Provisions of the new federal tax-reform law affect companies such as law firms with pass-through income.

Erin Arvedlund reports for the Philadelphia Inquirer:
@erinarvedlund | EArvedlund@phillynews.com

Philadelphia law firms are holding urgent meetings this week to decide whether to remain partnerships for tax purposes or to change into different corporate entities, attorneys and legal executives said Wednesday.

Why? The new Tax Cuts and Jobs Act. Pass-through companies — which include both mom-and-pop businesses and large partnerships such as law and accounting firms and hedge funds — may find tax filing more complicated starting next year.


Many law firms are set up as partnerships today and are taxed as pass-throughs, so attorneys pay taxes as individuals. Under the new law, partnerships may not be so attractive tax-wise.

At Stradley Ronon LLP, “we’re having a management committee meeting [Thursday] to discuss it,” said chairman William “Bill” Sasso. MAGGIE HENRY CORCORAN photo

Bill Sasso, chairman of Stradley Ronon law firm in Philadelphia.
His firm is meeting to discuss how to proceed.


“The tax partners are coming to the meeting,” he said. “It’s complicated, to say the least. The way [the tax-reform law] was rushed through, there’s a lot of uncertainty and unanswered questions.”

The new law changes the way pass-throughs — companies that pass profits directly to their owners as personal income — are treated.


In 2018, many will be able to cut 20 percent off their taxable earnings. Someone earning $50,000, for example, may have
to pay taxes on only $40,000.

Owners of pass-through businesses such as sole proprietorships, LLCs and S corporations are entitled to a 20 percent deduction for business-related income, applied to tax years beginning after Dec. 31, 2017, and expiring for tax years beginning after Dec. 31, 2025. But personal-service businesses — such as law firms, accounting firms, investment-advisory businesses, consulting firms, or medical-service businesses — do not qualify for the deduction.


That 20 percent deduction for pass-through income is limited to the first $315,000 in income for couples filing jointly and $157,500 for single filers. Still, it may incentivize some law firms to reclassify their tax status.


And under the new law, firms also may lose their charitable deductions, as well as business-expense deductions such as
event sponsorships and meals.


“We have to take a careful look at everything,” said Stradley Ronon’s Sasso.

Taking advantage of the lower pass-through tax rate “is definitely going to be helpful to smaller law firms — to reorganize and get the pass-through that way,” said lawyer Robert H. Louis, of Saul Ewing in Center City.


“Another idea floating around is spinning off associate attorneys
in law firms into a separate entity,” Louis said. “Those associates could become partners in their own partnership. They would get
the benefit of the pass-through because they are at lower income levels. Bottom line: It’s going to be helpful for smaller firms, and lawyers in big law firms with lower incomes, to reorganize” away from the partnership and into a pass-through entity.


Much of America makes money through pass-through income, according to the Harvard Business Review. Those who don’t
may start gaming the tax code so they can. “For example, if I’m
a partner in a law firm, and there’s income in the law firm, and it goes straight to me, and I get taxed as an individual at my labor marginal rates of 39.6 percent, let’s say, today, if I was in the top bracket,” noted Mihir Desai, a professor of finance at Harvard Business School.


Under the new law, Desia told Harvard Business Review, “that income that gets passed through to you as a partner in a partnership, we’re going to actually let you deduct 20 percent of it, which is basically like saying, we’re going to cut tax rates on those kinds of incomes by one-fifth. That’s a pretty big deal. And that is going to make people want to become pass-through entities, and it’s going to make some people want to become corporations.”


The tax games begin as the corporate rate also drops: The current graduated corporate rate structure, with its top rate of 35 percent
is replaced with a flat 21 percent rate beginning Jan. 1, 2018.


For sole-practitioner lawyers, the new tax law definitely helps.

“The deduction phases out after about $150,000 of income, so for solo practitioners that don’t make a lot of money, it’s great,” said Jeremy Wechsler, a lawyer in Willow Grove with his own practice.


“Larger law practices currently organized as an LLC will be thinking about converting their practices to C corps, since they’re going to get the 21 percent corporate tax rate,” Wechsler said.
MATTERN & ASSOCIATES
Rob Mattern, founder of Mattern & Associates in Chadds Ford,
said the new tax law took away deductions such as the home
equity line of credit.


For owners of legal-related businesses such as Rob Mattern, “personally, the law got rid of the home equity line deduction,
which was a loss for me. I use that to supplement my business credit line,” said the founder and president of Mattern & Associates, a Chadds-Ford-based legal support services consulting business that helps law firms outsource back- and middle-office operations.


“And the small businesses still take a hit on health care. My premiums went up 120 percent this year” for his employees’ benefits, Mattern added. “That problem wasn’t solved.”


As a solo practitioner, Wechsler said, he operates as a single member LLC/pass-through entity, and “I won’t be reorganizing
at this point because I can likely take advantage of some of the pass-through deductions at this time. However, I will keep an eye on what Congress does to fix parts of the new tax law that are temporary.


“They’re going to have to get back to work on this at some point. Otherwise, they’ll let middle-class tax cuts expire while corporate rates perhaps stay at 21 percent,” Wechsler said. “I’ll probably take a fresh look at my structure again in 2019 or 2020.”


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Wayne Parry reports
for The Associated Press: 

MIDDLETOWN, N.J. — Earle Naval Weapons Station, where the Navy loads some of
America’s most sophisticated weapons onto warships, suffered $50 million worth
of damage in Superstorm Sandy. Now the naval pier is fortifying itself with
some decidedly low-tech protection:
oysters.
The facility has
allowed an environmental group to plant nearly a mile of oyster reefs about a
quarter-mile off its shoreline to serve as a natural buffer to storm-driven
wave damage.

Other
military bases are enlisting the help of oysters, too. In June, environmental
groups and airmen established
a reef in the waters of Elgin Air Force Base Reservation in Florida, and more
are planned nearby. 

Three oyster reefs protect the USS Laffey museum in South Carolina. And military installations in Alabama and North Carolina have dispatched their enlisted personnel to help build oyster reefs in off-base coastal sites.
They are among hundreds of places around the U.S. and the world where oyster reefs are being planted primarily as storm-protection measures. And a bill just introduced in Congress would give coastal communities $100 million over the next five years to create “living shorelines” that include oyster reefs.

“Having a hardened structure like that oyster reef will absorb some of that wave energy,” said Earle spokesman Bill Addison. “All the pipes and cables that are on the pier now, all of that was washed away and had to be rebuilt. And there was a lot of flooding that came into the base. Will this protect us against all of that? No, but it will do a significant amount of good to protect the base and the complex and our surrounding communities.”

The NY/NJ Baykeeper group has been experimenting with oysters at the Navy pier since 2011, originally as a way to see if the shellfish, through their natural filtering ability, might help improve water quality in the murky Raritan Bay. (They did somewhat.)

In summer 2016, the group planted the oyster reef primarily as a storm protection measure — a trend that has taken hold around the world within the past decade or so, according to Bryan DeAngelis, a program coordinator for The Nature Conservancy in Rhode Island. Every coastal state in America is using oyster reefs as either a combination storm-protection or a water improvement project, or both.

In addition to cleaning the water, the oyster reefs help blunt the force of incoming waves.

“They are nice speed bumps,” said Meredith Comi, an official with the Baykeeper group.

Environmentalists say “living shorelines” including oyster colonies are far preferable to, and cheaper than, armoring the coast with steel seas walls or wooden bulkheads that invariably accelerate erosion of the sand in front of such man-made structures.

“Waves are affected by the roughness of the bottom,” said Boze Hancock, a marine restoration scientist with The Nature Conservancy who has studied and participated in oyster projects around the world. “Picture a wave trying to roll over a huge sponge, compared to one rolling over an asphalt parking lot. The ‘sponge,’ or rough, uneven oyster reef, sucks the energy out of the wave as it rolls toward the shore.”

U.S. Rep. Frank Pallone Jr., a New Jersey Democrat, recently introduced The Living Shorelines Act, which would make coastal communities eligible for $100 million over five years in federal grants for oyster reefs and wetlands plants. Its prospects remain uncertain in the Republican-controlled Congress.

In most spots, the oysters are designed not to be harvested and eaten. But in other places, including New Jersey, the oysters have been planted in polluted waterways where shellfish harvesting is prohibited, leading to concerns about poachers stealing them and sickening customers.

Such a dispute forced Baykeeper to rip out an oyster reef it planted a few miles from the Navy pier and relocate the shellfish to waters near the pier that are patrolled by gun-toting boats.