Law Firms & Attorneys
Tax and accounting for law firms and solo attorneys, from advanced client costs to partner compensation, with books that keep operating funds separate from trust accounts.
Law Firm Accounting Is Different
Law practices carry accounting requirements that most businesses never face. The most visible one is trust accounting. Client funds held in your IOLTA or trust account must stay completely separate from operating money. Your bar has detailed rules about this, and your books need to reflect that separation at every moment. We handle the bookkeeping side of this cleanly, though the trust-accounting rules themselves come from your state bar and we defer to that guidance.
Then there is the tax treatment of advanced client costs. If your firm handles contingency matters, you know this one well, or you should. When you advance filing fees, expert costs, or deposition expenses on behalf of a client, those outlays are generally not deductible when paid. Under current law, they are treated as something closer to a loan to the client. You get the deduction when the case resolves and the costs are either recovered from settlement or written off as uncollectible. This timing difference catches a lot of firms by surprise.
Who This Covers
Who This Covers
Solo practitioners, small and mid-sized law firms, partnerships and LLPs. Attorneys handling contingency work, hourly billing, or a mix of both. Firms that need their operating books separate from client trust accounts and their tax planning built around how legal practice actually works.
The Added Complexity
The Added Complexity
Partner compensation and guaranteed payments require careful structuring. Entity selection for law firms involves state bar rules alongside tax considerations. The qualified business income deduction phases out for attorneys at higher income levels under current law. And every dollar in and out has to reflect whether it belongs to the firm or to a client.
What We Handle
We keep your operating books clean and separate from anything touching client trust funds. Every transaction is categorized properly, with fee income, operating expenses, and partner draws tracked on the firm side, and client trust activity recorded in a way that makes reconciliation straightforward. The goal is books that are ready for both tax season and any bar audit without scrambling.
On the tax side, we work through entity structure and partner compensation planning. For firms with multiple owners, guaranteed payments and profit allocations need to make sense for the partners and for the firm’s overall tax position. For solo practitioners, the question is often whether an S corporation election makes arithmetic sense given your income level and reasonable compensation requirements. We run the numbers rather than guessing.
Trust Account Separation
Trust Account Separation
We maintain the bookkeeping separation between operating funds and client trust accounts. Three-way reconciliations of trust accounts tie out. Operating transactions stay on the operating side. Your bar has the rules for how trust funds must be handled, and your books reflect that structure from our end.
Partner and Owner Planning
Partner and Owner Planning
Guaranteed payments, profit distributions, and capital accounts for partnerships. S corporation compensation for solo practitioners and incorporated firms where the election applies. We structure compensation in a way that serves both tax efficiency and partner fairness, with quarterly projections so no one is surprised at year end.
What Often Goes Wrong
Advanced client costs catch many contingency practices off guard. You advance $40,000 in expert fees over the course of a year, and then April comes and you discover that none of it reduced your taxable income for the year you paid it. The cash left your account, but the tax benefit did not arrive. This is current law and worth verifying, but it changes how contingency practices should think about cash flow and tax projections.
The qualified business income deduction creates another ceiling for attorneys. Legal services are classified as a specified service trade or business, which means the Section 199A deduction begins to phase out once taxable income crosses certain thresholds. Above the phase-out range, the deduction disappears entirely. These thresholds adjust for inflation and should be confirmed with current figures, but the effect is that many successful attorneys receive little or no benefit from a deduction that other business owners rely on heavily.
Advanced Costs Timing
Advanced Costs Timing
Costs advanced in contingency matters are generally not deductible when paid. They sit on your books as something owed back to you until the case resolves. Without proper tracking, the cash outflow and the tax treatment fall out of sync, and projections become unreliable.
The Service Business Limits
The Service Business Limits
The qualified business income deduction that benefits many business owners phases out for attorneys at higher income levels. Planning around this means looking at retirement contributions, entity structure, and timing decisions that remain available. It does not mean ignoring the ceiling.
What Changes
You get books that hold up to scrutiny from both the IRS and your state bar. Operating income and expenses are tracked accurately, and client trust funds are kept separate with reconciliations that tie out. When a bar auditor asks for trust account records, you hand over a clean file instead of spending a weekend reconstructing transactions.
Tax planning accounts for the way law practice actually works. Advanced costs are tracked by case so you know the deduction timing. Quarterly projections reflect partner draws, guaranteed payments, and the income thresholds that affect your deductions. You move from reacting to the tax bill in April to understanding it throughout the year and making adjustments while they still matter.
Year-Round Planning
Year-Round Planning
We build projections that account for advanced costs timing, partner compensation structure, and the income levels where deductions begin to phase out. Decisions get made during the year when elections and timing can still be changed, not in March when the only question left is how much you owe.
One Place for Everything
One Place for Everything
You get all four roles a business needs in one place. Tax preparer, tax advisor, bookkeeper, and controller. Clean operating books and properly separated trust records mean you can respond to a bar audit or an IRS inquiry without panic. If this sounds like what your practice needs, book a consultation and we can talk through your situation.
Planning-First Tax & Accounting
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Start a Conversation
We begin with a clear understanding of your business, then define the engagement and establish pricing from the outset.