Tax Credits and Your New Law Firm
You have opened your new law firm, and likely have two primary goals: to maximize revenue and to minimize expenses. The first goal will benefit from, for example, focusing on your primary area of legal practice, effective marketing to your niche, and delivering great results for your clients.
One way of minimizing expenses is to make the best use of tax advice, so you legally pay as little business and personal tax as possible. Tax credits are available to new law firms. To benefit from those potential credits it is important to understand enough about federal and state tax laws so you plan ahead before simply incurring costs. Not planning ahead can cost a firm the credit and force them to rely only on deductions.
The Difference Between Tax Credits and Tax Deductions
Business expenses can be used to reduce tax liability. The federal corporate tax rate is 21% and California’s state corporate rate is 8.4% (the ninth highest in the country.) To contrast the difference, for every dollar-related expense you reduce federal taxes by 21%. Tax credits, however, mean that for every credited dollar you will reduce tax liability by a dollar up to the limit of the available credit.
Potential Tax Credits
Many tax credits are available to any small business or business start-up. As a law firm, it may be possible to claim credits associated with your particular area of practice. Let us begin with a more general example and then look at two approaches directed at law firms.
Common Tax Credits for Small Businesses
Your firm may offer health insurance for yourself and your employees. A program purchased through the SHOP Marketplace would qualify for tax credits, as would a scheme providing paid family leave covered by the Family and Medical Leave Act for certain employees.
Improved Process Tax Credits
The Research and Development Tax Credit is available to firms that enhance existing processes or develop and improve on existing prototypes and software. Many new law firms are founded by entrepreneurs who see opportunities to improve on what other firms currently offer. Enhanced processes to serve clients that are considered new to the taxpayer, and not necessarily new to the world as used to be the case, may qualify.
If your law firm has improved on the ways cases are handled, records are kept, research into previous cases or governing legislation is handled and analyzed, how clients’ records are recorded or communicated, etc. then you may qualify for R&D tax credits.
Greater efficiencies lower costs and improving client experience helps to grow revenue. Planning ahead before designing and implementing such improvements may result in a valuable tax credit as well as improved office practices.
Innovation is no longer limited to major corporations with dedicated R&D divisions. The 2015 PATH Act (Protecting Americans from Tax Hikes) made R&D tax credits permanent. It also modified the criteria to benefit small businesses and start-ups.
Making Additional Use of Practice Specialties
Many new law firms handle accident and injury claims. Many people who have been seriously injured suffer from long-term disability. It makes sense in a number of ways to ensure the firm’s offices are easily accessible to such clients, as well as them being served by someone in a similar situation. Empathy as well as expertise matter to clients.
The Disabled Access Credit is available to businesses that make their offices and other facilities fully accessible to anyone with physical disabilities. A law firm specializing in accident and injury claims may, automatically, make access easier to its clients, claiming a tax credit for such alterations makes more sense than simply limiting tax liability to a depreciation write-off.
The Work Opportunity Tax Credit (WOTC) is also available to firms that hire people belonging to one of ten targeted groups who have faced barriers to being employed. Physical disability is one of those groups. To qualify for the credit, the firm must obtain approved certification and file IRS Form 8850 within the designated timeframe.
Setting up your new law firm is exciting. Making full use of IRS opportunities to reduce costs is good business. Fully benefiting from tax credit opportunities must be planned for and clarified, in many cases, before expenses are incurred.
In this article, we have offered just three ideas on how a new law firm can claim tax credits. To learn more and to discuss your plans and how your firm can minimize its tax liabilities, please contact us by clicking this link.