Best Tax Write-Offs for Small Business Owners in the Legal Field

Intelligent, legal tactics to reduce taxable revenue

The business costs and prospects of a legal practice or law related business is a special brew. Knowing what you can and can’t deduct can lower your tax liability and give you extra cash to spend elsewhere. In this guide, you’ll learn the top legal tax deductions and how to document them as well as helpful year-round tax tips for legal businesses.

Ordinary and necessary business expenses

The bedrock is “ordinary and necessary” business expenses: ones that are typical and accepted in the legal industry, and that aid in running your practice. Rent, utilities, office supplies, professional insurance, salaries are standard examples. These costs are typically 100 percent deductible in the year they are paid or incurred.

Salaries, payroll taxes and contractors.

Wages and salaries of employees are deductible (as are the employer-paid payroll taxes). You can also deduct payments made to independent contractors — freelance paralegals, consultants or contract attorneys — but be aware of the need to classify these workers properly and retain appropriate contracts and records.

Rent and home office

Rent for office or co-working space used solely for business is deductible. A home office deduction is also available to many legal business owners if the designated area of a home is used regularly and exclusively for business. The home office deduction can involve a portion of rent or mortgage interest, as well as insurance, utilities and maintenance.

Office equipment and depreciation

C: Depreciation Big-ticket items such as office furniture, computers and specialized equipment are usually deducted over time through depreciation. In a number of instances, options like those for accelerated depreciation or immediate expensing let you write off the entire cost in the year when you made the purchase. Keep track of purchase dates, cost amounts and business use percentages to back those deductions.

Legal research and subscriptions

Fees for legal research services, case databases, industry journals subscriptions and continuing education materials are deductible as business expenses. It's a legal write-off that is absolutely necessary for the practice of quality and compliance.

Continuing education and professional development

CLE, seminars, conferences, and other training costs related to your practice area are also deductible. Travel, hotel expenses and meals related to career-building activities are other categories that can qualify if the main purpose of your trip was business.

Travel, meals, and client entertainment

Business travel, including transportation, lodging and reasonable meals can be deductible. Keep detailed records: date, reason and business relationship for every expense. There are strict limits on client meals and entertainment, though; for example, meals with a client during which you discuss business may be only 50 percent deductible, so keep your reservations and note guests.

Marketing and client development

The expenses for advertising, the website, business cards, networking events fees and client development campaigns are a business deductions from ordinary expense category. It can also be a way to reduce taxable income and grow your client base by investing in marketing.

Professional fees and insurance

Deductibility of fees: Any amounts paid to accountants, lawyers, consultants and other professional advisors are deductible. Professional liability insurance, business property insurance and other coverage related to your law practice are also deductible.

Contributions to retirement plans and employee benefits

Deductions for contributions to retirement plans — both your own and those of your employees, if you have them — are potent. Those include results-oriented defined contribution plans and simplified employee pensions that can reduce taxable income while aiding in attracting and retaining staff. Deductible premiums could also include an employer’s contribution to employee health insurance and some contributions to Health Savings Accounts (HSAs).

Interest, taxes, and business licenses

Business loan interest, credit lines used for the business operation and select business taxes and licensing fees can be claimed as a deduction. Taxes from local businesses, professional licensing fees and state-level business taxes paid to be a legal operator can reduce taxable income.

Bad debts and client-related costs

If an item of income turns out to be bad when a client fails to pay, bad debt deductions may apply if you can prove the debt was legitimate and never previously deducted as income. Costs paid for clients that were uncompensated may even be deductible, so long as good records make clear the business purpose.

Technology, software, and subscriptions

Cloud services, practice management software, legal research tools and other software that you subscribe to for regular use in your business are all deductible. These expenses are usually a recurring cost so keep track of the monthly changes and also what they were for in the business.

Recordkeeping and documentation best practices

Keep good, up-to-date records to prove your deductions. Hang onto all of your receipts, invoices, contracts, bank and credit card statements, mileage logs for business travel and notes detailing the business purpose of meetings and expenses. Keep business accounts and cards separate to make the record-keeping easier.

Common pitfalls to avoid

Commingling personal and business expenses — without clear attribution. - Failing to document client-related travel and meetings. - Misclassifying employees and contractors, which may have payroll tax implications. - Forgetting about depreciation schedules as well as immediate expensing opportunities.

Year-end tax planning strategies

Review expected income and deductions prior to year-end, in order to time purchases including prepayment of deductible expenditures if beneficial for tax timing. Look at accelerating deductible expenses into 2019 or postponing income to 2020, if this is in line with your cash flow and legal considerations.

When should you talk to a tax pro

Complicated transactions, classification questions or multistate operations generally require professional advice. A tax specialist can also assist companies with retirement programs, depreciation strategies and keeping up to date with the changes and legal write offs.

Conclusion

Knowing and recording legal tax deductions means every dollar spent in operating a legal business has the best possible value. Everything from office supplies and retirement contributions to depreciable property qualifies as a deduction, meaning you can subtract it from taxable income when taking advantage of the ones you're legally entitled to. Favoring neat organization of receipts, planning in advance at year-end, and seeking advice from a credible source on complex issues can help to maximize deductions and avoid penalties. Systematic tax planning for legal businesses will ensure that ordinary expenses become your “best friend.”