Get the Most Bang for Your Buck: Key Tax Deductions for Attorneys

Attorney Tax Deductions 101

When it comes to filing your taxes, tax deductions for lawyers can be a little complicated. There are several different types you will encounter, and it is important to know what you can deduct so you can maximize your savings on your tax filing. Well, tax deductions are a reduction in your taxable income. Simply put, the less income you are taxed on, the less you have to pay. Basically, the government just allows you to reduce your income by certain amounts for certain expenditures. Deductible expenditures for attorneys fall into two main categories – costs of doing business (business expenses) and costs of handling legal matters (case-related costs). While these can be somewhat self-explanatory, there are other details which impact how and when a tax deduction is applied. Lawyers are basically in the service business. You provide professional legal services in exchange for a fee. In general, this means you bill for your time and expenses incurred in performing those services, costs which you are entitled to recover from clients. The problem is, because you perform a service, you don’t have a lot of expenses to pay, therefore you don’t save a lot of money from the deduction. The more work you do, the less you deduct. For example, when you go to an office supply auction to buy pens and paper, you are unlikely to get a deal. While someone else may have bought that item for less, the person who bought them had to travel to the auction, pay for the gas or train fare or whatever transportation they used to get there. They had to spend time at the auction instead of doing billable work , they had to pay for lunch while they were there. All of that is time and money that you could have billed for. On the other hand, if he was to buy a new copier for his office, likely he would get a deal. That’s a big ticket item and you can probably get some good deals on it, especially if you agree to let them place their advertisements on your copier. Still, though, going to the store, looking at different copiers, coming home and adjusting it all take time and time is money. This is why having a staff is so helpful. Lawyers working in firms charge a lot of money per hour. For example, in addition to paying the lawyer, the client has to pay for paralegal time. Paralegals expense to the client the same way that lawyers do. While it is nice to spend all of your time with the client, that could hurt the client by costing them too much money. It is even better from a tax standpoint to send one person to court and keep another in the office on the phone. The person in court can bill the time for the client at a higher rate than the person in the office does at a paralegal cap. If you cover the expense of the phone call, you can bill your client almost the same amount as if you handled the matter yourself, but have paid a lower raw cost. In addition, the IRS allows lawyers to deduct fees from an insurance company as a business expense. The estimated cost of the case, even if you haven’t actually received any fees yet, can be deducted as if it has already been paid.

Deductions for Office Space and Furniture

For those of you with out home offices your options are quite simple, you will receive a deduction for the portion of your rent, heat and lights that were necessary for you to do your work. Really it is not much more than a reimbursement for your use of these items. You have to show why the space was necessary and only the portion that was necessary was deductible. The only real question comes when we discuss if your office, or part of your home, is dedicated exclusively for your business. If it was not, then you only get a portion of your deductions based on the percentage of your home dedicated to business use. Whether or not something is a home office is done based on the facts and circumstance of the situation. For instance, if you work from home a few days during the week and do your business work at your office for the other few days, then you do not get a deduction for your home office. If you are working on a business project at 9:30 PM at your home office desk, then you have found a way to use your home for business use that is exempt from the rule that it has to be your principal place of business. The court will likely side with this and allow for more deductions. Business office expenses – not home office expenses Office space at a rented location is deducted by taking the total of the rent you paid for that space and then taking the percentage of that space usage from the total square footage of the office. Your office and home office are two different locations and you may deduct both as long as they are used exclusively for business. You may even be able to deduct the entire amount paid for office space in an office building that you are the sole tenant of. Technology equipment such as computers, tablets, printers, scanners, fax machines, wi-fi routers, modems, business phone lines etc. are all subject to deduction of the portion necessary for business use. So if you got an I Phone and then took a business line, your I Phone is deductible in full since you had to get it to have a business line and that was the only purpose it operated in. A new fax machine, printer, and a fax machine that sends things directly to your email are all deductible since they function as multi-purpose machines. Other office supplies such as ink, paper, pens, staplers, stapler, notes books, calendars, planners, folders, sticky notes, paper clips, and business cards are all deductible. Just keep track of what you use and the actual receipts and you will be getting a nice deduction. If you are charged for shredding services by your landlord or other office supplier, that is deductible. If you are a member to an internet meeting service such as Webex or Skype, that is deductible. If you have to login to a service like Westlaw, Lexis Nexis, or some other digital library, then that is also deductible. Firm wigs and make-up, client gifts and travel expenses are often over looked and could be deductible. This list is a far from exhaustive, and you should speak with a qualified tax advisor about your particular situation.

Travel and Vehicle Expenses

Lawyers can also deduct certain travel and local transportation expenses incurred in carrying out the tax code’s business activities tests. In addition to meals and entertainment, they can deduct their travel costs directly related to the pursuit of a current or prospective client relationship. This can include, among other things, hotel and plane expenses, car mileage at the individual attorney’s business mileage rate, and parking fees. Domestic spousal travel can also be deducted under special rules.
Researching new clients can also involve travel. You generally can deduct these expenses as long as they are incurred prior to the opening of a tax year (after e.g., the end of a prior tax year). However, if the dedication turns stale, then it may be disallowed.
You can also deduct certain local transportation costs, such as travel between your office, a convention center or hotel that is outside of your business plaza, and a meal location.

Tax Deductions for Continuing Education and Workshops

A common occurrence for lawyers is that they are constantly striving to keep up with the current laws, qualifications and trends in their area of practice. In order to stay ahead of the game, it is important to attend seminars, courses and conventions related to your field. Luckily, these expenses may be deductible.
Education expenses must satisfy two requirements in order for the taxpayer to claim the related deduction:
• The education must be job-related for an existing position or necessary for meeting the minimum educational requirements of a current job; and
• The education must maintain or improve skills required by the current job or be required by the employer or by law to keep your current job, status, or pay.

Professional Expenses and Dues

In addition to legal fees, you can deduct other professional service fees. These include charges for bar association memberships, bar review courses, bar review seminar materials, insurance such as liability insurance (for instance, malpractice insurance), subscriptions to law journals, and other similar professional services. Some types of memberships (such as bar association memberships) may be mandatory for lawyers in their state to maintain their ability to practice law , while other types of memberships (for example, memberships to tax advisory or estate planning organizations) may be optional. Both types of fees are deductible, as long as the ones to tax advisory or estate planning organizations are paid in connection with providing professional services. Examples of optional membership expenses include bar review seminars, seminars on accounting systems approved by the bar association, and publications such as newsletters, journals, and law review subscriptions.

Marketing and Client Development Deductions

Marketing and client acquisition costs can often feel like an expense line item that never produces any return. However, in order to grow your legal practice, you have to spend money to make money, and in most cases, your investments are tax-deductible. Marketers recommend tracking clients gained and how they were acquired, so you can see which strategies have the best returns. This way, you can adjust your marketing budget to maximize your savings even more. For instance, if you know that 80 percent of your new clients came from publishing your blogs in the local newspapers, it might benefit you to allocate more of your marketing budget to writing published articles in your local publications rather than spending money on your mediocre Facebook ads.

Tips for Keeping Receipt and Other Documentation for Tax Purposes

When it comes to record keeping, the standard remains the same for lawyers: No receipts or documentation, no tax deduction. Accurately documenting expenses also makes adjustments more difficult for the IRS and makes claiming deductions in future years more efficient. Best practices require you save 1) receipts for expenses and/or 2) banks statement/credit card receipts that detail the spending. For large deductions, such as a deduction for a home office, you should have a receipt that equals the deduction you claim.
To make it easier to find receipts stick them on your wall in a dedicated area, like the door frame of an office, an area near your desk or a bulletin board in your hallway. Alternatively, you can keep them in a folder stuck to your wall. For recurring administrative bills, like internet service, click the e-copy button on your bank statement if you find your bank statement has attached pdf e-copies of billings. It is also helpful to calendar reminders for recurring administrative charges when you find the e-copies attached to your bank statement are fuzzy rather than clear and difficult to read.
With changes to the law in 2018, there are restrictions on deducting meals. However, you should still track and save receipts for meals when you are entertaining clients and entertainment-related expenses when it is appropriate.

When to Hire a Tax Professional

While the above list is far from complete, it does offer guidance and a good start to identifying potential deductions. Unfortunately, the muddiest waters involve real or perceived conflicts with the IRS, uncertainties as to the current applicability of the law, and potential pitfalls in arguing for particular deductions with tax professionals unfamiliar with the legal profession. Because the chances of misapplication of the law are so high, the prudent attorney will act to assure that deductions are properly applied and to secure maximum available deductions in a manner which does not trigger an IRS audit or penalty. In this instance, the use of a lawyer knowledgeable in tax law and familiar with the operations of law firms is highly suggested. While accountants and CPAs often have no problem with the numbers associated with trust , operating, or other accounts, the interaction of the numbers and the many areas of the law which affect law firm operations are frequently lost on accountants not used to dealing with lawyers, and the same lack of appreciation is sometimes found when lawyers try to apply accounting rules to other areas of the law. Thus, the importance of finding a tax lawyer who is experienced in handling the issues associated with the law firm cannot be overstated. While each lawyer may wish to take into account their own particular situation and those of others in selecting a professional, if someone tells you what you are doing or thinking of doing is not correct or not allowed, do not hesitate to ask for a second opinion.