Like all businesses, law firms are required by law to pay taxes. There are many ways for law firms to reduce their tax liability. Understanding how tax rules apply to law firms can help save money.
Choice of entity considerations. A law firm can be a sole-proprietorship, partnership, LLC, LLP, or a Corporation. Firms should consider the number of employees, the number of partners, and gross receipts in making this decision. How a firm is structured will affect how it pays taxes, which means that a law firm’s tax strategy should be specific to its entity type.
For example, corporations are subject to taxes on annual profits, which means that income is subject to double taxation—once at the corporate level, and once in individual salaries. This makes certain strategies (like year-end spend downs and loss harvesting) particularly appealing for corporations.
Organized accounting systems. Take advantage of accounting software and tools to organize your systems. These systems can help with billing and invoicing, bookkeeping, expense tracking, payroll, and tax prep. They help firms take the deductions to which they are entitled and store necessary documentation to substantiate reporting in case of an audit.
Qualified deductions. Qualified deductions for law firms include meals (deducted at 50%), professional fees (including accountants and tax preparers) and furniture, computers, or other office equipment. Law firms can also write off any unpaid debts, such as unpaid client accounts or loans to vendors.
Retirement contributions. Many firms offer their employees benefits. One of the most popular employee benefits is participating in a retirement plan towards which the employer makes contributions to the retirement plan. Contributions a firm makes on behalf of employees may be tax-deductible under this act, and the firm might also be eligible for a credit to offset the cost of starting the plan.
Professional help. Law firms should invest in professional services to maximize tax savings. This means hiring both a bookkeeper and a CPA who can function as a strategic advisor for all things tax-related.