It’s tax time, and if you’re a lawyer, that means you’ve got a lot of work ahead of you. Rounding up a year’s worth of personal and business expenses can be a tedious and often confusing process.
But, when you’re running a law firm, every dollar counts. You’ll want to make sure you’ve claimed all possible deductions—without overstepping and claiming more than you’re entitled to.
What tax deductions can you claim as a lawyer? Which ones do you need to be careful about? At a bare minimum, business expenses must be both ordinary and necessary in order to be claimed, but there’s a lot more to consider when assessing your expenses and filing your tax return.
Here are some of the top expenses that should be on your list this tax season—along with a few precautions you should take before claiming those expenses.
1. Home office expenses
More and more lawyers are working from home. If this includes you, and your home office is your principal place of business, you may be able to deduct certain expenses. You’ll need to determine what percentage of your home your office comprises, and then multiply that by your applicable home expenses for the year. These include portions of your rent or mortgage payments, utilities, insurance costs, depreciation and repairs.
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Another option is to use the safe harbor method, which allows you to claim up to $1,500 per year based on $5 per square foot up to 300 feet—no calculation required. However, if you use this method, you cannot claim the depreciated value of the portion of your home used in trade or business.
Caution: Your home needs to truly be your primary place of business—and a portion of your home needs to be exclusively and regularly used for business—in order for you to claim home office expenses as a deduction. Translation: If you work from home occasionally but don’t have a home office, that likely doesn’t count.
2. Advertising, entertainment, and promotion expenses
Almost all forms of marketing expenses are tax deductible—flyers, print ads, and even table fees for tradeshows can all be claimed when filing your tax return. Of course, online advertising is also deductible. Include this expense in your annual budget, and retain all invoices and receipts.
If networking is a big part of your promotion strategy, it’s worth noting that you can claim 50 percent of expenses for meals and entertainment.
Caution: Claiming entertainment expenses can be a useful tax deduction, but you’ll need to make sure that your outing was strongly related to your business. If you have a steak dinner with a client, but you don’t discuss any business, that meal can’t be claimed.
The Attorneys Audit Technique Guide from the IRS provides a specific example:
“In Israelson v. United States, 367 F. Supp. 1104 (D. Md. 1973), an attorney gave a party at a country club. Although the party was attended by some clients, persons who refer clients, and other business associates, no business was discussed. Therefore, no deduction was allowed.”
If you did discuss business at that steak dinner, you’ll need to prove it if the IRS comes knocking, so make sure you keep records of all your business meetings that take place over meals.
3. Travel expenses
If you need to travel for work, those expenses are tax deductible. For example, if you travel a fair distance to a courthouse you wouldn’t normally go to, you may be able to deduct travel costs.
Caution: As with entertainment expenses, you must be absolutely certain that your travel expenses are solely related to your business. Claiming attorney-client privilege to avoid disclosing the business purpose of your travel won’t work either. Here’s another example from the IRS’s Attorneys Audit Technique Guide:
“For example, one attorney substantiated airfare and lodging for several ski trips. When asked the business purpose he refused to answer, claiming the attorney-client privilege (refer to “Attorney-Client Privilege” in Chapter 1). The examiner questioned the documents provided because they included the names of his children and wife.”
4. Education costs
As a professional, you’re allowed to deduct ordinary and necessary education expenses required for your profession. Publication 535 from the IRS states:
“For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law.”
In addition to education required by law for lawyers, you may also be able to claim other courses you take. For example, if you’re attending the Clio Cloud Conference to network and learn new skills for improving your practice, you can claim that as a deduction.
To make the claim, you’ll need to prove the education you get “maintains or improves the skills required in your trade or business.”
Caution: Not all education expenses are deductible. For example, a course that qualifies you for a different profession—rather than maintaining or improving your current skills—isn’t tax deductible. For example, if you’re a tech-savvy lawyer taking a course in HTML so that you can design your own website, that might not make the cut.
5. Books and periodicals
Many lawyers are moving their legal libraries online, using services such as Fastcase for legal research. However, if you still keep a library with hard copies of legal research materials, these may be tax deductible. Just as you can claim the depreciated value of your work laptop and/or printer as a tax deduction, you may also be able to claim the depreciating value of the books you keep in your legal library.
Caution: Items in your legal library are only tax deductible if they’re usable for more than a year. IRC §167 allows for “recovery of the costs of any asset used in a trade or business if it has a useful life of more than one year and its value decreases with time.” In other words, you can’t claim depreciated value for periodicals or other legal materials bought on an annual basis. This includes loose-leaf volumes that receive periodic updates. These need to be claimed the year they’re purchased as a business expense.
6. Credit card convenience fees
One qualm that arises with accepting credit cards, despite their convenience, is that credit card companies charge fees to businesses who accept their cards. However, according to the IRS, these fees can be deducted as a business expense, as long as it is actually paid or incurred by your law firm.
Accepting credit cards might not be so scary after all!
Take control of your taxes
There’s a lot to think about when filing your tax return, but by carefully considering what you’re entitled to, you can maximize your deductions while keeping out of trouble with the IRS. Take the time to record all of your business expenses throughout the year, and you’ll be positioned to get the most out of your tax return.
Streamline your legal accounting
Having a tough time this tax season? It may be time to upgrade your legal accounting processes. Download our free guide, 5 Steps to Easy(ier) Legal Accounting, for a few tips on how to get started: