Updated 2/2/18: Under new IRC §199A, owners of passthrough entities including a law practice organized as a partnership or professional corporation may deduct 20 percent of qualified business income, excluding reasonable compensation for the business owner. No deduction is allowed for passthrough income from personal services, including legal services, and the deduction is limited to 50 percent of wages paid to employees, but these limitations are phased in above an individual income threshold ($157,500 for single taxpayers, $315,000 for married taxpayers filing jointly). Taxpayers below the income threshold may deduct 20 percent of law practice income derived from the services of paralegals, associates, and other employees.
You’ve decided to open your own law office and are ready for your clients’ cases, but are you also ready to handle the tax issues that go hand-in-hand with running your own business?
When starting your own law practice in California, one of your first decisions is what business form to use—should your practice be a sole proprietorship, a partnership, or a corporation? Don’t underestimate the importance of this choice!