Update: Senate Tax Bill Signals Key Considerations for Professional Services Firms
On June 16, the Senate released its version of the tax reconciliation bill, introducing several provisions that could materially affect professional services firms. Notably, the Senate draft omits the House’s proposed exclusion of specified service trades or businesses (SSTBs) from claiming pass-through entity tax (PTET) deductions — an omission that may offer temporary relief for firms structured as pass-throughs.
However, the Senate version imposes a new cap on PTET deductions, and the continuation of the $10,000 SALT deduction cap is widely viewed as a placeholder. The proposal has already drawn strong criticism from the SALT caucus, and lawmakers have acknowledged that further negotiations are needed to reconcile differences between the House and Senate.
Additionally, the bill proposes terminating the Section 179D energy-efficient commercial buildings deduction for projects beginning more than 12 months after enactment — a change that could impact architecture and engineering (A&E) firms that rely on this incentive.
Cherry Bekaert is actively monitoring the legislative process and will continue to provide timely updates. For the latest developments, read our latest article: Tracking Tax Reform: A Closer Look at the Senate Finance Committee Tax Framework.
The United States is on the brink of the most sweeping tax legislation in nearly a decade, ushering in a tax reform framework that presents a pivotal moment for professional services firms, including law, consulting and architecture and engineering (A&E) practices.
On May 22, the House of Representatives passed its version of a multi-trillion-dollar tax and spending reconciliation bill, which now moves to the Senate for refinement. The proposed changes could significantly reshape how these firms structure their entities, plan for growth and serve clients.
From adjustments to pass-through deductions and research and experimental (R&E) expensing to new limitations on state tax workarounds and interest deductibility, the legislation demands proactive planning and strategic recalibration. For firms already navigating regulatory complexity, talent pressures and evolving client expectations, understanding the implications of this reform is essential to remain competitive and compliant.
To explore the proposed changes and their potential impact in greater depth, consult Cherry Bekaert’s Tax Policy Insights.
1. PTET Limitations and SALT Deduction Cap Adjustments
For law firms, this could be one of the most consequential tax changes in years. The proposed limitations on pass-through entity taxes (PTETs) for certain service businesses, combined with a narrowly targeted increase to the state and local tax (SALT) deduction cap, could significantly reduce the effectiveness of a key strategy many high-earning partners rely on to manage tax exposure.
The reform proposes raising the individual SALT deduction cap to $40,000 for taxpayers earning under $500,000, with the benefit phasing out quickly after the income threshold is met, but not below the current cap of $10,000. Simultaneously, it seeks to limit the use of PTETs for certain service businesses, which many states adopted to help business owners bypass the SALT cap.
Important Clarification: PTET Limits May Target SSTBs
Limitations on the use of PTET regimes are targeted at specified service trades or businesses (SSTBs), which include those that operate in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, and financial and brokerage services.
If confirmed, this targeted limitation would disproportionately affect high-earning owners of SSTBs who rely on PTET elections to preserve deductibility of state taxes.
How High-Earning Partners Should Respond to SALT and PTET Reform
Law firms and consulting practices, especially those with high-earning partners, should take a close look at how the proposed PTET limitations and SALT deduction cap changes could affect their partner-level tax efficiency.
- A&E Firms: While often structured similarly, A&E firms may have more flexibility due to broader eligibility for other deductions (e.g., Section 199A). However, they should still evaluate how SALT and PTET changes interact with their multistate operations.
- Consulting Firms: The impact of proposed tax reforms on consulting firms will depend on whether a firm is classified as a SSTB. Given that many consulting firms fall under the SSTB designation, it is important to evaluate your firm’s classification carefully, as this will be determinative in assessing the potential impact of the reforms.
- Law Firms: With many partners earning above the $500,000 threshold, the proposed SALT cap expansion may offer little relief. These firms should model the impact of losing PTET benefits and explore restructuring or income management strategies to reduce their tax exposure.
2. Entity Structure and the Future of Pass-Throughs
The proposed reform revives a critical conversation for professional services firms: whether to remain structured as pass-through entities or consider converting to C corporations.
While the bill proposes to make the 20% pass-through deduction under Internal Revenue Code (IRC) Section 199A permanent and potentially increase it to 23%, many professional services firms remain subject to income-based limitations that restrict their ability to fully benefit from the deduction. This is particularly true for firms classified as SSTBs.
Importantly, the proposal also revisits how the deduction is calculated. While the original 199A deduction was subject to wage and qualified property limits, the proposed changes could adjust or expand these thresholds, potentially increasing eligibility for firms with higher income or more complex compensation structures. Firms should closely monitor how these calculation rules evolve, as they could materially affect the value of the deduction.
How Professional Services Firms Should Respond to Section 199A Changes
Professional services firms should take a proactive approach to evaluating their entity structure considering the proposed changes to Section 199A and potential corporate tax rate adjustments.
- A&E Firms: As these firms are generally not classified as SSTBs, they may have greater access to the full deduction. However, they should still evaluate how their structure supports long-term planning, especially if they are scaling operations or pursuing government and nonprofit contracts under the Inflation Reduction Act (IRA).
- Consulting Firms: With varied income levels across partners and often complex multistate operations, consulting firms should assess how the proposed increase to a 23% deduction, and any changes to calculation thresholds, will interact with their compensation models and growth strategies. For firms with significant reinvestment needs, a C corporation structure may offer more flexibility.
- Law Firms: These firms are often structured as partnerships with high-earning partners who may be subject to phaseouts of the pass-through deduction. Modeling the long-term tax impact of remaining a pass-through versus converting to a C corporation is essential, particularly for firms reinvesting in technology, talent or geographic expansion.
3. R&E Expensing
The proposed reform would restore full expensing for domestic R&E costs from 2025 through 2029, a departure from the current requirement to amortize these expenses over five years under IRC Section 174. To explore the implications of Section 174 changes in more detail, refer to our recent article: Optimize Your R&D Tax Credit and Capitalization Now.
How Professional Services Firms Can Maximize R&E Tax Credits
To maximize potential benefits, firms in the professional services sector should prioritize enhancing their R&E credit strategies and improving documentation practices.
- A&E Firms: These firms are well-positioned to benefit from the reform, particularly those engaged in energy modeling, sustainable design and construction technology. Given increased Internal Revenue Service (IRS) scrutiny in this space, it’s critical to maintain detailed time-tracking and project documentation that clearly links technical work to qualified research activities.
- Consulting Firms: Firms developing proprietary tools, data analytics platforms or AI-driven client solutions may qualify for R&E tax credits but often overlook them. Identifying and documenting these efforts, especially when embedded in client service delivery, can unlock significant tax savings.
- Law Firms: While less traditional, law firms investing in legal tech, automation platforms or AI-based research tools may also be eligible. These firms should work with advisors to assess whether internal innovation efforts meet the four-part test for qualified research.
4. Interest Deductibility and Capital Planning
Proposed changes to business interest expense rules under Section 163(j) would expand the amount of deductible interest by reverting to a more favorable calculation method. Specifically, the proposal would allow firms to calculate adjusted taxable income (ATI) based on earnings before taxes, depreciation, and amortization (EBITDA) for tax years 2025 through 2029.
This change would restore the more favorable EBITDA-based limitation and offer meaningful relief to capital-intensive professional services firms that rely on debt to fund growth or strategic investments.
How Firms Can Leverage Expanded Interest Deductibility
Firms should revisit their capital planning strategies to take advantage of this potential increase in deductible interest. Modeling the impact of EBITDA-based ATI could reveal opportunities to optimize financing structures and improve after-tax cash flow.
- A&E Firms: Firms financing growth through debt should reassess project timelines and capital structures to maximize interest deductions under the proposed EBITDA framework.
- Consulting Firms: Those expanding into new markets or scaling operations may benefit from increased deductibility, improving ROI on debt-funded initiatives.
- Law Firms: With ongoing investments in office space, legal tech and partner buy-ins, law firms should evaluate how expanded interest deductions could support long-term planning and partner distributions.
5. Additional Considerations for Professional Services Firms
Beyond the core tax provisions, several other developments could influence how professional services firms operate and advise clients.
No Carried Interest Reform
The House version of the proposed legislation does not alter the current treatment of carried interest; however, this remains a priority for the President Trump, who has asked the Senate to address it in their version of the bill. Firms with fund management or private equity components should monitor developments closely as any changes to this provision could impact the efficacy of their tax structure.
Estate and Gift Tax Sunset
Proposed legislation would permanently raise the estate and gift tax exemption to an inflation-adjusted $15 million starting in 2026. With the exemption currently set at $13.99 million for 2025 and expected to drop by nearly half if no action is taken, professional services firms and their partners should proactively evaluate estate planning strategies now, regardless of whether the proposed increase is enacted.
Loper Bright Decision
The Supreme Court’s decision to end Chevron deference may open the door to more legal challenges against IRS regulations. Law firms should monitor how this affects tax litigation and regulatory interpretation.
Next Steps: Turning Insight Into Action
The 2025 tax reform presents both challenges and opportunities for professional services firms. Whether navigating entity structure decisions, maximizing R&D tax credits, or adapting to new SALT and PTET rules, firms must act now to stay ahead of the curve.
If you have questions about how these changes could impact your firm or would like help developing a tailored tax strategy, reach out to your Cherry Bekaert advisor or contact a member of our Tax Policy team today.
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