Know If you’re running a law firm, every dollar counts—especially during tax season. Rounding up a year’s worth of personal and business expenses can be tedious and often confusing. But it’s in your best interest to ensure you’ve claimed all possible tax deductions for lawyers. The key is to do so without overstepping and claiming more than you’re entitled to.
So what tax deductions for lawyers can be claimed? And which law firm tax deductions do you need to be careful about?
In this article, we guide you through the top six tax deductions for lawyers that you can apply to your next tax return. You can keep these tips in mind as you conduct business throughout the year to maximize your return. Whether you’re looking for tax deductions for solo attorneys or work in a law firm, it’s important to be proactive in understanding smart tax strategies.
If you’re already at year-end, we’ve written a guide to year-end law firm accounting. It goes in-depth and helps you set your firm up to thrive in the new year.
The top 6 tax deductions for lawyers and law firms
At the bare minimum, business expenses must be both ordinary and necessary in order to be claimed, but there are particular law firm tax deductions to be aware of when assessing your expenses and filing the tax return for your law firm.
To help you prepare for tax time, we’ve rounded up some of the top tax deductions for attorneys to consider. We’ve also made note of a few precautions you should take before claiming those expenses.
1. Home office expenses
With law firm software like the Clio Suite, working from home is incredibly easy because it gives you the flexibility and efficiency you need to do your work. If your home office is your principal place of business for your law firm, you may be able to deduct certain expenses.
Determine what percentage of your home is dedicated as office space. 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.
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. However, if you use this method, you cannot claim the depreciated value of the portion of your home used in trade or business.
|Caution: In order for you to claim home office expenses as a tax deduction, your home needs to truly be your primary place of business. Additionally, a portion of your home needs to be exclusively and regularly used for business. That means if you work from home only occasionally, that likely doesn’t count.|
2. Advertising, entertainment, and promotion expenses
Almost all forms of law firm marketing expenses are tax deductible for lawyers and can be claimed when filing your tax return. This includes flyers, print ads, and even table fees for tradeshows. And don’t forget that online advertising for lawyers and law firms is also deductible.
Include marketing expenses in your annual budget as part of your law firm’s accounting practices, 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% of expenses for meals and entertainment.
Caution: Claiming entertainment expenses can be a useful tax deduction for attorneys, 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. Make sure you keep records of all your business meetings that take place over meals.
3. Travel expenses
Another tax deduction for lawyers is the cost of travelling. If you need to travel on behalf of your law firm, 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. Legal education costs
As a law professional, you can deduct ordinary and necessary education expenses required as a lawyer. 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 items as law firm tax deductions. This includes courses you take or legal conferences you attend. For example, if you attend the Clio Cloud Conference to network and learn new skills for improving your law 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 tax deductible for attorneys. A course that helps you build skills for any other profession than law isn’t tax deductible. For example, if you’re taking a course in HTML so that you can design your own website, that might not make the cut.|
5. Books and periodicals
Knowledge is power for legal professionals. Reading the best books for lawyers (like The Client-Centered Law Firm by Jack Newton) can help you run a great legal practice. Additionally, having the relevant legal research materials available can help you win cases.
Many lawyers are moving their legal libraries online, using services such as Fastcase or Casetext for legal research. However, if you still keep a library with hard copies of legal research materials, these could potentially be considered a tax deduction for lawyers. 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
When it comes to billing-related tax deductions for lawyers, you have to wait an average of three months from invoicing your client to when you get paid. However, according to the 2019 Legal Trends Report, 57% of electronic payments get paid within the same day they are billed, and 85% get paid within a week
There is one particular qualm that arises with accepting credit cards. Credit card companies charge fees for usage, and these can add up quickly if you have a lot of transactions. So are credit card fees tax deductible? According to the IRS, these fees can be deducted as a business expense, as long as they are actually paid or incurred by your law firm.
ProTip: Clio’s legal billing software makes the process of getting paid much simpler. You’re able to:
If you use Clio Payments to accept clients’ legal credit card payments securely and compliantly, those processing rates will be industry-low.
Knowing the tax deductions for lawyers keeps you ahead
There’s a lot to think about when dealing with law firm accounting and filing your tax return. But, by carefully considering tax strategies for law firms, you can maximize your deductions. Know what you’re entitled to so you can avoid trouble with the IRS. Take the time to record all of your business expenses throughout the year. You’ll then be positioned to get the most out of your tax return.
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Categorized in: Accounting