often hear vague suggestions/complaints that they have stronger lobbies. Proponents of the law argue that they are giving advantages to industries that “produce capital that is most beneficial to society”. This is to say that working to design new technologies, agriculture, and building infrastructure are more societally productive uses of human capital than doing legal work, being a doctor, or accounting. This concept may be an uncomfortable one, and has been discussed infrequently.