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Wise tax planning is the pathway to building wealth and achieving excellence in the legal field. 

Tax Tips from Milla Liberson, EA MBA, President at Smart Tax Group

January 23, 2025

In my capacity as an accountant and tax advisor, I regularly see attorneys making expensive errors and neglecting potential opportunities because they do not devote adequate attention to their financial affairs, which contrasts sharply with their dedication to their legal practices. I continue mapping out essential elements that lead to success in the legal profession. 

•  Managing Revenue Deferral to Maximize Potential

For legal practices, deferring income can be valuable for managing taxable income across different fiscal years.  Through the meticulous scheduling of revenue recognition, businesses can efficiently lower their tax liabilities while remaining compliant with IRS standards. 

Sending out invoices towards the end of the tax year can facilitate the postponement of income recognition to the next year. 

This approach not only aids in achieving tax planning goals but also offers a systematic framework for identifying opportunities to reduce tax obligations. Organizations must comply with IRS regulations concerning revenue recognition, as failure to do so or employing overly aggressive strategies may result in penalties that could undermine potential tax benefits. Furthermore, deferring income can contribute to a more stable cash flow, ensuring that funds are accessible to address liabilities as they occur. When combined with meticulous tax planning, this strategy can significantly improve its overall efficacy. 

•  Benefits through Tax Credits

Don't forget to claim your tax credits!

Legal firms may find it advantageous to utilize industry-specific tax credits that can help lower their overall tax obligations. Recognizing and applying these credits is vital for enhancing tax savings and reducing liabilities. Each credit has specific eligibility criteria that necessitate appropriate documentation and compliance with IRS standards. Firms should undertake a comprehensive review of their activities to identify their eligibility for these benefits, as this understanding is key to effectively minimizing tax liabilities.  

•  HRAs: A Smart Solution for Health Expenses

By implementing Health Reimbursement Arrangements (HRAs), law firms can reimburse their employees for medical expenses without attracting tax liabilities. This arrangement not only alleviates the tax burden on the firms but also ensures that employees receive essential benefits. 

Employer-funded Health Reimbursement Arrangements (HRAs) serve as a means for reimbursing eligible medical expenses. Contributions to these accounts are not subject to taxation, making them a cost-effective solution for managing healthcare expenditures and exploring strategies to lower tax liabilities. Reimbursements from HRAs are excluded from employees' taxable income. For law firms, these costs can be deducted from taxes, which further reduces their overall tax burden. HRAs can be specifically designed to cater to the distinct needs of a law firm, covering individual health plans or other medical expenses. This tailored approach ensures compliance while enhancing financial benefits. 

•  Monitor Partner and Member Transactions with Precision 

It is not uncommon to find issues in the oversight of equity, distributions, and loans to partners within a firm. If firms exhibit a lack of diligence and their balance sheets are flawed, it can result in an unfavorable view of their financial health. This misrepresentation may pose challenges when the firm seeks loans or when a partner transitions in or out of the firm. Our payroll processing services help you save time and money by handling all aspects of payroll management. From calculating employee wages to filing payroll taxes, we've got you covered. 

•  Elevate Your Retirement: Increase Your Contributions 

The adoption of tax-efficient strategies in retirement planning plays a crucial role in minimizing tax obligations and ensuring a secure financial future. Law firms can benefit from investing in tax-advantaged accounts such as 401(k)s, SEP IRAs, and SIMPLE IRAs. By permitting pre-tax contributions, these accounts significantly lower the taxable income for the year in which the contributions occur. 

The introduction of matching contributions or profit-sharing plans presents employers with a means to enhance their tax savings. These methods provide support to employees in their savings pursuits and are recognized as tax deductions for law firms, contributing to a further reduction in overall liabilities. 

• Utilize Section 179 Deduction

Law firms focused on enhancing their financial strategies can find considerable value in the Section 179 deduction. This tax provision allows firms to deduct the total purchase price of qualifying equipment or software in the year it is activated, thereby effectively lowering their tax liabilities. 

Section 179 acts as a tax incentive that promotes business investment in growth by enabling immediate deductions for eligible expenditures. This may include office furniture, computers, and case management software specifically designed for law firms. By effectively managing these financial outlays, firms can realize significant tax savings.