The proposed Build Back Better Act could increase federal revenues by roughly $1.7 trillion to fund social investments, including health care, education, and childcare over the next decade. To pay for these programs, the Build Back Better plan proposes various tax adjustments, several of which could directly affect law firms, attorneys, and their clients.
Understanding the plan and its key tax proposals can help you and your firm prepare and stay ahead of any potential changes to federal tax law.
Build Back Better background
After the House passed the Build Back Better bill in November, lawmakers have been working on an updated version of the proposal as it awaits Senate approval. They have been able to use the federal budget reconciliation process to reshape the bill and its tax provisions, some of which now differs from previous versions of the bill. The Build Back Better Act Reconciliation Bill requires a simple majority to pass the Senate.
The following looks at some of the tax implications and how they could impact different groups.
One implication for attorneys is the bill would change how the IRS treats expenses in contingency-fee cases. This could benefit trial lawyers and other attorneys who work on a contingency-fee basis because it would allow them to recover some of their expenses through tax deductions before a case is resolved.
Unlike attorneys who charge an hourly rate and can file their deductions in the same calendar year, lawyers working on a contingency-fee basis don’t get paid until — or unless — their client’s case is successfully resolved. These attorneys usually front the money to cover case fees and expenses and then get reimbursed through their case’s settlement money or judgment.
- Current rules: The IRS does not allow attorneys to take tax deductions on these expenses until after the case is over. Even then, those deductions are allowed only if the attorney is not reimbursed. Since it can take a while to resolve a case, an attorney might not be able to file for these deductions for years.
- New provisions: The IRS would allow trial lawyers to make these deductions immediately, regardless of whether they get reimbursed later. That means anything an attorney pays for out of pocket would qualify for a deduction that same year.
Estate planning attorneys who had been bracing for changes to inheritance tax laws can rest easy for now. Although previous versions of the Build Back Better bill included some noticeable changes to collecting estate taxes, the current reconciliation bill has left out most of those proposals.
Here’s what’s changed from the proposals in previous versions of the bill:
- Estate tax exemption will remain the same: The original Build Back Better Bill would have lowered the $11.7 million estate and gift tax exemption to $5 million per individual, adjusted for inflation. The reconciliation bill no longer includes this proposal.
- No new limits on grantor trust benefits: The original bill placed tax limitations on the use of grantor-type trusts, while the new bill excludes those limitations.
- Tax valuation discounts on non-business assets stay in place: The original bill would have done away with valuation discounts for transfers of non-business assets. These discounts are left untouched in the current bill.
Some of the Build Back Better plan’s provisions would change the way businesses pay their taxes. That could affect some law firms and their corporate clients. Some proposed changes include:
- Tax on corporate book income: The proposal includes a 15% minimum tax on corporate book income — the income firms publicly report to shareholders — for corporations with more than $1 billion in profit. This provision is new to the budget reconciliation version of the bill.
- Excise tax on corporate stock buybacks: The legislation would create a 1% excise tax on the value of stock repurchases during the taxable year.
Proposed tax changes for individuals could affect law firms’ employees and their clients. Changes include:
- Income surcharge: Income of more than $10 million would be subject to a 5% surcharge, plus 3% on income of more than $25 million.
- Limited IRA contributions: The legislation would limit contributions to Individual Retirement Accounts (IRAs) when balances reach $10 million, and it would accelerate required minimum distributions for those accounts.
- More generous state and local tax deductions: This provision would roll back limits on state and local deductions, increasing the cap on deductions from $10,000 to $80,000 until 2030.
The tax provisions in the reconciliation bill are extensive, and they are still subject to change. Understanding these provisions will be critical for law firms to manage their operations properly and for attorneys to serve their clients effectively if the changes take effect.
Our team of legal industry accounting experts can help you prepare for the reconciliation bill’s tax implications.