Does your accountant treat your law firm like any other small business? The playbook for Tax Services for Law Firms is different. Your fees come in varying amounts, and client funds are held in your trust account. Even a small accounting error can cost you valuable tax savings or lead to compliance issues. At Titan Tax Solutions, we specialize in law firm accounting, helping lawyers manage their finances efficiently, reduce tax liabilities, and maximize their take-home pay.

How a Law Firm Differs From Other Businesses

A law firm isn’t a service provider offering a run-of-the-mill monthly subscription. You work on an hourly or flat-fee basis or on a contingency basis. There are different values for each model as income is received and as the IRS taxes it. You also have client money, which is not the firm’s. A normal accountant is unlikely to come across these details. There is an additional layer of partner pay. The owners receive draws, guaranteed payments, salary, and distributions. Every option will impact on self-employment tax. You need to have a working knowledge of the rules that apply to your structure with your accountant.

Six Costly Gaps Generic Accountants Leave Open

Here are six ways that the wrong accountant will cost you money:

1. Client cost advances. These are typically not deducted, but treated as a loan to the client. The answer depends on your fee agreement and so does its wording.
2. Contingency fee timing. The cash method is when you are liable for tax when the fee is received. A large settlement may put you in an increased bracket.
3. Trust account funds. Money in your IOLTA account is not “firm income”. The interest on IOLTA accounts does not belong to you, but rather goes to the state program.
4. Owning pay and type of entity. A PLLC or PC can choose to be taxed as an S Corporation. If you do, then you will have to pay yourself “reasonable compensation.”
5. The QBI deduction. Law is a “specified service” business. So income thresholds limit the 20% deduction.
6. A tax levy applied by Michigan on flow-through entities. Michigan allows companies to pay state taxes on the entity level at 4.25%. Compared to the higher federal SALT cap, this election is 3 years long.

Many of these gaps remain until a notice is sent by the IRS. At that time, the repair costs are much higher.

A Closer Look at Client Cost Advances

If you hire an expert witness at a $20,000 rate on a contingency case, what happens if he loses the case? If you hire an expert witness, what happens if he loses the case? May you claim it this year? Often, no. Many courts consider advances to be loans, as you hope to be paid back when you receive the settlement. The unpaid cost can be written off if the case is lost then. Agreements on fees make a difference. The answer to this question may vary between a gross fee contract and a net fee contract. Changing the way these expenses are treated may require approval from the IRS. A general accountant will probably never ask you what type of contract you use.

Planning for Large Contingency Fees

The income that comes from contingencies comes in chunks. A big settlement could double your taxable income. If there’s no plan, then you will be hit with an unexpected bill and underpayment. The impact from having good law firm tax planning is spread throughout the year. We make quarterly estimates and timing, prior to the fee. A cash balance plan can cover some of the lump years of a big year as part of a 401(k). Additional office build-outs and equipment could be eligible for 100% bonus depreciation.

Generic Accountant vs. Specialized Tax Team

True Tax Services for Law Firms are more than just annual filing. Here are the pros and cons of the two methods:

1. General accountant: Files once a year and responds to what’s given to them. Specialized team: Plans all year around your billing model.
2. The generic accountant sees trust funds as any bank deposit. Specialized team: Keeps client funds and firm funds apart.
3. Accountant with small-business expertise: Knows and applies the specialized deductions that small businesses can claim. Specialized team: Uses rules created for professional services organizations.

Beyond Tax Returns: Financial Leadership for Your Firm

But if cash flow remains unknown, then tax savings are not appreciated. In strong firm accounting, the cases that pay, pay, and the cases that drag, drag. Clean books, timely reports, and a clear view of receivables are required. Our controller attorney tax services maintain your records accurately and on time. Our fractional CFO services provide a fractional CFO without a full-time salary. Collections, work in progress, and old receivables can be monitored monthly. Then you make decisions with real numbers, not guesses!

What Working With Titan Tax Solutions Looks Like

Titan Tax Solutions has over 30 years of experience to offer to each of its clients. Clear pricing, quick turnaround, and 100% satisfaction guaranteed. Our certified professionals are aware of IRS regulations and changing tax laws. We care for your firm as if it were a business that requires attention throughout the year.

We keep our process simple:

• Review: We read your fee agreements, entity & books.
• Plan: Mapping deductions, estimates, and owner pay.
• File: We produce precise returns, on time.
• We review your plan quarterly

Serving Law Firms in Troy, Oakland County, and Metro Detroit

We serve firms throughout Oakland County and Metro Detroit in our Troy, MI office. We work with attorneys remotely throughout the country as well. A number of companies are looking for a CPA for law firms in their vicinity. While credentials are important, real Law firm accounting experience is more important. Inquire from any advisor as to how they deal with cost advances and trust funds. Our lawyer tax services are suitable for attorneys of any size and specialism. Each practice has its own tax and billing peculiarities. We are taking the time to learn your name first.

Choose Specialized Support for Your Firm

Tax Services for Law Firms are designed to shield you from loss of income, loss of trust accounts, and loss of your license. A general accountant might overlook rules that are important. Titan Tax Solutions creates an obvious roadmap for the way your firm makes money. The short and simple answer is: does your accountant know your fee agreements? The information in this post is general rather than individual tax advice.

Follow us on Facebook for more details.

Frequently Asked Questions

What does a special accountant for law firms look like?

Yes, in most cases. Lawyers manage trust funds, cost advances, and odd income timing. A generalist may not notice the problems that a specialist can.

Do law firms have a tax-deductible cost advance to clients?

Not at once, but frequently. Many courts consider them a loan to the client. This depends on your fee agreement and accounting method; consult your tax advisor for details.

Is IOLTA money taxable income?

The funds of your IOLTA account are not firm income. It is fees that you earn only that count. IOLTA interest is distributed to the state program, not to you.

How are contingency fees taxed?

Cash-method companies will typically report the fee when they receive the cash. Constructive receipt may occur when the fee is earned, and funds are available. Make estimated payments in the context of big settlements.

What is the best business structure for a law firm?

This is dependent on your size, state regulations and owner pay objectives. There are many companies that choose to be a PLLC or a PC, and some choose to be an S corporation. Check out the numbers first before you make a selection.

Talk to Our Tax Experts Today

Looking to secure your finances and reduce your taxes? Give Titan Tax Solutions a call today at (248) 524-5240. Let’s create a tax plan for your firm.