Tax season doesn't have to be a last-minute scramble. For law firms and attorneys, getting your financials ready in advance is the key to minimizing stress, maximizing deductions, and getting back to your clients and cases faster. The core of a smooth tax season lies in organized, accurate bookkeeping.
Here’s a professional, step-by-step guide to preparing your law firm's finances for tax season.
1. Clean Up Your Books Now
Don't wait until the end of the year to start sifting through transactions. Get ahead of the curve by reconciling all bank and credit card accounts monthly and checking your ledger for accuracy now. This proactive approach helps spot any discrepancies, uncategorized transactions, or errors that can slow down tax preparation. If your firm uses QuickBooks Online, ensuring your accounts are clean and up-to-date is especially important.
2. Master Your Trust Accounts (IOLTA)
For many attorneys, Trust Accounting (IOLTA/Escrow accounts) is the most scrutinized part of law firm financials. It’s a non-negotiable area for compliance.
Reconcile Client Ledgers: Every transaction and client sub-ledger must balance to the total in your IOLTA account. Confirm that no earned fees are sitting in the trust account past the required transfer date, and absolutely no personal or operating expenses are paid from it.
Generate Compliance Reports: Have your IOLTA three-way reconciliation report ready to prove compliance. This report compares the bank balance, the book balance, and the total of all client sub-ledgers.
3. Categorize All Business Expenses
Law firm expenses can be complex. Properly categorizing your operating expenses is crucial for identifying all eligible deductions, which directly impacts your tax liability.
Review Vendor Payments: Go through your Accounts Payable & Vendor Payment records to ensure all operating expenses are correctly tagged (e.g., office supplies, software subscriptions, continuing legal education, etc.).
Track Firm Assets: Keep a clear, current list of any capitalized assets—equipment, technology, or large purchases—to ensure correct depreciation is applied for tax purposes.
4. Finalize Accounts Receivable and Invoicing
Your income statements are only accurate if your sales ledger is correct. Review your outstanding client invoices to make sure everything has been properly recorded.
Clear Outstanding A/R: Review and follow up on old or delinquent invoices. For cash-basis filers, you only report income when payment is received. For accrual-basis filers, this ensures the full, proper amount is reported, and any necessary write-offs are documented.
Prepare 1099 Forms: If you use independent contractors, prepare to issue 1099 forms by verifying their information and payment totals.
5. Review Key Performance Indicators (KPIs)
While not a direct tax task, reviewing your KPI & Metrics Reporting gives you a full picture of your firm's profitability and financial health. A tax-focused review of KPIs like "Net Income" or "Operating Expense Ratio" can offer insights that help your tax professional spot opportunities or red flags. Understanding the financial story behind your numbers is what moves you from compliance to strategic planning.
Partner with CPN Legal for a Stress-Free Tax Season
Managing the minutiae of legal finance can be overwhelming. Instead of pulling long nights to prepare for the looming tax deadline, let the experts handle it. At CPN Legal, our team specializes in Law Firm Accounting & Bookkeeping and offers full-service support. We're here to ensure your firm is audit-ready and positioned for financial growth.
Focus on your clients, not your ledger. Call us today at (513) 463-1817 to ensure your firm's financials are immaculate and tax-ready.