Helpful Articles
Tax Tips for the Solo Lawyer
Tax issues for solo practitioners and small law firms
are pretty much the same as those for other businesses. In order to
reduce your chances for an audit, report all income, and don’t
over-deduct your expenses. The IRS pays close attention to Form 1099
reporters, so make sure all of that income gets reported on your Form
1065 partnership return, Form 1120S income tax return, or your Schedule C
if your firm is not a partnership or S-corporation. From the expense
perspective, your firm is allowed to deduct reasonable, ordinary, and
necessary business expenses. For general law-firm operation, that means
rent, office supplies, telephone costs, legal research charges, bar
association dues, and other expenses that help you help your clients.
The IRS gets very picky about a few things, though, and a
front-line revenue agent conducting an exam will go by the book and
disallow certain expenses if you do not properly substantiate them. In
particular, mileage expenses, food expenses, and promotional expenses
are particularly troublesome to those experiencing an IRS audit. For
each of these expenses, a short rule of thumb is to keep all receipts
and a log recording the “who, what, when, where, and why” of the
expense.
Internal Revenue Code Section 274(d), for example, requires
taxpayers who deduct mileage to keep a log detailing the mileage, the
starting point and destination, and the business purpose of the trip, or
the entire deduction is subject to disallowance. Even the normally
more-reasonable Appeals Officers will sustain a disallowance if a
taxpayer cannot substantiate a mileage expense. For meals, a taxpayer is
permitted to deduct only 50 percent of the expense, and must keep a
contemporaneous recording of who attended the meal, the business purpose
of the meal, and what was discussed. Legibly writing these details on
the receipt is permitted. Because of huge abuses in the past, revenue
agents closely scrutinize promotion expenses for all three of the basic
requirements: are the promotion expenses ordinary, necessary, and
reasonable? Generally, the test is one of production—i.e., do the
(usually high) promotion expenses actually result in increased clients
and revenues?
Additionally, employment taxes are an important part of
running a business. The IRS closely monitors employment tax payments. If
they are not paid, the IRS (and the state taxing agency) is quick to
enforce collection of the taxes due. Sometimes collection action will
occur within two quarters of nonpayment. This can cause some
undercapitalized businesses to “pyramid” in the nonpayment of taxes,
which only makes an IRS revenue officer more determined to get the
business into compliance through lien filings, bank levies, and other
direct collection action, or to shut it down.
The IRS considers the nonpayment of payroll taxes
equivalent to making the United States an unwilling business partner or
lender. Unlike debts to a business partner or lender, though, Trust Fund
Recovery Penalties assessed against “responsible persons” who
“willfully fail” to collect and pay payroll taxes are not dischargeable
in bankruptcy.
Solo practitioners and small law firms, like other businesses, should
consult with a Certified Public Accountant or qualified tax lawyer for
tax help. Remember, this year you have until April 18 to file. For more
information, visit www.irs.gov.
David A. Sprecace is a solo practitioner in Denver, providing legal services in federal (I.R.S), state, and local tax controversy and litigation; business and bankruptcy litigation; and business planning, formation, and operation.
