Re: Effects of Tax Reform on Associate Salaries
Posted: Sun Dec 24, 2017 9:39 pm
jbagelboy wrote:Its really only property owners on salary in NJ/NY/CA/ect. that get fucked. So associates that rent will be OK and probably see a couple thousand in tax break. Salaries aren’t going up to “compensate” associates; they would only go up if clients became immensely more profitable, deal volumes and litigation increased, and the white collar service sectors saw increased demand as a result
Its equally likely the economy will crash
The first paragraph seems wrong, at least for many/most biglaw associates that live in states with material SALT income taxes. First, the mortgage deduction isn't changing for people who already own. Second, the aforementioned all get fucked because they pay state income taxes well in excess of $10k, regardless of state property taxes. Third, the GOP manipulated the new brackets to raise taxes on income between $157-$415k (for individuals; they appear not to have done something similar for joint filers), which covers the max brackets for associates and offsets reductions below $157k.
tomwatts wrote:BernieTrump wrote:(stuff)
I thought the pass-through stuff expressly didn't apply to law firms, though?
PeanutsNJam wrote:BernieTrump wrote:Law firms are pass through.
Yes, but the tax bill excludes "professional service industries" from the tax cut to pass-throughs, unless something has changed? Law firms seem to fit squarely into that category.
The new pass-through break is codified as a special deduction for "qualifying trade or business income" from passthroughs. Income from certain service industries, like lawyering, is excluded from QBTI. However, if your income is below a specified threshold ($157,500 for individuals, $315k for filing jointly), you may get to pretend that your service-industry income is QBTI based on some additional tests. The deduction phases out above those thresholds, disappearing completely at $207,500 for individuals and $415k for joint filers.
Graybrow wrote:tomwatts wrote:Well, the individual rates temporarily go down. So for the first few years, you get a small break on your tax rate while your deductions get cut. It should come out more or less as a wash. (I haven't done the exact calculation, but that's my rough estimate for a junior associate who rents in CA, and NY should be more or less similar.) Over time, it becomes a tax hike as the individual rates go back up and the deduction cut stays permanent.
It'll be interesting to see what Dems coalesce around as a fix. I'm assuming that Ds will run hard against this in 2018 and 2020, because it's pretty much a giveaway to shareholders without much else to it. (By the end of the 10-year window, most people's individual taxes go up.) But I don't know what Ds will propose to do about it.
The tax cuts will get extended in 2027 just like the Bush tax cuts got extended in 2010 and 2013. The only reason they put an expiration date on them was the Byrd rule. Democrats will be nuts if they campaign on raising people's taxes. And they also know, public rhetoric aside, the U.S. needed to lower its corporate tax rate. They'll run on "corporate tax scam" rhetoric maybe but they won't do anything.
As another person said, this is pretty ridiculous prognosticating, regardless of what happened with Bush. And as another poster said, Dems will/should campaign on taxing the rich while protecting the poor/middle class. And you should really look into the historic effective corporate income tax rate for US companies before opining on what the corporate rate "needs" to be. Here's a starter: https://fas.org/sgp/crs/misc/R41743.pdf.
BernieTrump wrote:Lots of misinformation in this.
Law firms are pass through. There won't be more $$ at corporate level to give away. Associate raises will come out of partners' draws, which won't change based on tax reform. The corporate tax rate discussed above doesn't apply.^
There is a cut for entities that are pass through for tax purposes. It phases out completely after 415K for married couples, to the extent the income relates to a service like practicing law. This effectively puts the top rate on such pass through income in the mid high 20s% area. This actually works as a 20% deduction off the top line, but the effect is a much lower rate.
Associates who don't own property/have mortgage will come out ahead, even in high tax states like NY and CA. 1-10K. Not a ton better.
This is wrong for many [edit: single filer] associates, partly because of the hidden rate increases noted above and partly because of the limitation on deducting SALT income taxes.
Associates who own property will do about the same, maybe a little worse.
Same as above, plus the restriction on SALT property taxes and (for new buyers) temporarily reduced availability of the mortgage interest deduction.
Partners will do better. As has been mentioned the AMT kills partners in the 500-1000K range. Those guys aren't deducting SALT anyway. Neither are senior associates, for that matter (especially in two BIGLAW couples). Pease takes a big chunk out of deductions for high earning partners 2,000-3,000K+. Rates go way down across the board for them. Pease goes away (if they're doing things like making donations). How much better depends a lot on state we're talking about. Some small number might do worse, and as was correctly pointed out, law partners will do worse than high-earning non-service business owners.
I think this is right, but the reasons stated are wrong. Partners will benefit from general benefit-the-rich changes, like the repatriation break, because they own disproportionately large investment portfolios on a per capita basis. But some of them will also suffer from the changes in rates/brackets as not enough of their income is in the new reduced top bracket to offset higher taxes on the income between $157k and $415k. The Pease limitation is only a 3% haircut on deductibility, and the relationship between AMT and SALT is the opposite of what you're suggesting (i.e., limiting SALT deductions is actually very harmful to most AMT payers because the SALT deduction is what puts them into AMT in the first place; take away the deduction, and suddenly they are "normal" taxpayers - which by default means they're paying more than AMT). See http://www.taxpolicycenter.org/taxvox/c ... inimum-tax.
The most interesting thing will be how associates get treated to try to get them K-1 income (and, accordingly, the approximately 20-30% top marginal federal rate). Most will be under 315K, so they'd get full use of that new tax cut, even for service industry pass through income. Firms could just admit them to partnership, but that comes with a set of issues. If you make them low value, no-vote equity partners, you still might really under or overpay any given year. IF you make them "salary partners", I suspect there will be audit risk, as income only partners with guaranteed salary and no share of P&L should really be classified as W2 employees for tax purposes. This is very clear in IRS regs. Previously, the IRS has never really cared, as long as taxes were paid (because all the relevant rates were about the same; the only difference was who paid the employer side of FICA payroll tax). I'd bet now that rates will be different, the IRS will take another look at salary "partners". In any event, I can't see firms wanting to make associates, at least those under year 5-6, "partners" in any shape or form, as it would be a risk for the firm to have know-nothing "partners" running around. Associates could form Associates of Cravath, LLP and have Cravath pay their partnership instead of the individual employees, but would cause admin bloat, and, depending on how much control the main firm kept (which would be total control, in any real world case), the IRS might view it as a sham. I suspect we'll see an IRS rule attempting to stop this. But before that happens, I bet someone tries something, as there's a huge tax savings here if people can find a structure that works, (bigger for married couples, but real savings for all associates).
This seems like something that will get talked about a moderate amount but will never actually happen. There's a zero percent chance that associates suddenly get admitted as partners en masse, which basically means that either each associate needs his/her own S corp or, more realistically, each firm needs a separate partnership for its associates. Both of these have some unappetizing non-tax consequences, some negative tax consequences (state filings), and run the recharacterization risk you note. Also, it's incorrect to say that the IRS hasn't cared about the issue - all the controversey people I've talked to have said that partner/employee/contractor distinctions are among the first items that come up on audit. There are withholding and benefit issues associated with the distinctions. And if the IRS didn't care about the partner/employee distinction, they wouldn't have issued new regs this year shutting down the partner-cum-disregarded entity employee loophole.
The lawyers making away like bandits are the midlaw and shitlaw people with 350K or less of income, all pass through.
I mean, they're getting a nice bennie (though it might not be as sizeable as you seem to think when you consider other downsides), but the only real bandits (at least among actual, non-corporate people) are those with existing wealth and people who are anticipating realization of carry. The rest of us are just various levels of fucked, which will become more salient as the GOP tries to use reduced revenue as an excuse for slashing social benefits.
^This assumes nobody takes the radical reorg. and practices law from an entity taxable as a c-corp. I've seen some analysis that, if an accountant will take an aggressive read of certain expensing and depreciation, partners could come out ahead. I doubt this happens because law firms are very conservative.
Edited: It looks like they didn't game rates/brackets for joint filers the same way they did for single filers. This probably means the bill is net positive or at least break even for a lot of married people. It still looks net negative for many single filers between restriction of SALT, gaming the bracket thresholds, and loss of the personal exemption.