Dec 13 When associates at New York law firm
Weil, Gotshal & Manges learned about their annual bonuses last
month, the details came as a bit of a jolt - not because of the
amount, but rather on account of the timing.
In a departure from recent practice, the firm said it would
deliver the bonuses in January instead of December, according to
an account in the legal blog Above the Law.
The change, coming just ahead of federal income tax hikes
expected for 2013, looked like something of an accounting feat,
with clear winners and losers - though it is a reversion to the
firm's historical practice before 2009.
It exposes the associates to a bigger tax bite by shifting
the income to next year, when tax rates are expected to be
higher, but it reduces the potential tax liability for partners
by allowing them to report higher income in 2012 before the more
punitive rates kick in.
While the $10,000 to $60,000 bonuses were close to the legal
industry norm this year, many associates at the 1,200-lawyer
firm were not happy.
"People are definitely annoyed," said one associate who
asked to remain anonymous.
A Weil spokeswoman declined multiple requests for comment.
Of the more than 10 law firms contacted by Reuters, none
have followed Weil's lead in deferring bonuses, with two firms
suggesting such a move would antagonize associates. But as
President Barack Obama and Congress hash out the best way to
avoid a wave of tax hikes and spending cuts set to automatically
kick in on Jan. 1 - the so-called fiscal cliff - partners across
the country are taking other measures to protect their earnings.
The law firms' strategy involves booking as much income as
possible in 2012, when rates are low, while deferring expenses
to 2013 in order to reduce taxable income in that year. That is
the opposite of typical year-end law firm accounting, when
managers usually try to find as many expenses as possible to
bring down the ending year's tax bill.
"It's tax planning in reverse, so to speak," said Kansas
City, Missouri tax specialist Scott Slabotsky who said he has
been advising his law firm clients to collect bills in 2012.
If the president and Congress are unable to reach an
agreement before Dec. 31, income tax rates will rise for almost
all Americans. Marginal rates will revert to levels before cuts
made by then President George W. Bush, which for many lawyers at
big firms who are in the highest bracket - earning $388,350 and
up - means a marginal rate of 39.6 percent instead of 35
Even if the president and Congress come to a consensus ahead
of Dec. 31, taxes on the wealthiest Americans are still expected
to rise, which is why firms are taking action now.
There are two basic approaches. Some firms are seeking to
shift more income to 2012 so the money will be taxed at a lower
rate. They are doing so by asking longtime clients to either pay
retainer fees up front or by redoubling the normal efforts to
collect hourly bills before the end of the year.
The second variety of accounting moves deal with deferring
expenses to 2013 when the write-offs will help offset higher
taxes. Those expenses can range from associate bonuses to rent,
pension plans, phone bills and other operating expenses.
The Kansas City law firm Shook, Hardy & Bacon usually
prepays certain January expenses such as rent, IT costs and
equipment leases in late December to get some of the following
year's expenses off the books early, said chairman John Murphy.
This year, Murphy said he will pay many of the smaller
expenses in January instead to reduce income in 2013 when taxes
likely will be higher. But he did not want to defer more
significant expenses such as pension plans, insurance, or
"We didn't want to get into a situation where you rob Peter
to pay Paul," said Murphy.
In New York, the five-lawyer corporate firm Wahab & Medenica
and the 30-lawyer real estate firm Adam Leitman Bailey both said
they normally try to collect what is owed by the end of each
calendar year. But with the uncertainty around next year's
rates, they are redoubling those efforts so as not to leave any
extra money on the table for the government.
"Bottom line, we are picking up the phone and calling
clients to get the bills paid... (and) making sure that November
bills go out immediately," said Adam Bailey, the firm's manager.
Firms including Milbank, Tweed, Hadley & McCloy and Arent
Fox said they were not asking clients to pay earlier than
normal, nor were they shifting expenses to next year.
"I don't think most firm managers are buying into that kind
of roller coaster ride," said John Soroko, chairman of Duane
Morris. "Certainly we won't do anything to artificially push
expenses into 2013."
Peter Zeughauser, a law firm consultant, said: "Firm leaders
sometimes defer expenses in the hopes that next year will be a
better year to sustain the cost." But he added: "The risk is
great if the firm continues to perform poorly and expenses mount
For law firm partners, there are hundreds of thousands of
tax dollars at stake. The average profits per partner in big
U.S. law firms in 2011 ranged between $500,000 and $4.5 million,
according to the American Lawyer. At that level of compensation,
the partners' tax brackets won't change, but their rates most
For associates, who are employees, the picture is a little
less clear. Their salaries typically run $145,000 to
$200,000-plus, and the tax changes could affect both their
bracket and their marginal rates.
The bonus deferral at Weil, where junior lawyers earn
between $160,000 and about $300,000, demonstrates how that could
happen. Take a hypothetical fifth-year associate earning
$230,000, whose $34,000 bonus was bumped forward to 2013. That
associate could be stuck with an extra $1,300 to $2,550 in
taxes, depending on his or her 2013 tax bracket and if the
person had filed individually, calculated David Kautter,
managing director of the Kogod Tax Center at the Kogod School of
Business at American University.
It's not surprising that Weil associates are angry, said
Bill Sansone, a New Jersey accountant who specializes in law
firms. He said some of the law firms he'd spoken to had
considered deferring bonuses too, but had decided against the
move as bad for morale.
"You aren't looking to upset people," said Sansone.