Best financial practices for the best attorney tax return
Whether you've had a law practice for years or are new to the field, taxes are no walk in the park
Whether you’ve had a law practice for years or are new to the field, taxes are no walk in the park. You went to law school, not business school. Why do you have to worry about numbers? Simply put, a law firm can’t run itself. Your legal practice’s success rests on running it like a business, including keeping the taxes up to date.
For attorneys, taxes can be full of disdain and confusion. However, accounting, taxes, and compliance are financial indicators of how well your firm is doing. If you need help with your taxes, that’s a good thing as it means you’ve been successful and made money. Here are some considerations for making tax returns easier for law firms.
Organizing Financial and Investing Paperwork
One of the largest burdens for small law firms is organizing their tax-related paperwork. It’s not only time consuming but also confusing. Nonetheless, it’s a crucial factor in keeping law firms in practice and afloat. If a business can’t organize their paperwork, they will invest more time and hassle or risk making mistakes on their tax return.
How should these documents best be organized? Most financial advisors recommend a financial aggregation system, such as QuickBooks or Mint. Working with a financial advisor and wealth management company such as Maia Wealth can provide you the opportunity to have a top of the line financial aggregation system to assist with this organization process.
Timeline for Completing Financial and Investing Tax Returns
Most businesses and even self-employed individuals need to submit their estimated tax payments quarterly and file an income tax return annually. Filing dates depend on whether the business is a corporation, partnership, S corporation, or sole proprietorship.
Sole proprietorships use the same tax schedule as individuals. Corporations can have various tax filing deadlines, which should be defined in your corporate resolution. State income tax due dates can vary and are determined at the state level.
Considerations for COVID-19
Nearly all small businesses are feeling the impact of COVID-19 in one way or another, including tax issues. When it comes to small business tax, the pandemic and the government’s response has led business owners into unchartered waters. You will need to determine if any of the following apply to your law practice:
Socially Distant Tax Write-Offs
COVID-19 has changed the way law firms conduct business, creating new and sometimes uncommon tax write-offs. Depending on how social distancing practices have impacted your law firm specifically, you might be able to claim the following as tax write-offs:
- Office supplies and equipment such as computers needed for employees working from home
- Software or subscription services that allow you to meet virtually with clients or be present in court
- Purchases to decrease the spread of COVID-19 in the office environment such a hand sanitizer, soap, masks, and cleaning supplies
- Leasing or purchasing additional office space so that clients or employees can practice better social distancing
Payment Protection Program (PPP) Issues
If you received a PPP loan to keep your business going, there are many tax implications. You’ll need to decide if you are applying for loan forgiveness as your decision will make a difference when filing taxes. Only loan proceeds used for specific expenses can be forgiven. The Consolidated Appropriations Act, 2021 (CAA 2021), H.R. 133, Division N, Section 276, affords that deductions are permitted for otherwise deductible expenses paid with the monies of a forgiven PPP loan. The tax basis and other attributes of the law firm’s assets won’t be reduced due to loan forgiveness.
Small law firms who have already filed tax returns reporting some expenditures as non-deductible may want to consider amending their return based on this new law. However, they should analyze the impact of amending returns to claim deductions and discuss their situation with a financial planner or tax professional.
Some small law firms are facing losses that they’ve never had to face before. Correctly accounting for these losses within their tax return is vital to ensure that taxes are filed correctly and to minimize their tax liability. Certain losses can have larger positive implications than business owners might think.
Hire a Financial Consultancy
As a lawyer with a small practice, everything falls on your shoulders. You are responsible for advocating for your clients. At the same time, you must also manage your team, make essential business decisions, and keep track of your finances. With such a long to-do list, you may feel like crawling into a hole and giving up.
Before you start digging, consider your available resources. You can’t do it alone, and the good news is that you don’t have to. There are professionals for that. A financial consultancy can help with tax return issues and management. Having basic financial statements, understanding tax liability, and taking advantage of accounting and tax software provides a solid foundation. Still, to make the most of your tax return, you need to hire a professional.
Mark Candler and Dave Owens of Maia Wealth are go-to wealth advisers for lawyers and law firms in Colorado. Specializing in debt reduction, investment management, retirement efficiency, and legacy planning, Mark Candler and Dave Owens are trusted professionals for attorney-focused wealth management strategies in the Denver metro area.