In this instructional video, Linda Artesani of Artesani Accounting explains how law firms should account for client‑related expenses by distinguishing between hard costs (advanced client costs) and soft costs. She defines hard costs as expenses the firm fronts for a client—such as medical records, filing fees, expert reports, travel, and other case‑related items—and clarifies that the IRS treats these as loans to the client, requiring them to be recorded as an asset (Advanced Client Costs) with a credit to the operating bank account. She walks through the proper journal entry, contrasts it with incorrect methods, and details how to handle expenses paid from a trust account, which bypass the asset account and affect the client matter liability directly. Artesani then demonstrates a streamlined workflow using LeanLaw together with Hubdoc or Dext to automatically code incoming bills to the Advanced Client Costs account, tag the matter, and push the data into QuickBooks for easy month‑end billing. For soft costs—postage, office supplies, and employee time—she explains they are ordinary expenses that are later recouped from the client via a Billable Expense Income line, noting the murkier tracking involved. Throughout, she emphasizes the efficiency of the automated process versus manual workarounds and offers her firm’s services to set up or manage the system for law firms.
Chapters
Hi there. Linda Artesani, Artesani Accounting and The Proper Trust. This week we're going to talk all about hard costs and soft costs, basically client costs and how you book them into the accounting for your firm. So learning about, learning about hard costs and soft costs, and I have to really pronounce that because I'm from Rhode Island, we like to drop the R. But learning about hard and soft costs can be confusing. You may even hear that term advanced client costs floated around, because advanced client costs is basically what you're doing as the law firm. You're, you're actually fronting the client money and paying for the expenses in, in the matter or case. Now, it's a loan. That's how the IRS views it, is it's a loan to the client. And it's a loan because even though you may be holding retainer for those funds, the retainer can't be used until the money is earned. So in this case, you'd be reimbursed for those, for those costs. And sometimes I think when you really get down to it, I've seen a lot of files where they do billable expense and billable expense income accounts. So they use the income and the expense account to offset. But that's not how the IRS looks at it. The IRS looks at these expenses as mini loans to the client. Advanced client costs until they're billed, of course, is, is, is a loan to the, to the person that you're working with, your client, and you're loaning them money upfront. You're paying it out of pocket, out of that operating account as an expense, and then you get reimbursed at the time you do the billing. Some great examples of hard costs would be cost of medical records, maybe some deposition fees. Filing fees, expert reports, interpreter fees if you're an immigration firm, or you're just a firm that needs an interpreter, witness fees, photographs, laboratory tests, sheriff's fees, the filing fees, process servers, investigators, and travel expenses. Just a few examples, and there's more. And for example, with an expense like a filing fee, a lot of times you have to file the matter in court. You have to pay a fee in Florida right now. Today it's $450. You have to pay for it in court, and then you have to book it in. Well, if you paid for it with an operating account, you have to book it into the account in the right way, and that would be into the advanced client cost account, which is an asset account. You don't book it into an expense because it's not going to be your expense. You're actually going to get reimbursed for it. So you just don't— never want to state it that way unless you don't get paid back, and then it would become a firm expense. So that's the key part of learning this. So if you are thinking in debits and credits, you're gonna debit the advanced client cost account, which is your asset. You're increasing the asset, and then you're credit— crediting your operating bank account. You'd be lowering the money in the bank account because you're spending money. That's basically how easy it is. If you use LeanLaw, I give you an example in the article that accompanies this video to show you how to do the expense setup. It's very simple to do. One of the things I really love about using LeanLaw, and if I use it, layer it with a Hubdoc or a Dext, D-E-X-T, Dext, these are accounts payable kind of programs, and you can do it in QuickBooks. It just doesn't work as well. But if you have a bill come in, you have it come into that outside exterior software like Hubdoc, and then it'll be coded to advanced client costs, and you can actually pre-code it to that. But then you have to make sure you hit the matter level. You hit that line item for the customer, and that way it's seen that way. Now you might be wondering, well, what do I do if I spend the money out of the trust account? That's totally different, and you will not be hitting the advanced client cost account because you're not fronting that money anymore. You're not going to book it into that asset. It's actually going to come directly out of that client matter account or the sub-liability. So that's pretty much the easiest way to describe it. What I love about LeanLaw, I like to call it the look, ma, no hands method. You have it come into Hubdoc or Dext and it's pre-coded. You just tag the matter and it gets pushed into QuickBooks, and then QuickBooks puts it in the advanced client cost account, and then it's read by LeanLaw and it's just sitting up there waiting for the end of the month for when you do your billing to bill that expense back to the client. And literally one click, it's in the system and ready for you in the right place in the accounting and in the right place to do your billing. It's that easy, that sweet of a workflow. So I think that that's the easiest way to do that and to use the software and not use Billable and QuickBooks and try to do all those workarounds that you can do. But why? It takes more time, and you might forget a piece when you make some kind of a manual workaround. It's nearly not worth doing that. So you might be thinking, what about the soft costs? Because those are the hard costs that I was just speaking about. What about the soft costs? And we're talking maybe some postage that you're spending money on. Maybe, maybe you're having the admin or the legal assistant make copies. So you want to get money back for that time and expense that it costs for you to pay your employee to do that. Soft costs are different. They're a different animal. You're actually paying for those expenses like postage. You would come out of postage and delivery expense. You're not gonna count every stamp and then allocate that stamp and advance client costs to the client, or multiple stamps. And you would never be able to do that with the, with the spent, the money spent on the expense of the employee and the paper and the printer. Just makes sense. So you're just gonna use for soft costs. You're gonna have the costs come in. You pay for paper, office supplies, you pay for for stamps, it's gonna go into the postage account. And then when you do bill it back, it's gonna hit that billable income line, billable expense income line, because it's now expenses that you're just recouping from your, your client, and it will lower the expense that you spent because you're getting reimbursed for it. It's just not easily tracked with soft costs. It's kind of a murky area. So that's how you would, you would do that. So I think that that's really the easiest high-level view of hard and soft costs in a law firm. I hope that makes it easier for you. If you're sitting here going, oh, this is so many things I don't want to think about as an attorney running my practice, feel free to reach out. This is the work that we do. We'd love to help you either set it up and you do it, or we do it. We have that capability, and it might be even more affordable for you to have us do it so you can do what you do best. practicing law. And on that note, I hope you all have a wonderful, wonderful week.
