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Tax Tips for Solo and Small Firm Lawyers

They say there are two things that are certain in life: death and taxes.

Between the two, most will say that taxes are preferable. Except perhaps those people who get audited. They might choose death.

In any case, whether you have filed your tax returns this year or not, there is always next year to consider. Here are some tax tips for solo and small firm lawyers to file away:

1. Deductions Generally

To be deductible, the tax code says business expenses must be ordinary, necessary, and reasonable. But attorneys, naturally, sometimes stretch the rules.

In one case, the IRS disallowed a tax attorney's deduction for a yacht he purchased to advertise his practice. He named the boat "1040" and said that it was an advertisement to other boaters that he provided tax counsel.

The IRS also turned back a lawyer's attempt to deduct travel expenses for his private plane. That resulted in a $1 million lost deduction.

2. Travel, Meals, and Entertainment

As the flying lawyer learned, travel expenses must be necessary for the business to be deductible. Like meals and entertainment expenses, they must also be reasonable and ordinary. Solo and small firm lawyers do a lot of traveling and may deduct travel, meal, and entertainment expenses if:

  1. You incurred your expenses while you were away from home.
  2. Those expenses were "reasonable, ordinary and necessary."
  3. Those expenses are "explicitly connected to a business purpose."

Generally, only 50% percent of business meals are deductible. Travel must be away from home and primarily for business.

3. Home Office Expenses

Tax laws have changed in recent years for home office deductions, affecting many lawyers who work from home. Home office deductions may include mortgage interest, rent, utilities, maintenance, and depreciation, but not mortgage principal payments.

Tax attorney Steven Chung, in an article for the Lawyerist, said that there are two tests for deductibility: 1) part of your home must be used regularly and exclusively for the business; and 2) your home office must be the principal place of business.

Some lawyers think they cannot take home office deductions if they also have a separate business address. However, Chung says they can take the deduction if they separate tasks between the outside office and the home office. For example, a home-office lawyer may use an outside office for client meetings and mail but still qualify for the home office deduction.

"You should be able to meet this requirement so long as you spend a majority of your time doing administrative and managerial work at home," he said. "This includes billing, legal research, brief writing, ordering supplies, setting up appointments, and keeping books and records."

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