Change in trial lawyer deduction would put firms on equal footing, advocate says

“It is no secret we have advocated that our members receive the same, fair tax treatment that every other small business in the country currently enjoys,” a spokesperson for the American Association for Justice told The Hill. “Obviously, we are exploring all avenues to clarify this confusing tax code.” 

The Treasury is looking to clarify a provision in the tax code that prohibits trail lawyers from deducting expenses for contingency cases in the year they are incurred. Instead, these expenses can only be deducted after the case has concluded. The AAJ seeks to make it so trial lawyers can deduct these expense in the year they are paid. 

Most businesses deduct expenses in the year they are paid.  

Currently, expenses incurred by trial lawyers for contingency cases are considered to be loans that the client will eventually repay. The law firm can only deduct the expenses after the client fails to make good the loan. The AAJ argues it is wrong to assume that these expenses are loans when there is no reasonable expectation that clients will repay them. Therefore, these expenses should be deductible in the year incurred. 

“We are not looking to change the amount of the deduction, only when it can be taken,” the AAJ spokesperson said. 

That timing shift will cost approximately $1.5 billion over 10 years and has roiled Republican tax writers like House Ways and Means ranking member Dave Camp (R-Mich.) and Senate Finance ranking member Chuck Grassley (R-Iowa). 

The two wrote Treasury Secretary Timothy Geithner last week urging him against making the modification. 

“We urge you not to make such changes in the government’s enforcement of the tax laws, absent a clear direction from Congress or to comply with court decisions,” they wrote.

Sen. Arlen Specter (D-Pa.) and Rep. Artur Davis (D-Ala.) both introduced bills last year that would have modified the law to AAJ’s liking, but their measures received a fair amount of pushback and were never enacted. The Treasury would essentially have to circumvent the will of Congress to modify how the law is currently interpreted.