As an attorney, you specialize in helping your clients navigate matters of the law. But managing the accounting and tax planning for your firm may be an entirely different story. Because tax laws can be time-consuming, change often, and are virtually impossible for you to stay up to date with, savvy lawyers turn to the MB Group for specialized tax planning for attorneys.
At the MB Group, we regularly work with law firms of all sizes to help them strategically minimize tax liability and maximize return. Read more about tax planning for attorneys and how our experts can help your firm achieve its strategic tax planning goals.
Strategic Retirement Planning
One highly effective tax planning strategy for attorneys and law firms is retirement planning. If you are a law firm owner, you generally have three options for establishing a retirement plan:
- Simple IRA
- SEP IRA
- Solo 401(k)
Each of these retirement plan options allow owners to save money for their retirement. The earnings on the investments will enjoy tax-deferred treatment. At the same time, contributions to the accounts may be tax-deductible. Because each of these plans have slightly unique features, it's important for attorneys to work with an experienced CPA to select the option that best meets your needs for today and tomorrow.
Align Tax Payments with Cash Flows
Law firms typically experience variability in cash flows from one month or year to the next. At the same time, most firms experience uneven partner distribution schedules — most of which are weighted toward the year's end.
By working with your CPA, you can establish smaller estimated tax payments in years with lower income. Or you can make larger payments near the end of the year and smaller payments at the beginning to best mirror cash flows. One note is to work with an experienced tax professional to avoid late/underpayment penalties.
Make Tax Planning a Year-Round Event
Instead of waiting until a few weeks or days prior to tax filing deadlines, it's best to make tax planning a year-round event. To do so, establish meetings with your tax accounting throughout the year. Ideally, many of these meetings should be scheduled for non-tax crunch times. You can also distribute tax decisions and paperwork throughout the year to ensure thoughtful planning accuracy.
Choose the Right Business Structure for Your Law Firm
Selecting the right type of entity for your law firm can equate to significant tax savings. However, there are no one-size-fits-all approaches when choosing the best structure. The business entity you select should be based on your firm goals, size of revenue, and owners.
It's important to look at all aspects of the firm to decide if it would be best suited as:
- S Corporation
- C Corporation
Hiring Family Members
Another strategic method you can use to generate tax savings is to hire family members. By hiring family members, you may shift a portion of income to a lower tax bracket. At the same time, hiring family members may allow them to contribute to the retirement plan of the firm.
Of course, there are strict rules that must be followed to capture this deduction. For instance:
- You must pay your family member a reasonable wage for the work they perform
- Your child must be of legal working age
- They must work in the firm.
By hiring a family member, your law firm may be able to take a deduction for reasonable wages paid to them. This can reduce the amount of taxable income passed through to you — depending on the structure of your business. Hiring family members may also make your payments of certain taxes deductible:
- Federal Unemployment Tax Act (FUTA) taxes and
- Federal Income Contributions Act (FICA) taxes.
Consider Utilizing Reimbursement Plans That Are Tax-Free
Law firms may be eligible to reimburse employees and owners for certain expenses by using the accountable plan. The accountable plan is a set of processes and rules that allow the tax-free reimbursement of eligible business expenses. Allowable expenses include
- Items directly related to the operations of the law firm.
- Items that would've been deductible if the business would've paid them.
However, you are required to have an accountable reimbursement plan in place. The accountable plan should outline when your employees are required to provide you with supporting documentation and to return any proceeds paid out in advance that weren't spent on business expenses that were legitimate.
Contact the MB Group for Tax Planning for Attorneys
At the MB Group, we are a leading accounting firm offering a vast range of services tailored to the needs of your business. And when you partner with us, you'll enjoy the ability to pay for services you need and none of the ones you don't. Contact our team today.