Help Insulate Your Firm with Careful Year-End Planning

The slowing economy has touched all sectors, and surely some of your clients are feeling the pinch. There's no question it's been a rough and uncertain couple of months. For law firms, the effects are numerous. Fees may not be coming in as reliably. Individual partners nearing retirement may have seen their nest eggs shrink dramatically. Partners may no longer have the luxury of being as tolerant of clients that are problematic from a billing perspective, draw an imbalanced share of resources, create headaches from an engagement perspective, or simply no longer fall in line with business goals.

Strengthening Finances

Fortunately, this time presents opportunities to strengthen the firm's finances and those of individual partners. The key in this or any year is careful tax planning ' including year-end tax projections ' that will help lessen federal and state tax liabilities, prepare for possible exposure to the alternative minimum tax, and discover potential ways to save and streamline.

Law firms emerge in the strongest position from a tax perspective when they defer income while accelerating deductions. Essentially, the same set of principles applies year after year. When economically feasible, cash basis partnerships should push large collections into the following tax year and make payments such as bonuses before the end of the year. Deductions for employer matches on 401(k)s or pensions can be accrued for cash basis taxpayers, provided the payments are made by the due date of the tax returns, including extensions.

For the 2008 tax year, a ripe savings opportunity is available: front-loaded deductions for purchases and leases of some new equipment. If your firm is planning upgrades to computer systems or office furniture, for instance, this might be the time to do it.

Depreciation deductions on the purchase price of fixed assets enable firms to cut their tax bills over the life of those assets, but under IRC Section 179, businesses spending up to $800,000 in qualified equipment purchases can immediately deduct up to $250,000 of the purchase price, rather than having to recoup that outlay in the form of depreciation deductions over a period of years. The benefit of this one-time deduction can be amplified by selectively applying it to assets with longer depreciable lives ' if total qualified asset purchases exceed $250,000.

Making more than $800,000 of qualified equipment purchases in the 2008 tax year will cut into this deduction, dollar-for-dollar.

Firms can also take a bonus first-year depreciation deduction of 50% on qualifying equipment after the Section 179 deduction. And, they are entitled to deductions for qualified leasehold improvements.

Be aware of an important deadline change. The extended 2008 deadline for partnership tax returns has been moved from Oct. 15 to Sept. 15. On the partnership level, this change is obviously burdensome at first, giving a shorter window of time in which to prepare the partnership's return. However, there is the flip side: Attorneys who in previous years may have been waiting until the very last minute to receive necessary documents from their partnership for their individual returns have a bit more breathing room, as do their tax preparers, who may have had only days to account for them.

Don't let individual income and estate tax planning take a backseat. Do all you can to accelerate individual deductions. Moves to consider include pre-paying real estate and state and local income taxes or accelerating charitable giving. Additionally, holders of appreciated stock can donate it to certain charities and receive a charitable deduction equal to the stock's fair market value. Simply donating the stock directly to the charity eliminates the tax liability on the gain that would result from selling it and then contributing the proceeds to the charity. Just be sure to map any of these moves out in advance with a tax adviser to remain cognizant of any exposure to the alternative minimum tax (“AMT”).

Additionally, with regard to your taxable estate, you should exhaust the $12,000 annual gift-giving exemption. A child or grandchild can receive $12,000 from each of his parents and grandparents in a single year. You need to be careful that no prior gifts were made during the year including items you might not even consider gifts, such as contributions to 529 college savings plans or life insurance trusts.

Conclusion

The year 2009 may be a slower time for some attorneys and their firms. Slowing cash flows and client pressures may start to be felt. You should seek more than ever to comb through overhead, examine your spending, and ensure that staff time is being maximized and used productively. Remember: Every economic change brings opportunity. There are hard decisions ahead, but year-end planning at the firm and individual levels can help ensure that you weather the storm.

Phillip A. Bottari, CPA ([email protected]), a member of this newsletter's Board of Editors, is partner in charge of the Friedman LLP Law Firm Services Group, which provides accounting, audit, tax, and practice management services to law firms. Richard G. Hoffman, CPA is a partner with Friedman LLP, Accountants and Advisors. He performs a variety of tax services for a broad range of clients, including commercial and residential real estate companies, professional services firms, and high-net-worth individuals.

The slowing economy has touched all sectors, and surely some of your clients are feeling the pinch. There's no question it's been a rough and uncertain couple of months. For law firms, the effects are numerous. Fees may not be coming in as reliably. Individual partners nearing retirement may have seen their nest eggs shrink dramatically. Partners may no longer have the luxury of being as tolerant of clients that are problematic from a billing perspective, draw an imbalanced share of resources, create headaches from an engagement perspective, or simply no longer fall in line with business goals.

Strengthening Finances

Fortunately, this time presents opportunities to strengthen the firm's finances and those of individual partners. The key in this or any year is careful tax planning ' including year-end tax projections ' that will help lessen federal and state tax liabilities, prepare for possible exposure to the alternative minimum tax, and discover potential ways to save and streamline.

Law firms emerge in the strongest position from a tax perspective when they defer income while accelerating deductions. Essentially, the same set of principles applies year after year. When economically feasible, cash basis partnerships should push large collections into the following tax year and make payments such as bonuses before the end of the year. Deductions for employer matches on 401(k)s or pensions can be accrued for cash basis taxpayers, provided the payments are made by the due date of the tax returns, including extensions.

For the 2008 tax year, a ripe savings opportunity is available: front-loaded deductions for purchases and leases of some new equipment. If your firm is planning upgrades to computer systems or office furniture, for instance, this might be the time to do it.

Depreciation deductions on the purchase price of fixed assets enable firms to cut their tax bills over the life of those assets, but under IRC Section 179, businesses spending up to $800,000 in qualified equipment purchases can immediately deduct up to $250,000 of the purchase price, rather than having to recoup that outlay in the form of depreciation deductions over a period of years. The benefit of this one-time deduction can be amplified by selectively applying it to assets with longer depreciable lives ' if total qualified asset purchases exceed $250,000.

Making more than $800,000 of qualified equipment purchases in the 2008 tax year will cut into this deduction, dollar-for-dollar.

Firms can also take a bonus first-year depreciation deduction of 50% on qualifying equipment after the Section 179 deduction. And, they are entitled to deductions for qualified leasehold improvements.

Be aware of an important deadline change. The extended 2008 deadline for partnership tax returns has been moved from Oct. 15 to Sept. 15. On the partnership level, this change is obviously burdensome at first, giving a shorter window of time in which to prepare the partnership's return. However, there is the flip side: Attorneys who in previous years may have been waiting until the very last minute to receive necessary documents from their partnership for their individual returns have a bit more breathing room, as do their tax preparers, who may have had only days to account for them.

Don't let individual income and estate tax planning take a backseat. Do all you can to accelerate individual deductions. Moves to consider include pre-paying real estate and state and local income taxes or accelerating charitable giving. Additionally, holders of appreciated stock can donate it to certain charities and receive a charitable deduction equal to the stock's fair market value. Simply donating the stock directly to the charity eliminates the tax liability on the gain that would result from selling it and then contributing the proceeds to the charity. Just be sure to map any of these moves out in advance with a tax adviser to remain cognizant of any exposure to the alternative minimum tax (“AMT”).

Additionally, with regard to your taxable estate, you should exhaust the $12,000 annual gift-giving exemption. A child or grandchild can receive $12,000 from each of his parents and grandparents in a single year. You need to be careful that no prior gifts were made during the year including items you might not even consider gifts, such as contributions to 529 college savings plans or life insurance trusts.

Conclusion

The year 2009 may be a slower time for some attorneys and their firms. Slowing cash flows and client pressures may start to be felt. You should seek more than ever to comb through overhead, examine your spending, and ensure that staff time is being maximized and used productively. Remember: Every economic change brings opportunity. There are hard decisions ahead, but year-end planning at the firm and individual levels can help ensure that you weather the storm.

Phillip A. Bottari, CPA ([email protected]), a member of this newsletter's Board of Editors, is partner in charge of the Friedman LLP Law Firm Services Group, which provides accounting, audit, tax, and practice management services to law firms. Richard G. Hoffman, CPA is a partner with Friedman LLP, Accountants and Advisors. He performs a variety of tax services for a broad range of clients, including commercial and residential real estate companies, professional services firms, and high-net-worth individuals.