As a lawyer, you must uphold the law and protect your client’s rights. However, beyond the legal battles, staying on top of your taxes is also critical to your profession. As with any other professional, you must comply with tax laws and regulations. Neglecting your obligations can result in severe consequences that could damage your reputation and harm your business. Conversely, being on top of your taxes can help you build your reputation and make informed financial decisions that can benefit both your personal and professional life. To make this easier, we’ve gathered the most common legal tax deductions every lawyer should know about.
When it comes to filing taxes, you should pay close attention to all potential tax breaks you may qualify for in order to maximize the amount you save on taxes each year. Remember to keep track of all receipts and other documents throughout the year so that when tax season arrives, you’ve prepared all the necessary paperwork needed to take full advantage of available tax deductions for lawyers.
Common Tax Deductions for Lawyers
1. Business Meals
One common tax deduction for lawyers is business meals. Business meal expense is money that you spend on a client, partner, or employee’s meals while doing business. These meals are held to build or maintain relationships, network, and grow your business. It can occur in various settings, including restaurants, cafes, and even the office.
In most cases, the IRS allows you to deduct 50% of the total cost of business meals as long as you meet certain criteria. These include being present during the meal and discussing business with the accompanying individual. Lawyers cannot deduct meals where you are not discussing business, such as meals with friends or past clients.
2. Travel Costs
Another common tax write off for lawyers is travel costs. You may often travel for work purposes, such as meeting with clients or attending court appearances. As long as costs are incurred while you perform business activities, they can be tax-deductible. Air and bus fares, hotel accommodations, and meals are common tax-deductible expenses.
However, if you travel for business and leisure, you can only deduct the costs related to conducting business. Furthermore, expenses that are extravagant or lavish are non-deductible.
Remember to keep records of your travel expenses, such as invoices, receipts, and travel itineraries, to support your tax deductions.
3. Health Insurance Premiums
Lawyers and attorneys who are self-employed and pay for their health insurance premiums may be eligible to deduct these expenses from their taxes. This deduction is available to those who are not eligible for a health plan through their employer or spouse’s employer. To qualify, you must show a net profit in your business, and the total amount of the health insurance premiums cannot exceed the net profit for the year.
It’s important to note that the deduction for health insurance premiums is subject to certain limitations and restrictions, so it’s advisable to consult with a tax professional to determine your eligibility and ensure proper documentation and record-keeping.
4. Business Use of Home
The home office deduction may be useful for lawyers who work from home. To be eligible for this deduction, the home office must be the primary place of business or a location where you interact with clients or do administrative work.
You can compute home office deduction in two ways: the simplified method and the regular method. Using the simplified method, you can deduct $5 per square foot of home office space up to a limit of 300 square feet. The traditional method involves calculating the real expenses of the home office, such as mortgage interest, property taxes, insurance, and utilities, and then multiplying those expenses by the home office’s square footage.
5. Professional Fees
Lawyers often rely on outsourced professional services to aid them to perform various tasks that are necessary for successful business operations. For example, accounting and tax preparation services can be outsourced to manage your finances. Other commonly used professional services include marketing professionals, business consultants, and even outside lawyer services. These expenses are tax-deductible. Properly documenting and keeping receipts of each service and paid invoice confirmation can help accelerate the tax filing process and avoid IRS audit concerns.
6. Office Supplies
As with any business, lawyers need to buy office supplies such as paper, pens, ink, and other necessary items used in the business’s operation. These expenses are deductions that you can claim on your tax return.
In addition to standard office supplies, technology equipment used for business purposes can also be claimed as a deduction. This includes computers, printers, scanners, and other office equipment. Lawyers can also claim depreciation on larger office equipment over time.
7. Retirement Contributions
Lawyers who contribute to qualifying retirement accounts such as a SIMPLE IRA or a Solo 401(k) plan can reduce their overall taxable income and automatically qualify for business related tax deductions. Contributions to these accounts are considered pre-tax dollars, which means they are not included in your taxable income. This, in turn, lowers the amount of income that is subject to taxes, resulting in a lower overall tax bill. The amount lawyers can contribute to these accounts varies depending on the type of account and your income level.
8. Continuing Education
Continuing education is a crucial aspect of professional development for lawyers. In most cases, lawyers need to complete a certain number of continuing legal education (CLE) hours each year to maintain their licenses. Fortunately, the expenses incurred for continuing education can also be written off.
Continuing education can take various forms, including online courses, conferences, workshops, seminars, and in-person courses. The costs of attending courses unrelated to their profession are not tax-deductible. In addition, if you have previous student loan debt, you can claim up to a $2,500 deduction from loan interest when filing personal income taxes.
9. Marketing Expenses
As with any professional, you may need to invest in marketing and advertising to attract clients. Fortunately, many of these expenses can be written off. Examples of marketing expenses that are eligible for tax deductions include print and digital advertising, SEO services, website development, and maintenance.
10. Credit Card Convenience Fee
Law firms often need more time to receive payments, with some waiting several months for full payment. As a result, many law firms accept credit cards to expedite payments. However, credit card companies charge processing fees for each transaction, which can add up quickly and result in significant year-end expenses. Fortunately, the IRS allows you to deduct all credit card processing fees so long as you paid the fees and have not passed on to clients.
How Hiring a Professional Tax Preparer Can Benefit You
Everyone wants to save as much money as possible when tax season rolls around. For lawyers and attorneys, this means taking advantage of tax deductions available to you. Despite your profession, you may not be fully aware of tax deductibles that you are eligible to claim. It is important to consult with an experienced tax expert who is knowledgeable in tax law and tax deduction optimization. At Tax Samaritan, we can assist in optimizing tax deductions to maximize your tax savings. We provide timely guidance on filing of tax returns according to updated rules while protecting you from expensive penalties.