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Should Law Firms Make Pass-Through Entity Tax Elections?
Law firms are often structured as pass-through entities (e.g., partnerships, LLCs, S-Corporations) due to traditional prohibitions against practicing law in corporate form. As such, in states that conform to the federal income tax treatment of pass-through entities, law firms are not subject to state income taxes — law firm owners (e.g., partners, members, shareholders) are subject to state income tax on their respective distributive shares of the firm's income.
The Tax Cuts & Jobs Act of 2017 (TCJA) included a $10,000 cap on state and local tax deductions. As a result, the owners of pass-through entities are limited in the amount of state and local taxes they can deduct on their Federal income tax return. In response, over 25 states have enacted pass-through entity taxes. These pass-through entity tax regimes allow the owners of law firms to preserve their state and local tax deduction on their income from the law firm.
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