New law preserves SALT and QBI deductions, avoids large tax hikes for law firms
Congress passed a broad tax reform package in early July that extends numerous expiring tax cuts and makes many additional changes to the federal tax code while preserving the existing state and local tax (SALT) and qualified business income (QBI) deductions currently enjoyed by law firms and many other pass-through businesses.
Small pass-through businesses—which are organized as partnerships, limited liability companies, S corporations and sole proprietorships—comprise 95 percent of all US businesses and employ more than half of the private sector workforce. Most law firms in the U.S. are small pass-through businesses, with more than 75 percent of practicing lawyers in the nation working as solo practitioners or in small law firms.
The One Big Beautiful Bill Act, signed into law by President Trump on July 4, generally makes permanent the individual income tax rates that were enacted as part of the Tax Cuts and Jobs Act of 2017 and were set to expire at the end of 2025. The new law also makes many other changes to the current tax code, reduces or increases spending for various federal programs, increases the federal statutory debt limit and makes numerous other changes to federal law.
Last month, ABA President William Bay sent a letter to Senate and House leaders expressing concerns about two key provisions in the earlier House-passed version of the bill that would have hurt many law firms and other professional service businesses.
The first provision would have eliminated the current ability of law firms, accounting firms, medical practices and other specified service trades or businesses (SSTBs) to deduct their state and local taxes on their federal tax returns. Instead, the tax liability would be pushed to the individual partners or other owners of the professional service businesses, therefore contributing towards their individual SALT deduction limitation.
According to several studies, eliminating the SALT deduction for SSTBs would raise taxes on those small business entities by up to $80 billion over ten years.
The second provision in the House-passed bill would have increased the current QBI deduction for owners of pass-through businesses from 20 to 23 percent and made it permanent, both of which the ABA supports. But while owners of most types of pass-through businesses would still be able to claim the full QBI deduction under the House bill, the deduction would continue to phase out for owners of law firms and other SSTBs whose taxable income exceeds certain thresholds ($197,300 for single taxpayers or $394,600 for married taxpayers filing jointly for 2025, indexed thereafter for inflation).
“Both provisions would be fundamentally unfair and further widen the tax parity gap between professional service businesses and other pass-through businesses and corporations,” Bay wrote. “The ABA believes that all pass-through businesses should be treated equally, irrespective of their lines of business,” Bay added.
The Senate Finance Committee later released an alternative tax proposal that would have substantially limited—but not eliminated—all pass-through entities’ ability to claim the SALT deduction. The Committee’s proposal also sought to make the QBI deduction permanent, but unlike the House-passed bill, it kept the deduction at its current 20 percent level.
In response to the House and Senate proposals, the ABA sent a grassroots action alert to thousands of ABA members and to the managing partners of almost 150 law firms in the ABA Full Firm membership program. The alert asked them to urge their Members of Congress to ensure that the final bill maintained the existing SALT deduction for law firms and all other pass-through businesses and permanently renewed the QBI deduction for owners of all those entities on an equal, non-discriminatory basis with no income limitations. ABA members responded quickly, sending over 425 additional letters to Congress within days.
Ultimately, Congress modified the final tax package to preserve the current SALT deduction for law firms and other pass-through businesses, thus avoiding any large tax hike on those entities. The final bill also made the QBI deduction permanent at the current 20 percent level and modestly increased the limits on income that owners of law firms and other SSTBs can earn and still claim some of the deduction before it completely phases out, thus allowing more of those owners to claim the deduction.
The Senate and House both narrowly passed the revised bill in early July, sending it to the President for signature.
The ABA Governmental Affairs Office is grateful to the many ABA individual and Full Firm members who helped persuade Congress to preserve the SALT and QBI deductions and to improve tax parity for law firms and other professional service businesses, and it will continue its efforts to ensure that law firms enjoy the same tax benefits as all other pass-through entities going forward.
This report is written by the ABA Governmental Affairs Office and discusses advocacy efforts by the ABA relating to issues being addressed by Congress and the executive branch of the U.S. government. Follow @ABAGrassroots on social media.
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