Savvy law firms know that success isn’t just about winning cases — it's about making smart financial decisions. Whether you're a solo practitioner or managing a large law firm, understanding and implementing effective tax strategies can significantly impact your bottom line.
From understanding IRS compliance for law firms to making the most of financial opportunities at your disposal, this article will discuss top tax strategies for attorneys and law firms.
From choosing the right legal structure to optimizing income timing and leveraging tax credits, let’s explore some essential strategies to help reduce your tax liability and enhance your firm’s financial well-being.
How you structure your law firm and the resulting legal fee tax considerations will impact your overall tax liability. It’s important to think through all the options as you decide which structure best suits your purposes. Issues to consider include what your tax bracket is as an individual vs. what your tax rate will be if your firm is structured like a corporation.
Most firms choose to operate as a sole proprietor, partnership, Limited liability company (LLC), or an S corporation. Less frequently, lawyers run their practices as a C corporation. If you do operate as a sole proprietorship, partnership, LLC, or S Corp, you can run your firm like a pass-through business, which means you don’t have to pay additional corporate income taxes. Instead, the company’s net income passes through to your individual tax return. Depending on your tax bracket, a status change can garner tax savings. If you’re a C corporation, however, you don’t have this option.
There may be ways to strategically plan year-end income to your tax benefit. For example, you can take advantage of ways to engage in tax-efficient billing for attorneys. Many businesses, law firms included, choose to defer sending out invoices until the end of the year, thereby causing a delay in the receipt of payment so income is shifted to the following year.
You might also be able to reap tax benefits from upping your deductible expenses by accelerating payments so they occur in the current tax year. Many firms give out staff bonuses before the end of the year and participate in charitable giving. Others undertake office improvements like upgrading computer hardware or software. Some attorneys opt to pre-pay professional expenses they’ll incur in the future such as legal education courses and association dues. Others may stock up on office supplies or pre-pay office rent.
Many law firm partners are compensated as employees, while others who operate as non-employee partners are considered self-employed. Each type of status has its own benefits and tax consequences. You should consult with your tax advisor on the best way to treat your compensation to gain the best tax benefits possible.
Look into options for upping your qualified retirement plan contributions to maximize retirement savings. Not only are allowable contributions immediately tax-deductive, but the money you earn on retirement fund investments grows tax-deferred. Your tax professional can help you structure the right retirement benefits as part of your law firm tax planning strategy.
Tax credits directly reduce the tax liability of the taxpayer. Examples of tax credits include the child and dependent care credit, certain credits related to education expenses, and a retirement savings credit, as well as additional tax credits that may be available to your law firm businesses. It’s important to understand how tax credits could potentially help reduce your firm’s or your individual tax liability by discussing your options with a tax advisor.
Maintaining excellent accounting records is of paramount importance in tax planning, especially since law firms may have to deal with client trust account tax implications. Finding technology consulting services to ensure that your law firm bookkeeping and accounting records properly reflect all of your firm’s financial activities is the foundation of any good tax planning strategy.
It’s important to take any state and local income taxes you may have to pay into account in designing a tax strategy. Some taxpayers find it beneficial to pre-pay these taxes before the year’s end to reduce their federal tax liability.
As a busy attorney and law firm owner, keeping up with all the changes in tax laws can be a challenge. It’s helpful to subscribe to a trusted tax information resource so you are alerted to any tax law changes that could affect tax planning strategies for law firms.
Even if you manage to find the time to keep up with the ever-changing tax laws, it’s still a good idea to develop a close collaboration with a reputable tax advisor who understands the unique way the tax laws can affect lawyers and law firms.
Partner with an experienced Chicago accountant for law firms for help creating an effective strategy tailored to your needs. Contact our team today to learn how we can help you with your legal practice tax optimization!
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