December 31, 2019 will mark the end of the decade. It is also the final day for many small law firms to close their financial books for the year. The April 15 deadline for reporting federal income tax is not far away.
Preparation and organization are important to any law firm preparing for tax season. Attorneys face unique challenges when it comes to filing taxes, which is why we prepared this article to present the top 5 tax filing issues for lawyers.
There is some confusion among law firms regarding deadlines. It all breaks down based on your fiscal year. A majority of law firms have a fiscal year that coincides with the calendar year. It can help simplify reporting income tax.
However, some agencies establish their own fiscal year. There is also the consideration of whether you are on an accrual or cash basis of accounting. Additionally, if you are an LP or LLP, you have additional filing requirements.
When you address these questions, you can determine when exactly your tax returns are due and what income you will need to report. It is always important to meet deadlines with the IRS to avoid penalties and other frustrations that stem from filing late returns.
A solo practitioner or small law firm is essentially the same as any other type of small business in terms of taxes. While there are disadvantages to having your own business, one of the primary advantages is the right to claim tax deductions.
The federal government provides several deductions to small businesses to help reduce their tax liability.
Your firm is allowed to deduct “reasonable, ordinary, and necessary” business expenses. It includes business expenses like rent for an office, supplies, legal research charges, bar association dues, and telephone costs.
The IRS will analyze deductions carefully. You must keep all receipts related to business expenses. Records should include the “who, what, when, where, and why” of the business expense.
The problem with claiming deductions is small business owners tend to claim the wrong deductions or overclaim. It is why the Internal Revenue Service (IRS) traditionally scrutinizes Form 1099 reporters far more than regular Form 1040 earners.
As a result, you must report all income on Form 1120S, Form 1065 Partnership Return, or Schedule C. These forms apply to your law firm only if you are not a partnership or S-corporation.
In addition to your income, you are allowed to deduct relevant expenses. It includes mileage, food, and promotional expenses. However, you need to exercise caution that you are doing so correctly. Working with a tax professional can help you organize business-related expenses for filing purposes.
The Tax Cuts & Jobs Act passed by the Trump administration produced some changes to the way meals and promotional events are deducted by small businesses, including law firms.
Lawyers are known to have business lunches and other events that may help advance the status of the firm. However, you must be careful in how you deduct the expenses.
Attorneys, like other small businesses, are only allowed to deduct 50 percent of the meal and beverage costs. The meals must be considered “ordinary and necessary” in the eyes of the IRS.
It is important to keep documentation about who attended the meal, the business purpose of the meal, and what was discussed. Also, make sure you keep the receipts.
The IRS examines promotion expenses like business meals closely. Promotion here refers to anything that can be deemed a gift to a client. An agent will ask three important questions: A) Is the promotion expense ordinary, B) necessary, and C) reasonable?
For example, a golf outing may be something you enjoy with clients, yet there is a grey area around whether it qualifies as a legitimate business expense. Therefore, avoiding claiming the deduction is usually in your best interest if you are unsure.
Law firms that do not act as solo practitioners and employ other individuals have additional tax responsibilities. Traditional employees need to receive W-2 forms by January 31 each year. The owner of the firm is responsible for filing W-2 and W-3 forms with the Social Security Administration.
Firms that work with independent contractors need to also report their income if the individual received more than $600 from you during the fiscal year. The IRS Form 1099-MISC is used to report income for independent contractors.
It is important that law firms stay organized throughout the fiscal year with their income and business expense reporting. Preparation is very important to make sure you meet critical IRS deadlines and remain in good standing.
Levy & Associates is someone you can depend on for tax purposes. We understand what it is like to handle taxes as a solo practitioner or small law firm. Our agency has more than two decades of experience in the tax industry, and we offer a plethora of services.
Contact Levy & Associates today to discover how we can assist your law firm. We are available at 800-TAX-LEVY or visit www.www.levytaxhelp.com.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.