Few occupations receive as much attention as the legal profession. Lawyers hold a high position on the occupational totem pole and are regularly portrayed as characters in a variety of media – films, television shows, books and others. Historically, the legal profession has possessed a considerable amount of prestige and many of our most talented citizens aspire to work in law in one capacity or another. Along with prestige, the legal profession has also been regarded as one of the surest routes to financial success. As it turns out, there are a variety of tax benefits lawyers may utilize to strengthen their financial condition. In this article we will discuss several of these benefits.
In order to develop their practice, lawyers regularly conduct formal business discussions with prospective clients and other professionals. Occasionally, these discussions occur just before or after some form of entertainment (such as a show, sporting event, etc.). Fortunately for lawyers, these entertainment expenses are deductible. However, under section 274 of the Internal Revenue Code, lawyers must comply with multiple requirements in order to deduct these expenses: they must be able to thoroughly substantiate the expenses (i.e. who was entertained, when did the entertainment occur, etc.), and they must also prove that there was a clear association between the entertainment and the business discussion.
Travel expenses incurred by lawyers are also deductible. As with entertainment expenses, travel expenses must be fully substantiated. The IRS is quite strict about these types of deductions and so it is imperative that lawyers keep excellent records of every individual expense.
Lawyers have to conduct a lot of research throughout the course of their practice and as a consequence they spend considerable sums on books, periodical and research software. The cost for books and subscription services which have a useful life greater than one year may be depreciated over a five year period; software is not considered depreciable and must be amortized over a three year straight line period. If a lawyer purchases books, periodicals or software on an annual subscription basis – thus making these materials accessible for one year at a time – then these expenses would be deductible in the normal fashion.
Another tax issue which lawyers must be aware of relates to client based expenses. It is not uncommon for lawyers to advance money to clients or to incur expenses on direct behalf of clients. If money is advanced to the client, this is treated as a loan for tax purposes and so it cannot be deducted. However, there is an important exception to this rule: if a lawyer incurs expenses on behalf of a client as part of normal operating procedure and then fails to receive reimbursement then these expenses become deductible. An example of this would be expenses such as postage and photocopies. These expenses are supposed to be charged to clients, but if a lawyer is somehow unable to collect payment for them then they may be written-off as “bad debts.”
These are just a few of the tax perks available to lawyers. In addition to these benefits, lawyers also need contemplate other tax related issues such as entity selection (or business structure), client trust funds, client-related expenses, accounting methods and others as well.
To learn more, view the presentation given by our CPA Lance Hulbert.
Image credit: Lorraine Lentz
For more information please view the following video presentation