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Ready or Not: Planning for Significant Tax Changes in 2013
The time is now for all businesses, law firms included, to plan for major tax changes that are scheduled to take effect on Jan. 1, 2013. Without congressional action, a variety of tax credits, exemptions and reduced tax rates will expire at the end of this year, and at this point election year politics make it difficult, if not impossible, to determine what Congress will do as the year winds down. Accordingly, all prudent business owners, including law firms and their partners, should be planning now for the potential tax changes that lie ahead.
Income Tax Rates
Perhaps the most well-publicized tax change scheduled to become effective Jan. 1, 2013 is the increase in income tax rates, with the highest marginal rate rising back to 39.6% from its current 35%. To make clear what this change represents, for a cash-basis law firm, this means that a client payment received in 2012 will generate approximately 13% more after-tax dollars for the firm's partners than the same payment received in 2013. While firms sometimes defer the receipt of end-of-year income until early in a new calendar year in order to defer also the associated tax liability, that may not be good planning this year if Congress fails to take action to keep income tax rates at their lower current levels. In fact, the scheduled increase in 2013 rates should serve as a powerful incentive for partners to bring dollars in the door before the end of this year.
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