Taxes for the solo law firm

• Efficient and accurate accounting is necessary for any law firm. Monitoring expenses, managing cash flow, and maintaining compliance with legal and ethical requirements are essential. For example, what happens in managing client funds and keeping a Lawyer Trust Account (IOLTA) to hold client funds in trust can require close accounting of IOLTA funds, with strict guidelines regarding exactly how they can be invested and administered. That’s why you must carefully analyze all bookkeeping entries connected to IOLTA accounts. Ensure your team sends your clients appropriate statements at the end of every financial year. Document all expenses.

Don’t Overlook Tax Credits and Donations

• As a law firm, you have various options to help you manage your tax liability and support charitable causes. For example, if you offer retention bonuses to your employees or assist them with student loan payments, you may qualify for tax credits. Under the CARES Act, employers can pay up to $5,250 per year towards an employee’s student loan debt and claim a deduction. This can be used to lower your tax burden and attract or retain talent. 

  Businesses paying their employees throughout the pandemic may be eligible for a 100 percent refundable tax credit equal to half the qualified wages. These calculations can be complex, so you will want an accountant for lawyers to perform them. If you made a charitable donation last year, you may be able to claim a deduction without itemizing.

  In addition, law firms may support charitable organizations by contributing to qualified organizations, which can help provide tax benefits. By leveraging these tax credits and charitable giving opportunities, law firms not only manage their tax liability but also allow them to give back to their local community.

• Keep receipts for business expenses, including parking, meals, court costs, office supplies, and rent. Remember, the IRS can get very picky about the expenses it allows and may disallow certain business expenses if you do not substantiate them.

  For meals, businesses are allowed to deduct only 50 percent of the expense and must record important information such as the business purpose, date and place where the expense was incurred, and amount spent.

  A promotional expense may or may not qualify as a legitimate business expense depending on whether it leads to increased revenue. A golf outing, for example, may or may not qualify as a legitimate business expense depending on the extent to which matters pertaining to business were discussed during the outing.

  Also, the number of golf outings claimed as a deduction can determine whether an IRS revenue agent will scrutinize the expense more closely. The IRS may take notice if the number of outings claimed seems excessive. The revenue agent examining and auditing your law firm’s tax return will want to double-check supporting documentation.