Tax Tips for Solo Practitioners

By David Shelvey

It's that time of year when solo practicing attorneys must assemble our client's paid invoices (income) and receipts for expenses needed to operate our law practice to either file our taxes for ourselves or hire a tax preparer to file our return. I’ve put together some tips that might help you along the way to "Return accepted" and to avoid receiving a dreaded IRS letter, "We have disallowed an expense and adjusted your return." By the way, you now owe.

It goes without saying that everything you report on your tax return is on the honor system. If the IRS concludes you have not been honest on your tax return or signed under perjury, both the IRS and the WSBA may seek further clarification.

ONE OF THE FIRST THINGS I HIGHLY RECOMMEND YOU DO IS GO ON THE IRS WEBSITE AND SIGN UP FOR AN ID.ME ACCOUNT.

This verifies your identity, and you can log on to the IRS website and review your account. You can use the ID.ME account to pay your tax bill, check on a refund, and see other account details. I also recommend you obtain a free identity protection PIN to prevent a thief filing a fraudulent return with your name. The IRS website has more information about this.

If you are filing a 'Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)', this year it is due Tuesday, April 15, 2025. You can file for an extension, 'Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return'. That form needs to be filed by April 15, 2025, and gets you until October 15 to file your tax return. You need to estimate how much tax you owe for the year on the extension form and then subtract the quarterly taxes you already paid for the filing year. If you do not send any money with the extension, and you owe the IRS, you may be subject to an under-payment penalty because your extension to file is not an extension on the late payment penalty and interest on the balance owing on April 15th.

SOME SCHEDULE C THOUGHTS...

On 1040 Schedule C, Line A, enter Lawyer and for Line B it asks your Principal Business or Professional Activity Code which is: 541100 Legal services. 541100 encompasses a broad range of professional services provided by lawyers, attorneys, and related legal professionals. Line D asks for your Employer Identification Number. This is a free IRS number, and I highly recommend you get an EIN, rather than use your personal Social Security number. I also recommend you get a separate business bank account that is linked to your IOLTA and not your personal account. Line G asks, ‘Did you “materially participate’ in the operation of this business during 2024?" The answer is "yes," unless you took the year off from practicing.

In Part 1, Line 4, asks for the cost of goods sold. Lawyers offer legal services, and not tangible goods. If you purchase a transcript or CD of a hearing, and mark the price up to your client, make sure you collect sales tax. If the Washington Department of Revenue audits you and notices you're marking up goods like transcripts, CDs, working copies, etc., they will expect you to collect sales tax. To correct this, charge the client your cost and add any reasonable shipping and handling fees.

Regarding Line 5, Gross Profit, if after a certain amount of years you continually report a net loss, the IRS may write you a letter pointing out that you are operating as a hobby and limit your expenses to be no more than your income. While the IRS has "form over substance," the WSBA has the standard of "the appearance of " what is professional conduct, and what is not. For example, the Bar isn't concerned if you make a profit. If they were, no pro bono.

To claim your home as an office expense to get the tax deduction, your home needs to truly be your primary place of business. Additionally, a portion of your home needs to be exclusively and regularly used for business. That means if you work from home only occasionally and work elsewhere, that likely doesn’t count. If you have been renting an office, you cannot double dip (claim home office expense and office rental expense).

THE MAIN THING TO KEEP IN MIND IS THAT THE IRS ASKS ONE QUESTION FOR MOST EXPENSES, "IS IT ORDINARY OR NECESSARY?"

Is it something that is expected and allowable? An example is work-related education expenses like legal education costs including CLE fees, lawyer books, training materials, education costs, car rental, traveling costs for attending a CLE in this state, or in a different state, country, or attendance at a conference.

Practically anything that improves your legal education or skills is generally allowed, as long as the costs are reasonable and not "lavish or extravagant." It is expected if you travel to London for a CLE that the traveling costs and meals will be more than traveling to Sumner. However, adding a nonlawyer, significant other, and/or children is not allowed as a tax deduction. Even hotel and meals costs beyond the CLE dates are generally not tax deductible. To meet the traveling expenses deduction with the associated hotel expenses, you need to do at least one session or class on the day of travel. For more information, Google "Topic on. 511, Business travel expenses."

Advertising costs include your website, business cards, marketing give-aways, and signage. If you pay for outdoor signs, it depends on how you are charged. Say you pay $5,000.00 for an outdoor sign, including those with LED lights. The IRS wants you to list this property classification as "Land Improvements" with a 15-year depreciation period. This would include the cost of the permit, and any inspection fees associated with it. If you have to pay annually for an outdoor sign, then this is an expense.

As a law professional, when it comes to office supplies and equipment costs, it’s important to ensure that anything you claim is used solely for business purposes. You can’t, for example, claim a computer as an office expense expecting a business tax deduction if it’s also used for personal use.

The written fee agreement you sign at the outset usually sets out the fees for various court appearances, Zoom meetings, and other court related work. The only thing a lawyer has to “sell” is his/her time. Normally, hearing fees include all the time the lawyer was in the courtroom, including time waiting for your case to be called. Most lawyers also charge for travel to and from court, especially if your matter is being heard in a court some distance from his/her office. Since you are not rendering legal advice, travel is usually billed at a lower rate than courtroom time. However, I have not been able to find out if the client can be billed for travel time, mileage and parking. I have read that you cannot charge the client for mileage and claim the mileage on your tax return as what your client pays you now becomes income. The waiting time is time you are not able to work on other clients’ matters. Since the lawyer is there on your behalf, and precluded from other profitable work, it is time your client pays for. Many lawyers do schedule multiple matters for the same court for the same day to minimize billing for waiting time, but that is not always feasible.

I heard an interesting argument the other day between a judge and a lawyer seeking attorney fees. One of the charges was "attendance at hearing flat fee." The judge asked, "Explain this to me." The lawyer said he charges a 2-hour flat fee to every client when appearing at a hearing. The judge asked, "If you get done in 30 minutes, do you do nothing for an hour and a half? If not, are you double billing?" Double billing occurs when an attorney invoices two or more clients at their full rate for work performed during the same time frame.

The IRS doesn't care if you double or triple bill, as long as you report this as income and pay taxes on it. On the other hand, the WSBA says that double billing or the appearance of it is unethical. By the way, the attorney redacted his court appearance flat fee.

Client costs include filing fees, court costs, and expert witness fees. Lawyers also need to be able to track and justify advanced client costs to clients, which can be challenging. Regarding credit card transaction fees, the Washington State Bar Association (WSBA) permits lawyers to charge clients a reasonable credit card convenience fee if they notify the client in advance. The fee must be based on the actual cost of the transaction. The WSBA considers credit card transaction fees to be an expense that can be passed on to client, providing the client agrees to the fee before it is charged.

Practice Tip:

Tasks vs calendaring due dates. One of the things I learned while working for Helbert Gelman was planning to meet due dates and cutoff times. I look at a task as a reminder what I needed to do to reach a due date. Personally, the biggest challenge I have is planning out the time needed to meet the due date and time. Example, the reply is due Tuesday by noon. What do I need to do to get the reply signed and submitted? I want to avoid delay by coordinating with the client when can they read and sign the reply? I also breakdown draft time, review time, making any changes, signing, uploading, and getting working copies submitted.

For my next article I will write about the joy of going solo.

 

David Robert Shelvey is a solo practitioner in Sumner, WA. He is a member of the TPCBA, the Pierce County Lawyer Magazine and CLE Committee. He has been an attorney since 2015 and is a Master Tax Advisor at H & R Block. He also volunteers as a president and cook for a local nonprofit. david@rockcraft.org.