Nowadays, most of the people are always on-the-go. Skipping meals unintentionally because you lose track of time while dealing with your workloads or eating snacks while working in front of your computer because you can’t spare a minute to eat a proper meal. You would drink coffee like it is a water that you must take in order to live because you need to beat the deadlines. You’re a good a multi-tasker because you don’t have a choice. This is the life of professionals. You’ll barely survive but you can manage.
As the year nearly ends and most probably the busiest season for business professionals, especially for lawyers. Despite the hectic schedule for work and the holiday season, you should keep in mind to wrap up the books and thus start the tax preparation.
Here are some tips that can help legal firms for the tax preparation:
1. Know the business organization
Law firms can be sole proprietorships, partnerships or LLC, or corporations whereas each business entity has different tax rules.
a. Sole proprietorship – Net income is subject to self-employment tax.
b. Partnership - The net income is passed through to the partners and subject to self-employment tax.
c. C-corporation - The wages reported on the W-2 are subject to payroll taxes. However, distributions of profits as dividends to the shareholders will be subject to additional taxation.
d. S-corporation - The net income is passed through to the shareholders.
2. Know the deadlines and the returns to be filed
After knowing the type of organization that the firm used you can easily know what are the returns you need to file.
3. Make a plan
Tax season is no joke. It will be troublesome for the legal firm and tax preparer to do things all at once. It should follow a process. Tax return should be done effectively and efficiently. List all the things that need to be done, allot time and properly designate the work. Remember that procrastination cost money.
4. Finalize your financial statements
Review if all the transactions are properly recorded and if not make the necessary adjustments. Here is the list that you need to check before finalizing the financial statements.
a. Basis of accounting – It affects your tax bill because it determines when you recognize income and expenses.
b. Trust accounts – Law firms must follow trust accounting to keep track of funds that do not belong to the firm unless if they have earned it. These funds can be gross settlements, deal proceeds, amounts owed to clients or third parties, or retainers that will be earned in the future. Trust accounts cannot be co-mingled and none of the funds in the trust account can be used to pay the firm’s expenses. It is important to confirm client retainer balance, document the movement of money and keep an updated summary of client ledger and reconcile each account monthly. Trust accounting should be strictly followed because it could violate bar rules and can be a sanction for disbarment.
c. Maximizing the tax deductions. Making sure that all business-related expenses are recorded on the books to maximize business deductions.
5. Organize financial records
Make sure you have adequate documentation and maintain supports for your business transactions.
6. Seek assistance
Preparing tax return is not easy even for a lawyer. Often times they seek for a qualified tax preparer.
Time is too valuable. It’s stressful that you need to do all the things with the limited time. But if you appropriately manage your time you can complete all the task before the deadline. It is undeniable that legal firm follows the legal accounting regulations and compliance requirements. It has strict rules that can’t be discarded thus a proper preparation is needed.
If you need help with your bookkeeping and tax preparation for your practice, contact us today at firstname.lastname@example.org or 832-437-0385.
We help you plan, forecast and analyze your financial data
so you can get on top of your finances today to grow your
small business big tomorrow.
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