There are some important tax to-dos you’ll need to complete before filing. Are you ready? It’s a good idea to approach this proactively, but where do you start?
- #1:Gather all pertinent tax information for your law firm
- #2: Closeout outstanding receivables and payables
- #3: Prepare for an audit
- #4: Strategize with your accountant
- #5: Streamline financial management
- #6: Pull your credit reports + scores
First things first, you’ll need a general idea of (a.) the tasks you’ll need to account for and (b.) how you’ll go about handling them.
Task #1: Gather all pertinent tax information for your law firm
You’re going to need to gather documentation covering the full gamut of activity in your firm. This isn’t limited to financial data either. Tax information can include important business data, such as:
- Expenses and deductions (e.g., bills, receipts, canceled checks, etc.)
- Inventory and equipment data
- Depreciation data
- Personal and business deductions
- Vendor bills
- Loan agreements
- Legal paperwork (e.g., parties in lawsuits, purchases, settlements, acquisitions, civil defense, etc.)
- Medical, insurance, payroll and employee records
- Your income and financial statements
- Theft or loss documents
- Corporate payroll data
- Employee documents (e.g., policies, dress codes, CLE requirements, W-2 reimbursement policies, etc.)
- A copy of your schedule K-1, (if applicable) which outlines shareholder income, losses, deductions and credits
As far as lists go, this isn’t comprehensive. It’s just a helpful place to start.
Task #2: Closeout outstanding receivables and payables
Do some (many) of your clients owe you money?
Do your best to close out any outstanding accounts receivables before the end of the year. Chase down clients responsible for unpaid invoices, resolve any disputes and do your best to collect.
Then there are payables.
Most law firms are organized as flow-through entities. A large amount of receivables means you won’t fare as well come tax time. Use accounts payables to offset receivables that put you in a less than favorable situation.
It’s a bit of a balancing act.
Task #3: Prepare for an audit
Conducting an internal audit means you have an updated copy of your balance sheet and profit and loss statements. Additionally, you’ll want an up-to-date copy of your income statement to analyze firm expenditure and savings.
Why go to all this trouble?
Remember all of the details I suggested you gather in task one? These are the same details the IRS will ask for if you’re audited.
That’s not reassuring.
It’s not a comforting thought at all. But it’s an important step savvy law firms plan for.
The IRS released its guide to auditing lawyers. It’s a 52-page document showing examiners how to pursue attorneys and law firms aggressively.
It’s a step-by-step, how-to guide on auditing you.
If you’re well prepared, with the necessary data in-hand, your auditor won’t have much to work with. It’s a helpful first step if your firm receives the dreaded IRS notification letter.
Task #4: Strategize with your accountant
Ideally, this is an ongoing process.
Most firms don’t spend a whole lot of time with their accountants, which is an unfortunate mistake. If you haven’t taken the time to reach out to your accountant, now’s the time. Don’t wait until the 11th hour when your accountant is inundated by the tax rush.
Approach them without delay.
Provide them with your documentation they need. Provide them with the appropriate access, statements and reports they need. If they need you to provide them with an unexpected piece of data, help them with what they need. The easier you make things for them, the better your circumstances will be.
Task #5: Streamline financial management
Does your firm have good financial habits?
Implement disciplined financial controls over your cash.
- Track your time appropriately, invoice immediately
- Require an upfront retainer for all new clients.
- Check references if you’re working with business to business clients. It’s a well-known fact that large corporate clients are often slow to pay
- Set retainer/project minimums and stick to them
- Create, outline and enforce your late payment penalties with customers
- Reject clients who consistently inflict financial harm on your firm
- Reward customers who autopay, penalize customers who pay on their terms
- Factor payment processing fees into your invoices
- Negotiate payment processing fees at the bank, card or processor level
- Negotiate for extended payment terms for your bills upfront
- Checks are endorsed immediately “for deposit only”
- The employees who record receipts from your bank shouldn’t be the ones to post to accounts receivable/general ledger
- Employees authorized to sign for checks shouldn’t prepare vouchers or record disbursements. They shouldn’t post to accounts payable/general ledger
- Minimize overhead
- Invest your cash on hand
- Build business credit/funding via traditional (e.g., loans, line of credit) and untraditional (crowdfunding, alternative loans, investors)
These details are important because they give you the ability to scale your business up or down rapidly. Train employees to manage your cash flow safely and protect your practice from fraud and embezzlement.
These are the basics, right?
They are, yet you’d be surprised at the number of (large and small) firms that don’t follow these best practices. This inattention to detail creates major problems come tax time.
These headaches are completely avoidable if you have the proper foundation in place. What’s more, these good financial habits are reflected in a variety of places – credit reports, bank account data and more.
Task #6: Pull your credit reports + scores
Do you have credit available?
Are you sure?
You’ll want to pull credit reports for yourself and any notable partners in your firm. You’ll also want to pull your business credit reports. Here’s why this is important for your firm.
Your personal credit reports + scores give you a heads up on any judgments or derogatory marks that may create problems with ethics regulators. It’s common practice for lenders to pull all three of your credit scores (your tri-merge or VantageScore), using the middle number in their creditworthiness and financial assessments.
This is crucial.
Pulling your credit report ahead of time means your creditworthiness ahead of time. You can address any serious problems before regulators come knocking. It also ensures you have suitable access to credit so you’re able to make the financial moves you need to make. You can refer to sites like Credit Karma or Free Annual Report for a free copy of your credit report.
What about business credit report?
Your business credit report (and score) is more important if you’re the owner or shareholder at your firm. A strong business credit rating means your firm is better able to:
- Get financing from both conventional and unconventional lenders at more favorable terms (i.e., no personal guarantees) when you need it.
- Minimize insurance costs: A strong business credit score means it will cost less to insure and protect your firm from any unexpected disasters.
- Proper financial separation: Specifically of personal and business finances. This separation makes tracking expenses and filing taxes much easier for businesses.
- Increased borrowing power: You’re able to borrow larger amounts of money, in less time and with more favorable terms than those without a strong business credit score.
Credit reports and scores come from Equifax, Experian and Dun and Bradstreet. Your business credit reports contain more data but are typically more concise. Here are samples for each.
- Equifax sample business credit report
- Dun and Bradstreet sample business credit report
- Equifax sample business credit report
See what I mean?
Short, concise and to the point. There’s more here than meets the eye. I’ll cover that in a future post and outline how law firms can use business credit in their favor.
We’re just scratching the surface here
I realize that.
There are some important tax to-dos you’ll need to complete before 2019 arrives. It’s a good idea to approach this proactively. Gathering all of your data/documentation ahead of time makes a significant difference.
But this isn’t everything.
You’ll want to bring in the professionals. Make a list of the documentation you’ll need to provide — schedule meetings with your accountants and financial professionals ahead of time.
Then get to work.
If you’ve kept decent records and you’re reasonably prepared, you won’t be caught off guard. In my next post, I’ll cover these end-of-year requirements in more detail.