When handling a law firm’s accounting, you’ll need to accurately differentiate between direct and indirect costs. If you don’t, you could incorrectly increase or reduce the net income of the firm in a given tax year. This could create increased tax liability, lead to a legal accounting audit and further result in more compliance issues.
A “Direct Cost” (aka Hard Cost) can be identified as any disbursement a firm pays as a “direct” expense to a vendor on behalf of their client. These expenses can include filing fees, costs paid to expert witnesses, the cost of court reporters, and various other direct expenses paid to vendors for a firm’s client.
An “Indirect Cost” (aka Soft Cost) is identified as an “in-house” expense associated with a client matter. These costs can include postage, long distance phone calls, facsimiles, and even photocopies.
Read this article to learn more about tracking direct and indirect costs to avoid tax liability and compliance issues.