Will you be caught off guard?
There are some important tax to-dos you’ll need to complete before 2019 arrives. Are you ready? It’s a good idea to approach this proactively, but where do you start?
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. This 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
This isn’t a comprehensive list. It’s just a helpful place to start.
Task #2: Close out 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 exact details the IRS will ask for in the event that you’re audited.
Which isn’t reassuring.
It’s not a comforting thought at all. But it’s an important step savvy law firms plan for.
The IRS released their guide to auditing lawyers. It’s a 52-page document showing examiners how to pursue attorneys and law firms.
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 in the event that 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.
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.