Can I write it off?
A survey of deductible expenses for solo lawyers and small law firms
Once again, Americans are plunging into tax season on the tail of the holiday season. However, this tax season may come with more questions and complications than ever before for some families and small business owners. Many solo lawyers and small law firms have experienced changes in the way they do business over the past year, leading to additional tax questions.
It’s crucial to meet with a financial professional to begin the process of getting organized to file your taxes as early as possible after the new year. Meeting with them early on gives you more time to collect essential information and documents and to help develop a tax strategy.
Part of that strategy should be identifying expenses you can write off when filing your 2021 taxes. Here’s an overview of items that solo attorneys and small law firm owners may not know they can deduct when filing their taxes.
Startup Cost Deduction
Often, the IRS requires significant expenses to be deducted over time instead of all at once by categorizing them as capital expenses. However, if you went solo in 2021 or opened a small law firm, you may be eligible for a deduction of up to $5,000 in business startup cost.
Tax-deductible startup costs include expenses such as:
- Market research
- Travel-related expenses for starting the business
- Searching for potential business locations
- Attorney fees
- Accountant fees
Additionally, professional fees paid to consultants, attorneys, accountants, and others are typically deductible at any time during the life of a business, even if they aren’t startup costs.
Suppose your business travel lasts longer than a typical workday, necessitates that you get to sleep or rest, and takes you to somewhere away from the city where you normally conduct business. In that case, your expenses may qualify for a deduction. However, keep in mind that you:
- Should have a specific business purpose planned before leaving home
- Must engage in business activity (finding new clients, meeting with clients, or learning new skills directly related to your business) while you are traveling
Maintain ample and precise records and receipts for your business travel expenses and activities. Travel deductions are frequently under scrutiny from the IRS, and you should be prepared to justify yours. Deductible travel expenses may include:
- Transportation to and from your destination
- Transportation at your destination—car rental, Uber fare, or bus or subway tickets
Expenses for specialized journals, magazines, and books directly related to your business are tax-deductible under the category of supplies and materials. For example, a daily local newspaper won’t count as specialized, whereas a subscription to Best Lawyers Business Edition, if you are a business lawyer, would be.
While it is always cheaper to spend money you already have instead of using a loan, you can get a tax deduction for loan interest. Business loan interest is a tax-deductible business expense as long as they are from a bank. Suppose a loan is for both business and personal reasons. In that case, the business portion of the loan’s interest expense is assigned according to the assignment of the loan’s proceeds.
It’s essential to keep track of the disbursement funds if you aren’t using the entire loan for business purposes. Note that credit card interest isn’t tax-deductible when incurred for a personal purchase. However, if the interest accrues from business purchases, it’s tax-deductible.
Unexpected Expenses from COVID/Socially Distant Business Practices
Almost every law firm and solo attorney experienced a rise in unexpected expenses related to the COVID-19 pandemic. Since it’s been a while since many of these costs were initiated or increased, it’s crucial to remember them at tax time. These might include:
- Cost related to your digital ecosystem: Most companies implemented a remote working model to continue as close to normal as possible business operations. Costs associated with implementing a remote work environment, such as IT consultation, related hardware installations, obtaining additional equipment, and others, can be considered restructuring costs and treated accordingly.
- Marketing expenses: Your practice may have needed to change some of its marketing practices in the face of the pandemic. Perhaps marketing was more focused online than ever before, or you had to invest more in client relationship expenses. Whatever the reason, they should be included in your business expenses at tax time.
- Sanitization costs: Even if the number of staff and clients coming in and out of your office was significantly reduced, you likely still made extra efforts to ensure your office space was clean and sanitized. Whatever you spend on supplies such as cleaning agents, hand sanitizer, tissues, or hiring people to clean can also be written off in your taxes.
With the 2021 tax season in full swing, now is the time to meet with an experienced tax professional to ensure you don’t miss any critical deductions. Remember that the more time you have between meeting with them and the tax filing deadline, the better.
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.