Top 11 Tax Questions any law firm owner should ask their CPA
I am not a CPA, but after 21 years of being self-employed and 13 years as a law firm owner, I have learned a few questions to ask my CPA at this time of the year as I prepare for my income tax filings. While we would hope and assume our CPA would know to advise us on this information (without our asking them), it’s still worthwhile to touch base on the basics to make sure we are taking advantage of all of the tax savings that may be available to you and your firm. And if these questions do not apply for now, it is still a great conversation for preparing for tax savings in the following years as a firm owner.
1. Are there any new tax credits that may apply to my business or personal account for this year? May I qualify for any of them? Could I?
Each year, the legislature makes changes to the Internal Revenue Code. Often, those changes affect small business owners. Therefore, it’s important we are up to date on the latest tax-saving options for our small business to take advantage of the latest changes.
2. Is now the year for me to consider filing as a S-Corp? I know it would require I file a corporate return. Aside from those fees, would it be a cost savings to take advantage of deducting my salary? When will it be a good time for me to file as a S-Corp?
Many Solo/Small attorneys file as a S-Corp. While it does require two filings (your corporate and a personal return), it usually offers tax savings once you start earning over a certain amount. Your CPA will tell you when it is time to make the switch to filing as a S-Corp.
3. Assuming this is the year to switch over to filing as an S-Corp, what restrictions should I know about if I want to reorganize my law firm into a partnership in the next five years?
The rules are strict around adding partners once you begin filing as a S-Corp. Be sure you tell your CPA your plans for your business before you make the switch.
4. Should I maintain the same salary and draw ratio that I took last year?
If your firm’s income and expenses tend to make drastic swings from year to year (like mine), then you must ask your CPA to re-evaluate the quarterly taxes you pay and how much you are designating as your salary. Keep in mind that your salary also affects your law firm’s contribution to your 401K plan (if applicable).
5. Should we continue to pay the same estimated taxes as we did last year? My net earnings seem to be significantly [higher/lower] than the year before.
Related to the question above, you may need to adjust the quarterly estimated taxes you pay based on your previous year’s net income.
6. I plan to hire an employee this year. When I am ready to do so, how will that affect my tax contributions other than an employee salary being a deduction? What information will you need from me before that?
As you can imagine, adding an employee is a big undertaking. You will need to start payroll processing, withhold taxes from their paycheck, pay in social security, unemployment insurance, and secure a worker’s compensation plan. And these are just a few items to consider.
7. (Related to the above): Since I am planning to hire an employee in 2024, do I need to set a 401k rather than only contributing to my SEP IRA?
While a CPA may punt to a financial planner for the nitty gritty details related to this question, he or she should be able to explain the laws around retirement contributions and your obligation to contribute to an employee’s retirement plan if you are contributing to your own.
8. I am planning on getting a new vehicle this year. Would it make sense to buy it through my business? What are the pros and cons of owning a vehicle through my business?
If you have been deducting your business mileage on your personal vehicle but find that you are using your car a lot for law firm related activities, it may make business sense to purchase a vehicle through your business and reimburse your business for personal miles you use. The benefit to this idea is that you can deduct gas, car washes, tire rotation, repairs—everything you need for your vehicle maintenance and care.
9. Am I maximizing all of the deductions I can? What do you notice I am not deducting through my business that might make more sense?
It has taken me many years to realize that I should be deducting a lot more than I am. For the longest time I was not even deducting my smartphone through the business even though I used it primarily for work. Be sure to review everything you are paying for on the personal side but using for your business.
10. I am thinking of buying a building through my business. Would it make sense for me to own it in my personal name and for the law firm to rent from me, or to buy it in the name of the law firm?
Many CPA’s have differing perspectives on this question. Some believe it is more of a legal liability question than a tax question. It is still worthwhile to glean perspective on how it could help your law firm tax liability if you owned the building rather than rent.
11. I work from my primary office a few days a week to meet with clients. But I also office out of my home a few days a week. Can I still deduct my home office for this work?
Generally speaking, if you rent an office space for your law firm you usually cannot also deduct your home office. There may be unique aspects to your law firm’s set up that would allow you to deduct your home office. And if you have other businesses, and you use your home office exclusively for those businesses, you likely can deduct the home office through that manner.
Happy Tax Season!
~Heather
