Attorneys have unique challenges when filing their tax returns.
Unfortunately, unless you specialize in business law, you probably haven’t had thorough training in the economics of operating a law firm. If you’re an attorney and learning as you go, you could be making serious errors in your tax reporting. Here are some common errors attorneys make on their taxes and how you can avoid them.
You probably know to itemize your business expenses. Some expenses you’ll bill to your clients like mailing, photocopying, consulting, and travel. But some general expenses will be covered by the firm like office equipment, stationery, and utilities. Anything not billed to the client should be claimed as a deduction. However, there are other deductions you may be missing. If you took out a loan as startup capital or to buy into the firm, you can deduct the interest payments on your taxes.
Your health insurance premiums can also be deducted as part of business expenses, whereas your doctor visits would be listed on your personal income tax return. You will incur some business expenses which may not be reimbursed by the firm like some business gifts, elements of your cell phone plan like insurance, or home internet service which you use for business. These should be deducted on your business expenses.
Failing to file multiple state returns
Does your law firm limit its practice to one state or do you operate over multiple states? Even if you only have one client from another state you’ll need to pay taxes to that state. If you lived in one state but worked in another you would need to pay taxes to both. The same principle applies here.
You do have the option of filing a composite return which is one return for all states. However if you do business in states with vastly different tax rates, this can do you more harm than good. It is usually better to file each state separately.
Underpaying your tax estimates
The government wants its money on time and in full. Like all businesses, law firms need to pay quarterly estimates. If you underpay your quarterly estimates, you’ll be hit with fees after you file your return. That’s why it’s best to update your estimates throughout the year and keep your bookkeeping up to date. Pay the increases on your estimates each quarter if your firm income increases.
On the other side, many firms operate a business that’s busier at different times of the year. For example, real estate attorneys may be busier from spring to early fall because that’s typically when more homes are sold. Your tax estimates should reflect the variance of your income. If some months are slower than others, you should adjust your payments accordingly. If you’re overpaying your taxes, the government isn’t going to return your money to you with interest. You could be investing the money you’re paying the government back into your firm.
Not appealing an audit
One of the scariest things that can happen to a business is an IRS audit. The agent will pore over your accounts and issue you a tax bill with fines at the maximum penalty. Many people will pay this assessment out of fear or just relief to end the whole process. This can cost your firm thousands of dollars. You can appeal the initial assessment and provide documentation to your case. The agent may then adjust your assessment to your benefit.
It’s important to operate your firm as a business and to get the maximum benefit from your tax return. Careful accounting throughout the year will make your tax filing easy. Call us today at 732.625.2734. JADDE Financial Solutions will help you avoid the stress of tax inaccuracies and make sure your business is tax ready throughout the year.