Tax season can be stressful, pushing you out of your comfort zone—practicing law—and into a complex world of expenses, deductions, and bookkeeping (unless you’re a tax lawyer). Even if you’ve hired a legal accountant, it can be difficult to navigate what’s needed from you to prepare for your return. This year, why not minimize the stress of tax season by getting organized before you visit your accountant?
To help, we’ve put together the following guide filled with tips for preparing your legal practice for tax time.
Get your books up-to-date
It may be obvious, but can also be overwhelming: You need up-to-date books before you can ask your accountant to file your 2018 taxes. For lawyers, this means you’ll want to finalize the following items before your start your taxes:
- Collect your receipts. To make this easier, consider using an app like Evernote to go paperless and easily capture digital copies of your receipts.
- Reconcile your bank accounts. Be sure to gather your year-end bank and credit card statements.
- Review state sales taxes. Note that status of what has been or will be filed for your state sales taxes for the year—your accountant needs this information to reconcile with your year-end financial statements.
- Check W9s and W2s. You’ll need to have these on file for all contractors and employees.
Know your deadlines
The best way to avoid fines and late fees is to file your taxes on time—so be sure to verify tax deadlines for your practice well in advance. Here are some important tax return deadlines to know that might apply to your practice:
- S Corporations and Partnerships: March 15, 2019
- Individuals and Corporations: April 15, 2019
Consider a federal tax extension
If you don’t think you’ll be able to get your paperwork done on time, you should strongly consider filing for a tax extension. While a tax extension won’t get you out of paying your 2018 taxes owed by the usual deadline, it will give you extra time to prepare and file your tax return (and avoid any penalties for filing late).
Filing for an extension is easy: Submit a one-page form, along with your taxes owed for the year, to the IRS online or by mail. Either you or your accountant can prepare the relevant form and submit it to the IRS.
To file for a tax extension, submit the form that corresponds to your business type below by the required date:
- Partnerships – March 15, 2019: To qualify for an automatic 5-month extension, use Form 7004.
- Corporations – April 15, 2019: To qualify for an automatic 6-month extension, use Form 7004.
- Sole Proprietors – April 15, 2019: To qualify for an automatic 6-month extension, use Form 4868.
Understand common tax deductions for lawyers
Tax deductions can be tricky for legal practices: You want to claim all possible deductions that you can—but you also don’t want to overstep and claim more than you’re eligible for. How can you start to identify which of your tax expenses might be eligible to claim?
In general, you can deduct purchases that are ordinary and necessary for your work. Here’s a list of common tax deductions for lawyers and legal practices that can be deducted on Schedule C, Form 1040, unless otherwise noted.
Home office: If you’re running your practice from a home office, you may be eligible for the home office deduction. In order to qualify, you need to meet the following three requirements set by the IRS:
- Exclusivity: You need to use your office solely for business.
- Regularity: Your home office must be used on a regular basis.
- Precedence: You need to spend the most time, and conduct the most important business activities out of your home office.
The simplest way to calculate your home office deductions is to create a standardized deduction of $5 per square foot of your home that’s used for business (up to a maximum of 300 square feet).
Typical types of home office expenses that are deductible on a percentage basis include:
- Telephone and internet expenses: Note: If you use these technologies for both business and personal use, (in a home office, for instance) you can deduct the percentage of the cost based on how much you use them for your business. Keep records to prove the amount of business use (annotated call logs and office hours). If your phone and Internet are used solely for business purposes, then they are 100% deductible.
- Mortgage interest
- Property taxes
Vehicle expenses: You can likely deduct car expenses—if you use your car for business purposes. The rules for car expenses are complex, so be sure to check out the latest guidelines for car expenses. You can also find a list of current (and prior) standard mileage rates here.
Business insurance: The cost to insure your business is fully deductible as a business expense.
Charitable contributions: You can deduct charitable contributions that are made to qualified organizations on Schedule A (Form 1040). Corporations can deduct these on their corporate tax return, while sole proprietorships, single member LLCs, and partnerships all deduct these costs on their personal tax return.
Retirement contributions: Contributions made to an Individual Retirement Account (IRA) can reduce your taxable income for the year. Keep in mind that your total contributions for the year can’t exceed your total earned income for the year or the annual maximum level of contributions (whichever is less). The IRS announces these limits each year.
Business interest and bank fees: Interest incurred on business loans and on business credit cards can be deducted as a business expense. Note that if a loan is part business and part personal, you can only deduct the percentage of interest that applies to the business part of the loan. You can also deduct fees and bank charges for your business bank accounts.
Legal and professional fees: The costs of professional services, such as fees paid to your accountant or bookkeeper, are deductible as a business expense.
Business meals: You can deduct 50% of qualifying food and drink costs. To qualify, the expense needs to be a business meal. Hold onto the receipt and jot down the purpose of the meeting and who you met with.
Learn about more of the top tax deductions for law firms.
Estimate and pay your quarterly income taxes
Estimated tax payments are due four times per year: April, June, September, and January. To submit your quarterly payment, simply fill out Form 1040-ES and mail it—along with a check—to the IRS office closest to you. You can also pay online or by phone.
To calculate your quarterly payments, you need to first estimate your adjusted gross income, taxable income, deductions, and credits for the year. Use your income, deductions, and credits from last year as a jumping off point. Once you have estimated your income for the year, use Form 1040-ES to calculate the estimated payments.
Ask for help
Let’s face it: your expertise is in the law, and that’s where you want to focus your time and energy. While it’s ultimately your responsibility to keep and maintain records of your expenses and keep up-to-date on your practice’s tax situation, don’t be afraid to hire a professional to help if you need it.
Hiring a bookkeeper or an online bookkeeping service can help you process a backlog of bookkeeping, making it easier to be prepared to meet with your accountant this tax season.
Navigating the treacherous terrain of tax time can be daunting for solo and small firm attorneys without an in-house accounting department, but there are a number of resources available to help. By understanding how to get and stay organized, you can make tax season run smoother for your legal practice.
Portions of this post were contributed by Kendra Murphy of Bench Accounting, the online bookkeeping service that pairs you with a professional bookkeeper and uses simple software to do your books for you.
Note: The information in this article applies only to US practices. This post is provided for informational purposes only. It does not constitute legal, business, or tax advice.
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