C Corporations

If your law firm is a C corporation, its federal income tax will be a flat rate of 21%.  The Illinois corporate tax rate is now 9.5% (7% income tax, 2.5% replacement tax).  So in total, that’s a combined tax rate of 30.5% paid by the corporation.

In addition, amounts paid out as compensation, while deductible to the corporation, are subject to federal income tax and payroll taxes.  Dividends paid to shareholders are subject to an additional layer of income and possibly net investment income tax.

Most law firms, like most service organizations, report their income on a cash basis versus the accrual basis.  On the cash basis of accounting, you report as income as cash is received and report expenses as cash is paid.  While on the accrual basis, income is reported when earned and expenses when incurred, regardless of when cash is received or paid.

The law firm that reports on a cash basis of accounting does not report its uncollected accounts receivable as income or report its unpaid accounts payable as expenses.  Typically, accounts receivable far exceed accounts payable and, as such, the cash basis of accounting is much preferred for tax purposes.

Cash basis corporations are also allowed to prepay certain expenses and deduct them in the year paid.  For example, one month’s rent can be paid in advance and deducted, as well as various other supplies and expenses that are incurred in the normal course of business.

ORBA’s Law Firm Group can help you monitor your law firm’s cash position at year end to minimize the overall tax liability.  In most cases, it will be most efficient to ensure the corporation is as close to a zero tax situation as possible.  However, in some cases it will be more efficient to retain earnings for future investment rather than require capital contributions of previously taxed income.

Our advisors can help you review the corporation’s taxable income at year end so that payment of expenses or bonuses to your shareholders results in the most tax efficient outcome.  With proper planning, ORBA’s Law Firm Group helps its law firm clients that operate as C corporations eliminate all corporate-level taxation

Individual Tax Planning for Lawyers

Individual income taxes can be relatively simple for attorneys who are employees of a C corporation that has a single office located in Illinois. However, one’s tax situation is much more complex for attorneys who work for a firm that is a limited liability company, a partnership or an S corporation that has offices in multiple states and/or foreign countries. In these instances, a partner or shareholder may be liable for multiple state returns and may be required to file quarterly estimated tax payments. At ORBA, we know there are many planning opportunities in this area.  Law firms often file composite returns in states where the firm does business. We can advise you which of those returns impact you. For example, there can be a substantial tax savings to opting out of New York or California returns and filing individually.  Our experts are here to help you develop a tax planning strategy designed to minimize your taxes and increase your cash flow.

We will help you identify tax-savings strategies, such as determining if you have any unreimbursed business expenses that can be linked to your firm’s K-1 on your tax return.  Because law firms often earn a large percentage of their income in the third or fourth quarter of the year, we can monitor your share of income each quarter to help defer your quarterly estimated tax payments.

Some law firms operate as a partnership or professional corporation, with each partner maintaining his or her own professional corporation though which bills are paid, distributions are received and salary is paid to the attorney.  ORBA’s Law Firm Group has extensive experience in setting up these types of structures and can guide attorneys on how it works.  Law firms often offer 401(k) and other retirement plan options to their attorneys. We will help you sort through the options so that you can make the right choices for your future financial security.

Whether you are just beginning your career in the law, changing firms or looking toward retirement, ORBA’s experienced tax professionals are here to help you with every aspect of your personal income tax planning and preparation requirements.

New Partner Tax Assistance

As a new partner in a law firm, you have more challenges and responsibilities than ever before with what may seem like a lot less time.  We can help manage the time-crunch, at least when it comes to your personal tax situation and transition into partnership, so that you can focus on your billable hours.

ORBA’s Law Firm Group has experience with helping our clients understand the changes to their tax and financial situations.  As a new partner, you may be presented with multiple documents to review and sign, such as purchase, operating or shareholder and buy-sell agreements, among others.  In addition, you may no longer be considered an “employee.”  Instead, you will probably be one of the following:

• Corporate shareholder, with the corporation being taxed as a C or S corporation;
• Member of a limited liability company (LLC), with the LLC being taxed as a partnership, C or S corporation; or
• Partner in a partnership, with the entity being taxed as a partnership, C or S corporation.

The different combinations of your individual and entity classifications can create significant tax consequences.  At ORBA, we will inform you of the new tax obligations and rules that will now impact you, as well as keep you informed of developments through your career.