Whether you’re a partner or an associate in a law firm, the Internal Revenue Service has rules that apply specifically to you as well as several opportunities. Following is a list of tax provisions that affect attorneys in particular.
Tax Benefits for Partners
The following deductions and benefits pertain to partners in a law firm:
- Home office deduction: The home office deduction may be available to practitioners who run their business out of their home. This deduction is not as straightforward as it may sound: The space must be dedicated to running the practice. In addition, the deduction is based on the square footage of the dedicated space, not the total square footage. Once the square footage is calculated, a proportional share of expenses, including mortgage interest, real estate taxes and utilities, may be deducted. The deduction does come with a cap.
- Unreimbursed expenses: Law firm partners may be able to use Schedule E to deduct business expenses that were not reimbursed by the firm. This is a valuable deduction because it reduces both taxable income and the self-employment tax.
- Capital account loans: Interest paid on capital account loans also are deducible on Schedule E.
- State taxes: State taxes are tricky. The total allowable deduction for all state and local taxes is limited. As long as the amount isn’t exceeded, you may be able to deduct any state taxes the firm pays on your behalf on Schedule A of your personal return. Ensure that you are filing in all relevant tax jurisdictions and document your filings and consider filing composite state returns.
- Self-employed health insurance: If your firm shows a profit for the year, medical, dental and long-term care insurance costs may be an above-the-line deduction. This deduction is worth more than an itemized deduction.
- Retirement savings: Take advantage of tax saving offered by your firm’s retirement plan. Deferring income can result in substantial tax savings.
Tax Considerations for Associates
Associates are salaried employees at their firms who have federal and state income tax taken out of their paychecks and whose income is reported on Form W-2. Consequently, they have fewer options for deductions. They cannot take itemized deductions unless they exceed the standard deduction amounts. They may, however, benefit from the following:
- Unreimbursed business expenses: These expenses can no longer be deducted as a line item, but associates can ask their firms to implement an accountable reimbursement plan. Such a plan would allow associates to be reimbursed without having to report the reimbursements as income, and the partners would be able to deduct the amounts on their Schedule E.
- Income deferral: Deferring income by maximizing use of the firm’s retirement plan may reduce taxable income.
- Student loans: If your firm has a student loan payment program, the amount they pay may not be taxable if certain parameters are met.