Law Firms are in essence small businesses. As tax season approaches, we sat down with Integrity Financial Partners in our shared law office to learn about the tax issues that affect solo attorneys and small law firms.
As part of our ongoing Practice Development Series, Law Firm Suites brought in Ryan Cole and Adam Lazarus of Integrity Financial Partners to lead a seminar on tax planning and wealth management strategies for solo attorneys and small firms. Fun fact, Ryan and Adam’s company was Law Firm Suites’ first virtual office client.
After over an hour and half of answering all sorts of tax planning and deduction questions, everyone in the room came to the same conclusion: taxes are nothing to mess around with. One ill planned deduction can lead to an extensive audit process, requiring attorneys to account for their bookkeeping for the last five years.
After the presentation, Ryan Cole sat down with the Law Firm Suites Sales & Operations Manager, for a short Q & A about managing tax issues associated with running a small law practice:
Q: What is the biggest mistake solo attorneys and small law firms make with respect to corporate taxes?
A: In my experience, most self-employed lawyers overlook setting up an appropriate retirement plan. A good retirement plan is more than just about the future, it’s about the present. You can deduct the full value of the retirement plan contribution as a business deduction.
A partner in a successful law firm who contributes the IRS maximum of $51,000 can take an enormous deduction and depending on their tax bracket reduce their taxes by up to $25,000. Contributing $51,000 a year to a retirement plan may not be economically feasible for an attorney who just started a new practice. I still recommend contributing as much as you can to a retirement plan as you can still realize a several thousand dollar deduction. By planning for the future, you can save in the present.
Q: How should attorneys organize their finances to be best prepared when consulting with a tax professional?
A: This may sound simple, but attorneys should use bookkeeping software. The first thing to get sloppy and disorganized when dealing with the daily stresses of practicing law, managing your business, client retention and marketing initiatives are the seemingly minor details. Unfortunately for me, many of these minor details are tax related.
Every attorney has to find a system that works for them. Some of our clients are meticulously organized and regimented in keeping accurate, up-to-date notes on expenses. For these people, a simple Excel spreadsheet works just fine and frees up precious billable hours that may otherwise be spent learning the ins-and-outs of tax planning software.
On it’s most fundamental level, law firms are small businesses. For most small businesses, it is essential to keep track of incoming money, outgoing money, and expenses. For a lawyer, this may get more complicated as you have to keep tracking of filing fees, referral fees and any of counsel income you may receive.
In my experience, accounting software, like Quickbooks or Peachtree, are the most effective at tracking streams of income and expenses in one centralized place. They are very intuitive programs to use (like managing your checkbook easy) and typically work right out of the box with minimal setup. But if you do not want to learn the ins and outs of the program, you can always hire a bookkeeper on a part-time basis. The average rate is $50 an hour.
Finally, do not bring your tax preparer a box of unorganized receipts. We would prefer to keep our sanity and your goodwill.For law firms, it is essential to keep track of incoming and outgoing money and expenses Click To Tweet
Q: How much money should attorneys expect to pay on average for business tax preparation?
A: The minimum rate is $1500.00 for a simple solo attorney tax preparation and would vary based on the number of partners and complexity of the return. This may seem like a lot of money to a new solo attorney, but it is deductible against your business expenses!
The most important thing to remember is that taxes are not something you should be trying to save money on. You should choose a firm that you feel comfortable with. You should also choose a firm who employs professionals with advanced degrees, such as an MBA or CPA. These professionals will isolate all your tax planning opportunities for the upcoming years, so that you are maximizing your earning potential while limiting your liability as much as possible.Being organized with your taxes helps save you time and stress. Click To Tweet
Q: Finally, will you clear up some deduction gray areas?
|Item||Can You Deduct It?|
|Your New Work Suit.||No. (Only if it is a uniform that you are required to wear, like a UPS uniform.)|
|Your Taxi Ride to Work.||NEVER|
|Any CLE’s You Take.||YES|
|Your Conference in Maui.||YES. Including Travel.|
|Your Conference in Maui for Two Days and a 5-day Family Vacation.||Just the expenses associated with the conference.|
|Meals and Entertainment.||50% of the value, if work related.|
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