Tax day is just around the corner, and with Partnership and S-Corp returns due on March 15th, we wanted to share some key information about how to best prepare your law firm for tax season this year. Being prepared for tax season is the #1 way to ensure that you’re not strapped for cash when tax day comes. Even if you’ve been doing your own books this year and you feel confident with your data, the truth is that being unprepared can end up costing you thousands in unexpected obligations at tax time.
Step One: Understand Your Law Firm’s Tax Responsibilities
Each year, your law firm’s taxes will depend on a wide range of factors. Among them are entity type, the number of owners or partners in your firm, any financing you’ve received, and the location of your practice. To fully understand the many factors that go into your tax liability, we recommend participating in a tax planning session with a qualified CPA or Tax Professional. Before you can do that, you’ll need to be solid on your financial data so that they can effectively help you plan for tax day.
Step Two: Gather Your Law Firm’s Tax Documentation
The most important thing you can do to prepare for tax season is to simply ensure that you have all the documentation you need to file at your disposal. Even if you don’t have your books in good shape, ensuring that you have each of these items will help you be more prepared for tax day:
- Receipts for all transactions throughout the year
- Incorporation documents
- Employer documentation from the IRS or state revenue office
- Payroll ledgers
- W9s from contractors
- A W-2 if you paid yourself a salary from your firm
- Home office information
- Vehicle information and mileage logs
- Loan documents
While this is not an exhaustive list, starting here should help you gather the tools you need to put your books together.
Step Three: Put Together Your Law Firm’s End of Year Financials
This part is where things can get a little tricky! If you want to save money on tax preparation fees and avoid any surprises on tax day, the best thing you can do is to deliver a clean accounting file to your tax professional. Before you can do that, you’ll need to take steps to ensure that your books are complete and that all expenses and deductions are accounted for. Then, you can close your books for the year and generate your end of the year financial reports.
Here is an article about how to close your books if you use QuickBooks Online.
If you use an integrated software for both practice management and bookkeeping, the steps you take here may be different. What’s important is that you can reconcile your books at the end of the year and that your books, bank accounts, and client trust ledgers are all consistent with one another.
Step Four: Get a Second Opinion or Re-evaluate Your Strategy
If step three was difficult for you because of missing information or you can’t seem to get your books to reconcile, just know that you’re not the first law firm owner to face this issue! Reconciling and closing the books is even more difficult for attorneys and law firms than for other business industries because of the complex set of accounting requirements required for attorneys. Here’s what to do:
- If your books won’t reconcile: Speak with a trusted bookkeeping professional for law firms about review & support options. Legal Ease can review your books for you to check for any errors and resolve issues with your DIY books.
- If your books are incomplete: Consider hiring a team of bookkeeping experts for attorneys to take on the job of cleaning up your books. A major added benefit of outsourcing this clean up to a firm like Legal Ease is that we ensure that your books are 100% ready to ship to your tax pro and give you proactive guidance to improve your bookkeeping in the upcoming year.
- If you’re confident in your books but don’t have an accountant on staff: We recommend considering review & support from a qualified bookkeeper who specializes in the legal industry, even if you feel confident in your books. This is the only way to ensure you get the maximum deductions at tax time. Even the best DIY law firm can miss recording certain expenses and lose out on thousands of dollars in deductions.
Step Five: File Your Law Firm's Taxes
Now that you’ve completed the steps above, you’re ready to file! Send your completed accounting file alongside any documentation required by your tax professional. Adhere to any deadlines they give you to avoid delays or late filing penalties.
