Are settlement funds taxed?

CosmoLex Team

Many plaintiffs are surprised to find their settlement funds are taxable. The amount and whether or not the funds are entirely taxable is dependent on several key items. Lawyers who are responsible for providing clients with a settlement sheet, so it’s important to keep this in mind throughout the process. Key items to note include the following[1]: Punitive damages and … Read More

What year-end financial reports should my law firm have?

CosmoLex Team

At the end of each year there are various financial reports law firms should have to be in compliance and have the data they need to make strategic decisions for the following year. Accounts Receivable and Collections Reports Make sure all time and billing is up to date. For invoices that are past due, create a full list of any … Read More

What Should Be Included in a Settlement Statement?

CosmoLex Team

Once settlement funds are received and deposited into the trust account, a lawyer should always draft a settlement statement. This statement shows the proposed distribution of the funds to cover fees, case expenses and any outstanding payables associated with the matter. The purpose of the statement is to make it clear to the client how the money is being handled … Read More

How do invoice payments need to be allocated?

CosmoLex Team

Not all invoice payments can be directly recorded as revenue, and doing so can have negative repercussions for the firm including an unnecessary tax liability. Law firms need to apply payments in the appropriate order once payments are received. Payments should be applied in the following order once taken in: Taxes Cost recovery, including reimbursable client costs Late fees and … Read More

Is recovering advanced client costs taxable?

CosmoLex Team

Correctly allocating advanced client costs to ensure the appropriate tax impact is applied is critical in order to avoid the Internal Revenue Service (IRS) audits and violations. These costs need to be allocated directly as hard (direct expenses) or soft costs (support expenses), with the tax treatment being applied differently to each. Hard costs as those associated with payments for … Read More

Should my firm use accrual or cash basis accounting?

CosmoLex Team

There are two methods law firms can run their accounting by: accrual basis or cash basis. The primary difference between the two is the point at which revenue is realized. In cash basis accounting, revenue is recognized once the payment is received. In accrual basis accounting, revenue is realized when the sale is made even if the payment isn’t complete. … Read More

How should our firm record matter costs?

CosmoLex Team

Matter costs need to be properly recorded in the accounting records due to their tax implications and compliance requirements. To track these costs properly, firms need to determine which category an expense falls into: hard cost or soft cost. Hard costs are any advanced payments the firm puts out to cover matter expenses. These types of costs are typically passed … Read More

How do I read my law firm's balance sheet?

CosmoLex Team

The balance sheet provides a crucial tool in understanding your firm’s financial health at a glance and determine its current value. Many accounting programs can easily produce this report for you. Not only can this help guide decisions, but you may also need to present this information in order to obtain a loan. The balance sheet follows a straightforward formula: … Read More

Can general accounting programs like QuickBooks generate required legal reports?

CosmoLex Team

There are some specific reports that law firms are required to generate due in order to meet ethical obligations – such as a three-way reconciliations report for trust accounts. But there are also other non-trust account-related reports that attorneys are required to produce in certain situations. For example, under the lodestar method of calculating a reasonable attorney fee recovery, the … Read More

Why are accounts receivables considered an asset?

CosmoLex Team

When a law firm provides services and issues an invoice for those services, the law firm is essentially extending credit to the client. Your firm’s accounts receivable (A/R) tracks the amount each client owes for services rendered in the past, e.g. the amount of credit your firm has extended to each client.[1] (Attorneys can avoid having to extend credit to … Read More