When it comes to income tax planning, one of the most important things to understand is that not all professions are created equally.
Yes, it’s true that are certain rules that we all have to follow when it comes to the Internal Revenue Service. But at the same time, there are best practices that may work splendidly for one job that may be woefully inadequate for the next given how they generate revenue, considerations when it comes to their income and payment structures, etc.
Case in point: attorneys and lawyers. Those in the legal profession can potentially enjoy a significant amount of savings when April rolls around again in 2023 by keeping a number of important things in mind along the way.
It’s All About Timing
By far, one of the most important things to understand about this process is that timing is everything for saving money on your taxes as an attorney or other legal professional.
Not every job has the option to defer revenue to the upcoming tax year as opposed to the current one, for example. In most jobs, when you get paid is set in stone and that dictates when you pay taxes on that money. Things work a bit differently in the legal world. You can always defer revenue at this point of the year into the next tax year, all while accelerating expenses at the same time to the current year.
Essentially, if you’re a cash basis taxpayer and in a position to do so, try to delay any last-minute income until after January 1, 2023. Then, try to increase your last-minute yearly expenses to sometime in December. One great way to do this includes making your January 2023 estimated tax payments to the state early. However, there is a $10,000 limit on deductible taxes, so watch out for that limitation.
Another way to accomplish this for a law firm would be to delay collecting unpaid invoices from clients until after the first of the year. Then, you would make sure that all end-of-the-year bonuses get paid out in December. It’s essentially the same basic concept, just executed in two different ways. Some firms may even want to experiment with both strategies at the same time.
Note that while this particular technique is ideal if your revenue remains relatively stable from year to year, there are several important considerations that you would want to make if you think you might have a far better 2023 than you did in 2022. If you think that next year will be significantly more profitable for your firm, you would want to reverse this strategy – meaning you should accelerate revenue and defer expenses as much as you can.
This would take some of the burden off of 2023, reducing the amount you owe in taxes down to a more manageable and consistent level as opposed to allowing yourself to get hit with a massive tax liability in one fell swoop.
Those Business Meals Are About to Change
Another important thing to keep in mind when it comes to tax planning for lawyers and attorneys has to do with an upcoming change in the law that you need to be aware of.
The chances are high that you go on a lot of business meetings – whether you’re taking opposing counsel out to discuss a case, you’re ordering in dinner for you and your assistants who are in the process of pulling an all-nighter, or if you’re entertaining a client who is in from out of town.
In 2021, the allowable deduction for business meals like those outlined above went from 50% in 2020 to 100% for both 2021 and 2022. So long as the expense went directly to food and drinks that were provided by a restaurant and weren’t considered to be overly extravagant, you could write the entire thing off on your taxes the following year.
All of this is to say that if you haven’t already been leaning into those business meals, you should do so while you still can to maximize those deductions. It’s unclear whether these rules will remain the same going into 2023 or if they will change back down to something that resembles the way things were before a bit more closely.
Note that this is entirely separate from those meal-related expenses that had always been and will continue to be totally deductible. This includes but is not limited to things like holiday parties. Because of this, it’s always recommended that you keep a separate list for meal-related expenses and employee-related expenses, so things don’t get too confusing when it comes time to file your taxes.
Don’t Neglect Depreciation
Finally, those in the legal profession have to deal with the concept of depreciation more often than most. Things like office equipment (both for firm locations and for home offices), company vehicles, and even real property all depreciate in a way that can save you money. It’s also no secret that this type of thing commonly attracts the attention of those at the IRS, however, so you’ll want to guarantee that you’re doing so in the right way.
This includes the 100% bonus depreciation for personal property that the Tax Cuts and Jobs Act created for any property that was (placed in service” after September 27, 2017 and prior to January 1, 2023. Any business property that you invested in during this period could get a full tax deduction during that very same year. This is as opposed to what is commonly done, which is to spread out those costs over multiple years. But keep in mind that 2022 is the last year before things go back to the way they were – meaning that depreciation will go back down to 80% in 2023 and will continue to decrease from there.
If you’d like to find out more information about the types of tax planning tips that attorneys and lawyers can put to good use, or if you just have any additional questions that you’d like to discuss with someone in a bit more detail, please don’t delay – contact us today to schedule a tax planning appointment.