Tax Tips for Law Firms

Whether you’re a partner or an associate in a law firm, the IRS has rules that apply specifically to you as well as several opportunities. Following is a list of tax provisions that affect attorneys in particular.

Tax Benefits for Partners

The following deductions and benefits pertain to partners in a law firm:

• Home office deduction: The home office deduction may be available to practitioners who run their business out of their home. This deduction is not as straightforward as it may sound: The space must be dedicated to running the practice. In addition, the deduction is based on the square footage of the dedicated space, not the total square footage. Once the square footage is calculated, a proportional share of expenses, including mortgage interest, real estate taxes and utilities, may be deducted. The deduction does come with a cap.
   
• Unreimbursed partnership expenses: Law firm partners may be able to use Schedule E to deduct business expenses that were not reimbursed by the firm. This is a valuable deduction because it reduces both taxable income and the self-employment tax.
   
• Capital account loans: Interest paid on capital account loans also are deducible on Schedule E.
   
• Self-employed health insurance: If your firm shows a profit for the year, medical, dental and long-term care insurance costs may be an above-the-line deduction. This deduction produces a higher dollar-for-dollar tax savings than if taken as an itemized deduction.
   
• Retirement savings: Take advantage of the tax saving offered by your firm’s retirement plan. Deferring income can result in substantial tax savings.

Tax Considerations for Associates

Associates are salaried employees at their firms who have federal and state income tax withholding taken out of their paychecks and whose income is reported on Form W-2. Consequently, they have fewer options for deductions. They cannot take itemized deductions unless they exceed the standard deduction amounts. They may, however, benefit from the following:

• Unreimbursed employee business expenses: These expenses are no longer a federal deduction (still deductible on state level), but associates can ask their firms to implement an accountable reimbursement plan. Such a plan would allow associates to be reimbursed without having to report the reimbursements as income, and the partners would be able to deduct the amounts on their Schedule E.
   
• Income deferral: Deferring income by maximizing use of the firm’s retirement plan may reduce taxable income.
   
• Student loans: If your firm has a student loan payment program, the amount they pay may not be taxable if certain parameters are met.

For more ways law firms can benefit from tax provisions, contact me at dwitt@bpw.com, or call our direct line at (805) 963-7811.