Tax season: The time of year when your personal and business accounting tie up a frustratingly disproportionate amount of time, effort, and resources. This is especially true for lawyers.
When the onerous tax paperwork is added to your workload and takes away from billable hours, it can be difficult to simplify the tedious process of gathering evidence of spend, running a business, and practicing law.
To make your life easier we have gathered some tax season hacks to make filing your return as seamless as possible and help you get the largest return possible.
1. Tax Expenses 101: To be deductible, a business expense must be both ordinary and necessary.
The former being a cost “common and accepted in your industry,” and the latter “helpful and appropriate for your trade or business.” You may then distinguish usual business from expenses that include capital and personal expenses.
2. Play by the rules – and don’t assume to win easily.
Don’t assume every claim is an automatic refund. Certain rules apply to your ability to claim expenses. You may not be allowed to deduct an expense the year in which it was incurred, or in some instances, not at all: think depreciation, amortization or depletion.
3. Capital expenses can yield the highest tax return for lawyers, especially solos.
These are costs that are part of your investment in your business and deemed an asset. Three types of capital expenses exist: start-up costs, business assets, and improvements.
4. Treat every expense as a capital expense.
When you go into business, track,save, and consider every expense a potential deduction and capital expense. Start-up costs such as advertising, travel, and employee training are going to be some of a lawyer’s most fruitful resources.
5. The negative sometimes comes before the positive.
For particular assets, you must receive payment through deprecations. You generally can’t recover costs until you sell the business or go out of business – or choose to amortize certain costs for setting up your business.
6. Timelines on spend are key for claims.
You cannot claim on costs spent before deciding to begin your business (these are personal and nondeductible). You can, however deduct costs spent in attempting to acquire or start a business as a capital loss.
7. Keep personal and business expenses separate—with one exception.
You cannot deduct personal, living, or family expenses – but expenses that are used for business and partly for personal purposes can be divided. Calculate the total cost between the business and personal, and deduct the business part.
8. Hire a professional if necessary.
Maintain records of your expenses and spend throughout the year, but don’t be penny wise and pound foolish when it comes to saving time from your day job in order to file a tax return. An accountant can save you hours of time and potentially help you receive a larger return.