New Law Firm Owners: Year-End Tax Tips You Can’t Afford to Miss

Starting your own law firm has likely been a whirlwind of legal work, administrative tasks, and client management. But as the year draws to a close, there’s one critical area you cannot overlook—your taxes.

You’ve put in the hard work to build your practice, and now is the time to ensure you’re getting the most out of the tax deductions and benefits available to new business owners. Year-end tax planning can save your firm thousands of dollars, especially during the critical early years of operation.

If you’ve been too busy growing your client base to think about tax strategy, don’t worry—we’ve got you covered. Here are the key year-end tax tips every new law firm owner should know.

1. Deduct Startup Costs Like Office Setup, Legal Fees, and Marketing

When launching a law firm, there are significant startup costs that go into getting your practice off the ground. The good news is that many of these expenses can be deducted, reducing your taxable income for the year. The IRS allows new businesses to deduct up to $5,000 in startup costs, which can include everything from office setup to initial marketing efforts.

Key deductible startup costs include:

• Office setup: Furniture, office supplies, technology, and any renovations to your workspace.
• Legal fees: Any costs related to setting up your business structure, registering your firm, or drafting contracts.
• Marketing expenses: Branding, website creation, and initial advertising campaigns to get your name out there.

Pro Tip: If your startup costs exceed $50,000, you may need to amortize the excess over 15 years, but most new law firms can take advantage of the full $5,000 deduction immediately.

2. Evaluate Entity Structures (LLC, S-corp) for Tax Savings

As a new law firm owner, the entity structure you choose for your business will have a direct impact on your taxes. If you haven’t yet evaluated the best structure for your firm, now is the time to consider whether you should form an LLC, S-corp, or C-corp.

How your entity affects taxes:

• LLCs are pass-through entities, meaning that profits and losses are reported on your personal tax return. While this simplifies filing, it may result in higher self-employment taxes.
• S-corporations offer potential tax savings by allowing you to pay yourself a reasonable salary and take the remaining profits as distributions, which are not subject to self-employment taxes.
• C-corporations are taxed at the corporate level, which may make sense for larger firms, but they also involve more complexity.

Pro Tip: Many new law firms benefit from electing S-corp status to minimize self-employment taxes. It’s a move that could save you thousands of dollars in the first year alone.

3. Take Advantage of First-Year Depreciation on Office Equipment

The end of the year is the perfect time to purchase any office equipment or technology your law firm needs and take advantage of first-year depreciation. The IRS allows businesses to fully deduct the cost of certain office equipment using Section 179, meaning you don’t have to spread the deduction over several years.

Here’s how you can benefit:

• Purchases such as computers, printers, office furniture, and other equipment can be deducted in full, as long as they’re put into service before December 31.
• For 2024, the maximum Section 179 deduction is $1,220,000.

Example: If your firm purchases $20,000 worth of office equipment in December, you can deduct the full $20,000 from your 2024 taxable income, giving your firm an immediate financial boost.

Pro Tip: Ensure that all equipment is in use by the end of the year to qualify for the deduction this tax season.

4. Understand How to Write Off Business Expenses vs. Capital Expenses

One of the trickier areas of tax planning for new law firm owners is distinguishing between business expenses and capital expenses.

• Business expenses are the ongoing costs of operating your law firm—like rent, utilities, legal research subscriptions, and office supplies. These are typically fully deductible in the year they are incurred.
• Capital expenses include investments in assets like furniture, technology, or even office renovations that will benefit your firm for several years. These are usually capitalized and depreciated over time, unless you qualify for Section 179 or bonus depreciation.

Pro Tip: Work with your accountant to ensure that you’re categorizing your expenses correctly to maximize your tax deductions. Misclassifying an expense could result in losing out on valuable deductions.

5. Review Client Receivables and Decide on Income Deferral Strategies

If your law firm has outstanding client receivables, you have the option to defer some of that income into the next year to lower your taxable income for 2024.

Here’s how it works:

• If your firm operates on a cash-basis accounting method (which many small firms do), you only recognize income when it’s received—not when it’s earned.
• By delaying the receipt of client payments until January 2025, you can reduce your taxable income for 2024, effectively deferring taxes on that income until the following year.

Pro Tip: Make sure you balance deferring income with your firm’s cash flow needs. You don’t want to create a short-term cash crunch just to save on taxes.

Why Year-End Tax Moves Matter for New Law Firm Owners

As a new law firm owner, the decisions you make now will have a lasting impact on your firm’s finances. Maximizing your deductions, taking advantage of first-year depreciation, and implementing income deferral strategies are all essential steps to ensuring your firm’s profitability as you move into 2025.

The bottom line: Being proactive about your year-end tax planning can save your firm thousands of dollars, give you peace of mind, and help you start 2025 on the right financial footing.

New Firm, New Savings—Let Us Help You Navigate Your Taxes!

At Prestige Accounting and Consulting, we specialize in helping new law firm owners like you maximize their tax savings and more. Whether you need guidance on deductions, entity structures, or first-year depreciation, our team of experts is here to ensure your firm is financially sound.

Contact me today to schedule a consultation and let us help you prepare your law firm for financial success.