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Simple Guide to Tax Planning for Attorneys

Written By: MB Group

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: A SIMPLE IRA, which stands for Savings Incentive Match Plan forInline Blog Images - 2023-02-10T101119.936 Employees,  enables both employees and employers to make contributions to traditional IRAs set up for employees. This plan is often perfect for small employers that aren't currently sponsoring a retirement plan. SIMPLE IRA plans lack the start-up and operating costs of a conventional retirement plan, which is what makes them ideal for smaller businesses. 

  • SEP IRA: This retirement plan is a basic individual retirement account not unlike a traditional IRA. This plan is for business owners, and contributions are tax-deductible. A great feature is that investments grow tax-deferred up until retirement. Then, distributions are taxed as income.

    SEP IRAs are ideal for both self-employed individuals as well as small business owners that don't have many employees. The main reason this isn't used by bigger operations is because if employees are considered eligible participants in your plan, you, as the business owner, must contribute on their behalf. Moreover, those contributions must be an equal percentage to your own compensation. 

  • Solo 401(k): This is a traditional IRA plan designed for a business owner with no employees. Contributions can be made as both the employee and as the employer. A business owner can contribute both elective deferrals up to 100% of compensation up to the contribution limited as well as employer nonelective contributions. Non elective contributions can be made up to 25% of compensation defined by the plan. 

Related Blog: Solo 401k vs SEP IRA: Which is best for small business owners?

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:  an S corporation business structure that passes its taxable income,three business partners deductions, credits, and even losses on to its shareholders. This business structure is only available to small businesses that have fewer than one-hundred shareholders. An S corporation is known as a "pass-through entity" . This is because businesses with this business structure pay no corporate taxes, but pay shareholders. Those shareholders are the ones responsible for the taxes that are due. 
  • C Corporation: In a C corporation, owners (or shareholders) are taxed independently of the entity. This legal structure is also subject to corporate income taxation. Profits are taxed at both at the corporate level, and the personal level. A C corporation limits the liability of both investors and owners, making this a popular type of business structure for many. 
  • Partnership: Partnership business structures come in a few varieties, but the two most common forms are a limited partnership and a limited liability partnership.
    • Limited partnerships have one general partner whose liability is unlimited while the remaining partners have a limited liability. Oftentimes partners with limited liability are there to help get a new business off the ground. They might help fund the business, but ultimately they have no hand in its operations. 
    • A limited liability partnership functions much of the same way a limited partnership does, the crucial difference, however, is that every partner has limited liability. Under an LLP structure, every owner's personal finances are separated from the business'. In the event of legal action, all personal assets are protected. Additionally, personal assets are protected against the company's creditors. 

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.

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