Tax Planning for Legal Professionals

Welcome to Accountants LawPod, where accounting professionals and law firms converge, hosted by Lynda Artesani, Sarah Prevost, and Steven Libhart.

Hey, Sarah. Well, we're missing our sidekick, and I don't want to forget to say that because we already talked about it, but now that we're recording, so we're missing Steve. But you know, it's the beginning of the year, and it's Beginning of the year. So it's January for bookkeepers, or, you know, it's, it's not a— it's not our happiest season. It's, uh, probably the busiest because we get a lot of leads coming our way, and a lot of the attorneys will be looking at their—

That's a happy moment. However, it's the timing in which they all come.

The timing. And then a lot of times, you know, we have clients that don't respond all year, and now they're sitting there going, I gotta get my stuff ready for the tech, I gotta close the year. And then they're looking at it, and then they're asking Questions, why isn't it finished? And then you write back, well, here's the list I've been bugging you with for the past 8 months that you haven't answered these questions, or this is what's holding us up, I'm missing statements or whatever.

And then maybe that's a topic for a future endeavor.

That is a topic.

I don't know how to work with people like that though.

I, I remember doing that in the very, very beginning of my career, and, and I, I— a couple people just threw me a big giant box. Yeah, I remember thinking, I'll give them an organizer so next year they can put it all— I even made the labels and all you do is shove the papers in. This is going way back. Yeah.

Yeah.

And they just gave it all to me shoved in the front left front section.

They never even used the front section of it.

They didn't organize it at all. And I like, you know, I can remember my husband saying, well, I could have told you that was going to happen. I'm like, hey, thanks. Which kind of leads into this topic because this week we're going to talk about tax planning for legal professionals. And we're going to give you what we think you all should be looking at for maybe implementing some change because new year. How do we say, I've been working with Lori and I, or one of our employees, we're calling it New Year, New You. And we, we're gonna start on the 1st, and then it was, we're gonna start on the 5th. It's really the official first day, right? But, um, New Year, New You. So you could implement some changes now because it's the beginning of the year. And if you do have— if you did work on Friday, you might have to go back and fix things, but it's only one day, so it's not a big deal, you know.

Well, I mean, in, in the New Year Uh, kind of mindset though, you, that's a good time to really kind of look at, okay, I've got the full year closed. I've got the information in front of me. Do I want to go ahead and just take a stab at writing a budget, doing small steps for stuff like this? Or, you know, maybe looking at my numbers, I'd say forecasting is probably one of the areas that might be the smartest thing to do.

Yeah. We just talked to someone on our behalf for goal setting.

Exactly.

Setting a goal for a year. 3 years, 5 years. It's good to put it down, but it also is good to put— don't put it down and tuck it away and never look at it. If you wanna make the changes like we're probably gonna talk about today, you want to be able to start to go down the road of looking at them and then seeing how you're doing against them. Because every year we post what we think— you and I set a goal for the business.

Yeah.

And at first we were like very much in alignment, and then last year you were like, And I'm like, oh, you're crazy. That's, that's way too much. But then we got closer to your goal. We bypassed my goal, and I'm like, okay, well, she was right. Um, and maybe sometimes it is good to shoot for the stars because you never know.

But you never know. Yeah, you just put it out there.

I think the biggest thing to do—

we've heard repeatedly from other coaches, other people in our profession, and I'm sure the legal profession has repeatedly heard this. Is reviewing it quarterly. And I feel like what is a great time right now is once we get a moment together this week, we just get on our calendars the days that we want those days to be. And it can be whatever day we need it to be and set a time, the hours just for reflection and review, even if it's not about, you know, are we hitting our targets? Like you're saying, it's not just about looking at the numbers and comparing and overanalyzing. Being honest about where we stand, and then what kind of changes do we want to make? I know instinctively we've done this really well individually, just as professionals. You and I have done this really well.

I think too, it falls into the same thing as like everybody on January 1st, I'm gonna eat better, I'm gonna do this and that, and then, oh yeah, eat better, I'm gonna meditate every day, I'm gonna sleep 8 hours every day. So you throw 3 things, 3 really big changes, and then they never stick, none of them, because you It's hard to do that. But if you can just pick one thing— we had a good friend when we decided to change our, uh, our practice management tool. We were changing a couple of things that year. We were looking into doing that, and we had a good friend, Ian, over at Carbon, who, who we were going to— thinking about moving to, who said, don't do that now. Do this one change you want to do, you know, using Ignition, and do that first. Yeah, see how that lands, and then think about the other thing down the road, which we've now come to. But that was really great advice because we fine-tuned this, then moved on to this.

And we refining. I mean, it's part of the process, right? It's part of the journey, I guess you could say, is the refinement. But I also feel like, what's the saying that somebody— I forget who says this— it's the small things. You do the small things to build, and these small things build up. It's not like you're, okay, I'm gonna bite the whole apple and eat the whole thing in one swoop.

Right.

You're gonna take the small bites to get to the big one. And when we're planning, I feel like in this profession, They're very mutual. They're very similar in accounting and in legal. You are kind of maybe reviewing your entity structure. You're reviewing your pricing models. You're reviewing what are the costs that you spent? What are the trials that you tried that turned into— I tried this software and next thing you know, I'm like, oh shoot, I paid 12 months of the software. I need to change it.

Mm-hmm.

It didn't do me any good. Staff. Retention. Maybe you had a bumpy ride last year. Maybe you need to reevaluate your, your handbook and what works for the staff.

Because you want to keep your staff if they're good. Yeah, because it's very expensive to switch staff.

It is. It's very expensive.

And it does slow the process of everything down because there's a learning curve to everybody's workflow.

And yeah, that's definitely something. And taxes are the big one. Look, I think the biggest thing is looking at and meeting with that tax professional at least twice a year just to check in, but meeting with them and saying, okay, now my taxes are filed. What, what was the total amount I paid for federal and state for those that have state? And how, what is the percentage of that?

Yeah, what's your tax percentage? Because you ask people that, they don't know the answer to that. Sometimes I don't know. I have to go and like, it's simple math, but it's like I have to think about it. So I then know, and then that'll help you calculate your estimated taxes, which A lot of times we find clients either don't have an awareness of that and they find out at the end of the year, or they know about it but they don't pay it because they think for some reason they don't understand how it's quarterly. Which there was some discussion about maybe moving that to be like every other country that has it like half year instead of quarterly, because quarterly puts a big burden on all the businesses. But you know, you gotta wait for Congress, so good luck.

Honestly, regardless of what happens at that level, I feel like it's the habit piece, right? So I like Getting into— you're an S corp, you're maybe you're new to being an S corp and you have to understand payroll. Okay, so let's just break down the simplicity of it in the tax world side of it is we're, we're trying to make sure that our salary is right but the taxes we're paying in as much as we can bear. There's going to be a criteria that the tax professional will help us with on that, but how much will be paid in that bucket? Now if you're used to paying an estimate On a quarterly basis, and that feels like a big chunk. What if we divided it by 3 and just broke it down for that quarter?

Put it away. You start that little account and just get it out of the operating, so it's out of sight, out of mind.

Exactly.

But that way it's there. It doesn't hurt as much when you pull that out to pay it when you've pulled it out monthly. I, I think— I mean, it might just be a cycle.

To me, it's monthly, but I've met people— I love this— I've met a couple people that are Okay, I pay my— I charge on my credit card, but I pay— I have a way to pay it every week. You know, not every credit card offers that. It's not that they're paying it off in full, it's the habit for them to pay it every week because they've already spent the money, so they want it out of their bank account. It's the way you manage funds, and that's the hardest rub, I think, in all of this is—

Because a lot of times their head's down and they are working, doing their legal work, and this is not something that they really— you kind of I find with most of the attorneys we work with, they love what they do and they're really good at it. They live in this high verbal world, and when you start talking about numbers, it's scary. They don't have that— not that they don't have the knowledge of it, but they really don't like it because it's kind of like us, right? So it's kind of like the opposite. And I think that that's part of like taking the time to do it, and that time has to be non-negotiable. You can't book into that time. You make that time, set it aside to set those goals. And to review your stuff. And then you don't, don't cover that over as it gets closer. Like, that's the only time you have for, you know, a client or something, and you, you break that rule. You want to really dedicate that time and preserve it because it's for yourself. It's a lot easier to fix something, right the ship, so to speak, in like at the quarter than to have it go all the way to the end of the year and you see something that you didn't really expect or want to be that way.

Yeah.

And then it's a lot harder to— I mean, you can take Things at very high level, if you're looking at, looking at your records. So maybe you're looking at, you're doing billable expenses and billable income, knowing full well the IRS would rather see it as advanced client costs because it really doesn't affect your numbers. You're paying for it for a client, mini loan, and you're getting it back when you bill. So maybe a better way to do that is to start to make that transition. Now, that's a transition. You really want somebody, a professional, helping you transition that way. But you might want to change that. You might want to change the way you bill your clients. Maybe you're tired of chasing it and you got a lot of AR and, you know, you're getting paid after the fact, and maybe you don't collect a lot of retainers, and maybe you want to change to a subscription billing or fixed fee billing or anything different and start to implement it. Maybe do an implementation in a small part of your business. Don't do it for everything.

Look at the value of your time. What if this, Lynda, you look at the value of your time And let's say you're a solopreneur. Should you be the one collecting on those invoices as well as billing for them and doing all the work?

That's why it stays uncollected. Nobody wants to be that bad guy calling up for money that you earned, like that you should be paid for. And we see it all the time, and the clients will say to us, oh, that's never going to get collected, write it off. And my heart breaks because you did the work and now you're not getting compensated for it. And all you have to do is some realization numbers, and then you're going to realize that It's your hourly rate is not what you think it is if you're writing down a lot of that stuff.

Well, there's, there's ways to do it differently too. It's like you and I, when we chat, we look at someone's set of books and we look at the structure, whether you're solo or, or a large firm, how many hands are in the pot, how many people are doing things, where's the redundancy. And we try not to reduce someone's job, but we try— there might be value in The role that someone's playing in your business that is somewhere else.

Yep.

And, and they're just caught in this hamster wheel and it's reevaluating that. So that's why I think what we're both saying is when you're looking at the whole piece, okay, the piece that is easiest is either start with writing a budget and/or forecasting the numbers. Those, I'd say forecasting the numbers first because I feel like that you can back into the rest of it. If you understood where to forecast to, maybe you will understand what The dollar would go to, right? The excitement around it is exciting. It's a snowball moment.

Yeah, forecasting's way more fun than budgeting. Yeah, I gotta say, I can remember having very little money to go food shopping, and that's where I, I liken back to that, those days where I had the calculators. I put things in the carriage. That sounds like budgeting, and I didn't like to do it. Yeah, and have to take stuff out because I knew it was going to go over.

Yeah, well, and you just, you start there, right? Like, to your point, you take stuff out if you need to, if you're too much, right? But then once you start there, then you can move into the other areas. I'd say for us, like Lynda and I, just our own experience, we'll look at things and we'll look at software. It's easy for us to try a bunch of things because why are we going to talk about it unless we've tried it? And once we try it, and then before you know it, it's like, oh, that— we had no intention of that continuing, or that's not being utilized any longer because we had someone else doing it.

And we had a few of those. They seemed good, but sometimes Yeah. You start with some software and they seem great, and then nothing happens with it afterwards. It doesn't evolve.

Yep.

And then it's not fitting, and then there's something else better out there. But, and you could be sitting, and as you grow as a business, as you get more and more people working for you, that's a lot of licenses that you're paying for that maybe everybody didn't stop using it and you don't even know it. We've seen that with law firms where—

Totally.

They're paying for software, and then when they did a roll call to find out who's actually using the software, paying for 50 seats and 4 people are using it, that's a very expensive software mistake.

That was a heart-wrenching moment.

That was horrible.

That was a real moment. That's not some made-up thing that Lynda just shared.

No, that was a true story.

True story. The other thing I think, Lynda, what do you think about this is when you're looking at like hybrid model of ideas of like the offering, we talked about employees. So firms that are offering things, the 401, what is the adoption? Is everyone doing it or are they kind of forced into it? And then your bonus structure or your time-off policy. Does that work? Is it actually working? A lot of people set it and forget it. Admittedly, it's easier to do that.

Oh, yeah, for sure. It's easier to do that.

The more engagement it is. And also, like, for us internally, I mean, one big thing that Lynda and I are— we're like, okay, we've done our all-hands or team meeting for however long at a certain time. Does this actually work? What needs to change? Open to trying something different. Moving it around, taking evaluation. Let's see what happens. Let's see what the reward is on that. Maybe we have to shift it again. I don't know. We'll see. We'll see what people—

We don't— we're going to test it out. But, you know, it's funny because a lot of times if it's coming from you and I and we're, we're asking the questions, we're not going to get the honest answer where it could be somebody else in the firm that asked the questions. But also, um, you know, we just hired somebody new who's great, and I wanted to hear her opinion because she's only been to maybe 5 meetings.

Yeah.

What does she feel about it and how does she see it?

Yeah.

And it was really interesting to hear her take on it because she's not been in it for all these days and just to see what she thought and have a little discussion about it because I think it, it seemed like it was very— it worked out pretty well. I think we got a good take on it coming from somebody who's just boldly honest. Yeah.

Brand new. You know, it's interesting too. I— when you look at ways to tax plan and, and look ahead. You have to look in the rears to help you plan ahead. And then a lot of people say, well, that's a lot, you know, like I'll never have a year like that. Okay. Yeah.

Then it—

that's where the quarterly or the monthly evolution or change. And I mean, in full service, it's hard for us as the accounting professional to work with you And you're designing a whole bunch of other things with other people, like a financial planner and/or, you know, your tax professional or a coach. And then you're just— it's like dropping a bomb on us. We have to shift. So I believe the strongest effort that you're gonna have, the smallest change that you can make, is the level of engagement that we have. So if the engagement is You know, we're not really technically meeting maybe as often as you need. Well, let's reevaluate that, change our pricing structure to have more intentional meetings. To your point, Lynda, maybe that's your accountability partner right there.

And I think sometimes too, we get clients that are all gung-ho in the beginning. They show up and they're like, they didn't like their last accounting firm and they, they're coming to us and they want to have it better. And as you set them up and start going, they're all excited. And then that all wanes off and they miss the meetings. They don't show up. And they're not. And then come to find out the real issue with the last accounting firm was you, that you didn't participate. And then it falls on us to figure out how do we make that more mutual? I mean, because they get busy, not, not intentional, because they want to be there.

Yeah.

But they're, they're busy and they have work to do. And how can you fix that to help them? Just do a Loom video of what you would have said in front of them. And they can't interact and ask questions, but you open the door to maybe they have some questions on what they have. And at least it shows you care. So you didn't, you didn't come to the meeting, I'm just going to run through these financial statements with you, without you, but for you, and then, and kind of discuss what you see. And I think sometimes just that is helpful, helpful for the client to see that we do care about it, we do want you to do well. And sometimes we see things and it's like, we really need to discuss this.

Yeah.

Like, you know, it can be something as simple as we notice you aren't paying for XYZ insurance that you really should have, you're missing this. Or any little thing. It could be anything. You didn't pay the estimated— we noticed that you didn't pay the estimated taxes. Was that a decision you made with your tax professional, or did you just forget? I mean, it's not the end of the world. You can still do it, but you want to show that you care, that you've actually noticed, because sometimes we get our head down too, which is hard. But we want to help them, and there's things that have changed this year for There's not a lot of changes, thankfully, for tax purposes, but we do have the staff meals kind of going away that we were getting the 100% of that. We were not getting that.

Oh yeah, the, the, yeah, well, meals in general have shifted.

Yeah, and it's something new. So you should discuss with your tax professional what's changed this year.

Yeah, yeah.

What should I be looking for? How should I be booking it in? Because you don't want to be booking in, for example, we had it happen with a client booking in a bunch of entertainment. And that is not deductible. So yeah, you're paying for it with business funds, but know that it's not deductible. And then what we have our staff do is we are entertainment— dash— not deductible. It's written right there. They have to see it every time we produce the financials. So there's not a question of it at the end of the year when we rip it off and they, they look at their end of the year numbers as they're getting their taxes done. And they're like, why is this so different than yours? And it's going to be different. It's not going to match identically because there's depreciation and All the little tweaks the tax professional makes. But if you have $50,000 inside of entertainment expense and that gets pulled off your numbers, you're going to have a vastly different looking profit and loss that you're paying taxes on. And that's something you need to be aware of. Yeah. When these things come down the road and, you know, and then also distributions, you should be looking at what you pull out of the business, you know, what it is.

The other thing too, I, I do feel strongly like Like you're saying, these numbers and understanding them. But the other thing too is like, you also— what are you, um, what are the rules that have changed within your jurisdiction? We're, we're in the legal profession, right? The compliance. We all know California has shifted drastically. What does this next shift look like? Are you compliant? I'm always amazed at, um, when people come to us and I was like, well, do you have your tax? Like, you're doing business in this state.

Mm-hmm.

But you're also doing business in another state and I don't see a trust account for that. Does the bar rules mandate that? What kind of structure is that? It's looking at through this lens of reevaluating. I'm honestly amazed that that is still something that doesn't get discussed. It's sort of like, well, I kind of looked into it. How many years was it? How many years ago?

Yeah.

It's the same. So we have the same, you have the same kind of due diligence on our side that we do as professionals that you do in your own profession. And I think what you're saying Lynda, is you're thinking about all these things and you have all these old ideas of what they might have been based on older rules. And because rules change, like any profession, it's a good time to sort of come back together and ask the question. Now, of course, I feel like we're getting a plethora since, uh, the bill has been signed last year. There's a plethora of stuff coming out there and all the noise and all the conversations and how to unwind it.

Yeah.

Your personal individual piece of that is so different, and that's where that tax person is going to help you the most.

They're invaluable, but don't ask them to answer all your questions on March 15th or April 15th or 17th, I think this year. Don't ask them those questions and then get mad because they don't have time to answer, because yeah, they're up— they have to be aware of the deadline with all their clients. Uh, it's tough. It's really tough.

Yeah, and, and also looking at the, the rules, I feel like, um, you know, some people we We meet with, they have an office, and then they, well, we don't really want to have the office anymore. People are moving around, or we want to go to hybrid. What does that look like? How does that affect you? Do you have payroll? What type of payroll do you have? Do you have health benefits? Health benefits right now, as we all know, it's been in the news, it's all over the place, it's very costly.

High.

What does it look like? Yeah, so those are good conversations to have, and I feel like This is definitely labeled as tax planning. I do feel like this is more about business planning. This is more about really looking at what your business is doing, and it always impacts you personally. It's, it's gonna— they're gonna be hand in hand, or what you do personally impacts your business. To say that they're separate is not always true.

It depends on the structure. We always say when we talk to clients, like, what are your— you don't— we don't go right to the, what are your business goals? Like, what are your personal goals? We'll start there, and then we kind of back into the business goals because they go hand in hand.

Yeah, they go hand in hand. Yeah. Well, and one thing we had in kind of in our journey is we had someone recently ask us, uh, what is our 3-year goal? You know, you always hear people talk about 5-year, 1-year.

Yeah.

Okay, well, 3— okay, 3 years actually. Okay, 1, 2, 3, what could we do? And first thing she and I did was, what did we do the last 3?

Yeah.

And we thought between not just financial but also like What have we physically done in the business? And all right, now we're, we're kind of getting into a different area, a plateau, I guess you could say, of a new, positive new way. So what does that look like? And maybe just those questions and writing those down for yourself.

Yeah. And actually writing them, like not typing them, handwrite them, because there's a lot of— with the brain and handwriting, it helps you connect in kind of a different way. And I think that's important too.

Yeah, there's, there's a lot of good things in, in planning in general. Maybe Steve can offer another segment of this and we can find out what his thoughts are too. So yeah, good topic. Yeah, it was good.

I'm assuming it's gonna populate like soon. Uh, also, also one other thing, 1099s. Oh yes, to deal with. So don't forget about them. We're still under the $600 rule. Next year is going to be the happy year where it's going to go up, but this year is $600. It's still the nightmare of figuring out who gets a 1099. Start now. You should have started last year. Yeah, plan for this. Even when— even though the threshold's changing, really plan for it next year too. Same, same thing. Because it's— it makes for life to be so much happier because the timeframe is so fast. And even when you're looking at a 3-year goal, it sounds like a long time, but let me tell you, the older you get, it zips by. So, you know.

Well, maybe we can have another guest on that, that really talks about this segment because we've Received, as we do every year, a new set of questions that I'm like, are you kidding? Great questions, but no, no, no, we're not changing the ship right now.

Yes, don't change everything. Yeah, start small. One thing. Don't go crazy and say, I'm going to change my billing, I'm going to change my way I do my client calls, I'm going to change my entity structure. Don't do that.

Pick one, talk it through first. Don't dive in and then find out how it feels the other end.

For sure.

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Cool.

I love how she does that.

It's always a surprise too. It's like, I know, I always listen because it's different. Like, what's she gonna say now? Surprise! We'll see you all next week, everybody.

Yeah, bye-bye!