Tax season is that time of the year when law firms cannot afford to make a mistake in filing. It will result in a higher tax issued to the business. Higher tax means less profitability, and less profitability means slow progress.
There are usually three types of law firms – those that maintain detailed accounting records in preparation to tax seasons, those that do the important parts and keep the rest for later and those that keep all of the accounting to be done at the minute, right before tax season.
When it comes to taxes, postponing the accounting for taxes is never a recommendation. Keeping the records updated is the best practice. It cuts down the stress that is expected once tax season starts.
Three primary steps to reducing the stress during tax season rush:
- Having all the important and relevant accounting data. Dates, deadlines, file requirements. It might vary from law firm to law firm.
- Keeping your accounting data in one place, organized and in order. All your previous tax return files, income statements, balance sheets and expense receipts must be compiled in one system before being passed down to the accountant.
- Analysing what your law firm’s responsibilities are as a business model as well as an employer. It is important that law firms take care of their obligations as a business and as an employer to its staff, like giving out 1099- Misc. forms to those who need it, before the tax season rush.
Tax Deductions
Tax deductions are the expenses that you deduct from your yearly 1099 legal fees revenue after calculating taxable income. These are the metrics you should be tracking regularly. By doing so, you can bring your taxable income down a notch and lower your law firm’s taxes.
These are some of the tax deductions you can track to reduce your tax burden. Be wary to keep all receipts relevant to these tax deductions as proof.
- Office Expenses
Deducting office expenses can be tricky and it is recommended that you consult an experienced tax professional before you do. Here’s a list of ways you can reduce office expenses when you are ready:
- Home office deduction for law firms that are doing their business from a rented residence. This can include the rent, insurance and utilities for the house.
- Interest costs for rent, or mortgage if applicable, on the law office building.
- Deducting office supplies such as invoices, receipts, cabinets, beverages etc. that have been reasonably bought out of necessity for a year worth of usage.
- Furniture and equipment meant for the office deducted as first-year expense, regular depreciation or safe harbor.
- Resources such as books on legal practice have depreciation values, which can be counted as tax deductions. These resources should only be those that can be used over a year.
- Office repairs and maintenance deduction
- Marketing
Expenses for marketing campaigns for your law firm are almost always deductible. These expenses include:
- Ad campaigns, printable and online
- Dedicated website and maintenance
- SEO services
- Hired marketing agency
- Education
Continuing Legal Education (CLE) is a term used for employees undergoing “ordinary and necessary education required to improve or maintain their legal practice within the firm and to keep their licenses, handled by the firm itself. These expenses are deductible since they are directly related to legal practice.
Any education that is not related to legal practice will not count as tax deductions.
- Credit Card Convenience Fees
Many law firms accept credit card fees as payment from their clients for providing legal services. If your firm is one of them, you will be charged a certain fee per transaction or a monthly flat fee, or both, by your credit card company. These are called credit card convenience fees.
If your law firm mostly attracts clients who prefer credit card payment, your fees might stack up to a big number. Luckily, credit card convenience fees are deductible, cutting down a hefty amount from your business expenses. It applied as long as the transactions are directly related to the business itself and not to any personal expenses.
- Professional Dues
Bar fees, trade association dues, chamber of commerce fees are examples of professional dues. These are paid for by the law firm that the participants are a staff or member of. These expenses are counted as tax deductions.
- Travel Expenses & Mileage
Travel expenses on behalf of your law firm can be deductible as business expenses. These travel expenses include:
- Transportation through any ride-sharing apps or taxis
- Air travels
- Hotel accommodations, including meals, lodgings and laundry
- Out-of-state conferences or meetings
Travel expenses that require you to go out of your “tax home” (a certain radius that your law firm operates) are counted as deductible. Any other expectation is non-deductible. And similar to the rest of the tax deduction metrics, these travels must be related to the legal practicing business.
If you are using your car to go to places because a case demands it, you can take the standard mileage deduction on these business-related drives. The certain amount of car cost per miles driven, that includes the gas, oil, tires maintenance and insurance, is deducted as business expense. You will be required to have all the proper receipts as proof.
- Insurance
Insurance fees can be deducted as business expenses. Malpractice insurance covering liability for professional negligence and property insurance covering damages and liability for accidents in the office premises are deductible expenses.
Keeping Track of Tax Deductions, Staying Prepared for Tax Season
With the help of a credible and experienced bookkeeper and the assistance of acclaimed legal practice management softwares such as QuickBook and LEAP, you can bring the tax for your legal practicing business a whole lot down. Now that you know of the tax deductions metrics you should be working on, you can keep ahead of the game while staying compliant with tax guidelines and saving a lot of money.
