How Lawyers Should Deduct Unreimbursed Business Expenses
The rules for deducting unreimbursed business expenses are complicated enough that your firm’s lawyers may be tempted to forgo the process altogether. But lawyers who neglect to take such deductions on their federal tax returns are likely leaving money on the table. The following is a quick look at IRS rules.
Associate and Staff Expenses
For law firm employees to deduct workplace expenses, their total itemized deductions must exceed the standard deduction and be greater than 2% of adjusted gross income. Only expenses over that amount are deductible.
Employees need to keep in mind that not all unreimbursed business expenses qualify as deductions. They must be: 1) incurred during the current tax year; 2) related to the firm’s business; 3) what the IRS terms “ordinary and necessary” (useful and appropriate for work, but not necessarily required); and 4) unreimbursed by your firm.
Rules for Partners
The rules are more complex for partners. Partners cannot deduct unreimbursed expenses incurred on behalf of the partnership if the firm would have reimbursed the expenses. But if the partnership agreement specifies that partners must pay certain partnership expenses out of their own funds, those expenses generally can be deducted on partners’ individual tax returns (using Schedule E).
Note that deductible unreimbursed business expenses reduce a partner’s earned income from the partnership. This also generally reduces a partner’s earned income for self-employment tax purposes.
What is Deductible?
Lawyers typically are able to deduct such unreimbursed expenses as:
- Dues to professional (but not political or lobbying) associations;
- Business liability and malpractice insurance premiums;
- Certain continuing legal education (CLE) costs;
- Gifts to clients and employees (subject to limitations); and
- Business-related meals and entertainment.
Travel expenses are probably the most common type of deductions. Commuting expenses for travel to and from an individual’s customary workplace are not eligible. But costs associated with traveling to client sites or business meetings – including gas, tolls and parking – typically are. Expenses such as transportation, hotels, meals, laundry and tips incurred on business-related trips or while temporarily (for less than a year) working away from home might be eligible.
Getting Professional Advice
Determining what qualifies as deductible unreimbursed business expenses can be challenging. Partners, in particular, are urged to seek professional tax advice. Your firm may also want to talk with its tax advisor about such money-saving reimbursement systems as an accountable plan. For information on deductible reimbursed business expenses or accountable plans, contact Kal Shiner at 312.670.7444.