Professional service businesses have a lot in common. Your people are your product, your revenue depends on billable work, and your owners are often in the highest tax brackets. When it comes to taxes, though, a law firm, an architecture firm, a consulting firm and a marketing agency can land in very different places, and the difference often comes down to how the tax code classifies the work you do.
At Forbes & Company, professional service businesses are one of our core specialties. From our offices in Alpharetta, Georgia and Charleston, South Carolina, we help firms across the country plan ahead, and here’s the year-end information we share with firm owners and partners.
Why SSTB status splits professional firms so sharply
What is the QBI deduction?
The Qualified Business Income (QBI) deduction lets owners of pass-through businesses, such as partnerships, S corporations and sole proprietorships, deduct up to 20% of their qualified business income. The One Big Beautiful Bill Act (OBBBA) made the deduction permanent and widened the income range over which it phases out. Whether your firm gets the full benefit depends on whether it’s a specified service trade or business (SSTB).
Are law firms and consulting firms SSTBs?
Yes. Law and consulting are both listed as SSTBs. Once an owner’s taxable income rises above the annual threshold, the QBI deduction from SSTB income phases out and eventually disappears. OBBBA’s wider phase-out range helps owners near the threshold, but high-earning partners still lose the deduction entirely.
Do architecture and engineering firms qualify for QBI?
They do. Architecture and engineering are expressly excluded from the SSTB definition, so owners can keep the deduction at higher incomes. Above the threshold, the deduction is subject to limits based on the W-2 wages the firm pays and the value of its depreciable property, but it doesn’t vanish the way it does for a law or consulting firm.
Is a marketing agency an SSTB?
Generally not. Marketing, advertising, design and creative work aren’t on the SSTB list, so most agencies qualify for QBI. The exception is when the work is really consulting, such as strategic advice billed separately from creative execution. Agencies that offer both may want to look at how services are described, priced and invoiced so ordinary agency revenue isn’t lumped in with consulting.
Year-end QBI planning
For firms that are eligible, year-end QBI planning often involves adjusting W-2 wages or owner compensation to maximize the deduction. For an S corporation, for example, raising or lowering an owner’s salary changes both the wage limit and the amount of qualified income, and there’s usually a sweet spot. Owners near the SSTB threshold may also be able to use retirement contributions or other deductions to bring taxable income back into range. These calculations are worth running before December 31, while payroll can still be adjusted.
Timing is mostly about billing and collections
How can cash-basis firms reduce this year’s taxes?
Many professional firms use cash-basis accounting, which means income counts when it’s collected and expenses count when they’re paid. That gives you two practical levers:
- Delay invoicing or collections into January, so the income lands in next year
- Accelerate expenses into December, such as prepaying certain services, buying needed equipment or paying outstanding vendor bills
This only makes sense if you expect next year’s tax rate to be the same or lower, and it’s important not to hold payments that are already available to you, since income you could have received is generally still taxable this year.
Can accrual-basis firms deduct year-end bonuses?
Yes. Accrual-basis firms can deduct year-end bonuses in the current year as long as the obligation is fixed by December 31 and the bonuses are paid within two and a half months after year-end, which is March 15 for calendar-year firms. This rule generally doesn’t apply to bonuses paid to owners, whose compensation is deductible when it’s actually paid.
What law firms need to know about trust accounts
Law firms have one important extra step. Client trust funds, including IOLTA accounts, belong to your clients and must stay out of the firm’s income until they’ve been earned and properly transferred to the operating account. Year-end is a good time to reconcile trust accounts and confirm that earned fees have been moved and recorded in the right period.
High earners have more to optimize
Partners and owners in professional firms are often in the top brackets, so a few strategies come up again and again.
What is a PTET election?
A pass-through entity tax (PTET) election lets your firm pay state income tax at the entity level instead of on the owners’ personal returns. Because the firm deducts that tax as a business expense, it works around the federal cap on deducting state and local taxes (SALT).
OBBBA raised the SALT cap to $40,000 (with small annual increases) through 2029, but the cap phases back down toward $10,000 for taxpayers with higher incomes. Most law, consulting and architecture partners are well above that phase-down range, so PTET remains valuable. Rules vary by state, and in many cases the firm needs to make the election or actually pay the tax by December 31 to claim the deduction on this year’s federal return, so it’s worth checking your state’s requirements now.
Are cash balance plans worth it for professional firms?
For high-earning owners, a cash balance or defined benefit plan can allow much larger retirement contributions than a 401(k) alone, often several times as much for older partners. Contributions are deductible to the firm, which can also help owners near the SSTB threshold preserve more of their QBI deduction. Under the SECURE Act, a new plan can often be adopted as late as the firm’s tax return due date and still count for this year, but it’s wise to start before year-end, since these plans need actuarial design and have to be coordinated with any existing 401(k). They also come with ongoing funding requirements, so they work best for firms with steady profits.
Settle partner compensation for the year
Partner compensation mechanics need to be settled before the books close. That includes finalizing guaranteed payments, reconciling draws against each partner’s share of profits and confirming which partners need to be included in multi-state composite returns. Firms with partners or clients in several states should also review where income is sourced, since that affects both composite filings and PTET.
Research and development credits aren’t just for tech companies
Can architecture firms claim the R&D credit?
Often, yes. Architecture and engineering firms that design new solutions, test alternatives or solve technical uncertainties may qualify for the research and development (R&D) tax credit. Marketing agencies and consultancies that build software, apps, data tools or other technical products can qualify too. The credit is a dollar-for-dollar reduction in tax, and it’s one of the most commonly missed opportunities we see among professional firms.
What changed with Section 174?
OBBBA also restored immediate expensing of domestic research costs under Section 174. Before this change, businesses had to spread those costs over five years, which created surprisingly large tax bills for firms that did any development work. Smaller businesses may also be able to go back and capture the benefit for 2022 through 2024. The elections and deadlines here are technical, so talk with your CPA about which options are still open for your firm.
Contractors and pass-through costs
What should agencies do about freelancers at year-end?
Agencies and consultancies that rely on freelancers should collect a Form W-9 from every contractor before year-end, so 1099s can be filed on time in January. Starting with payments made in 2026, the Form 1099-NEC threshold rose to $2,000, up from $600, so fewer small payments will need a form. It’s also a good time to review whether each worker is properly classified as a contractor rather than an employee. Someone who works set hours, uses your equipment and does core work under your direction may look more like an employee, and misclassification can lead to back payroll taxes and penalties.
Should agencies report ad spend as gross or net revenue?
Agencies should also review how pass-through ad spend is handled. When you buy media on behalf of clients, reporting that spend as gross revenue makes your top line look larger, while reporting it net shows only your fees. The choice affects revenue figures that lenders, buyers and investors see, and in some states it affects gross-receipts taxes, which are calculated on total receipts rather than profit. Getting this right now avoids restating numbers later.
Your professional service business year-end tax checklist
Before December 31, work through the following with your tax advisor:
- Confirm whether your firm is an SSTB and model owner compensation to maximize QBI
- Decide whether to delay invoicing or accelerate expenses if you’re on a cash basis
- Fix year-end bonus amounts if you’re an accrual-basis firm
- Reconcile client trust and IOLTA accounts if you’re a law firm
- Make or confirm your PTET election and payment deadlines
- Evaluate a cash balance or defined benefit plan
- Finalize guaranteed payments, draws and composite return details
- Identify R&D activities and review Section 174 options
- Collect W-9s and review worker classification
- Confirm how pass-through ad spend is reported
Frequently asked questions
Do law firm partners get the QBI deduction? Only below certain income levels. Law is an SSTB, so the deduction phases out as taxable income rises and disappears entirely for high earners.
Why do architecture firms get better QBI treatment than law firms? Architecture and engineering are expressly excluded from the SSTB definition, so owners keep the deduction at higher incomes, subject to wage and property limits.
Is a PTET election still worth it after the SALT cap increase? For most high-earning owners, yes, because the higher SALT cap phases back down at upper income levels.
Let Forbes & Company help your firm finish the year strong
Forbes & Company is a family-owned accounting firm that’s been client-focused since 1997, and we understand how professional service firms operate because we are one. Whether your firm is in the greater Atlanta area, the Charleston area or anywhere across the United States, we’d be glad to help you time your income, protect your deductions and plan with confidence for the year ahead.