The scenario every law firm owner knows too well

It’s mid-January. You finally close the loop on holiday catchup when an email lands in your inbox:

“Hi! It’s time to get started on your tax return. Can you send over your financials?”

You pause.

You know you made money last year. You were busy. The firm grew. But the details? Do they look like expenses scattered across cards, folders, and inboxes? Reports you meant to run but never quite got to?

Common tax pain points sound like:

• “I thought we were profitable… but the numbers don’t look great.”

• “My CPA keeps asking questions I can’t answer.”

• “What happens if my trust accounting is a mess?”

If you’ve had this moment, go ahead and breathe out. It’s a very normal law firm experience. But it doesn’t have to be your norm for next year. For most law firms, tax season stress falls on preparation that didn’t happen consistently throughout the year.

There’s no time like the present to shift from a fire drill to a formality. And that shift pays dividends far beyond April.

Why tax prep is uniquely painful for law firms

Law firms don’t operate like most businesses. In addition to revenue and expenses, you’re responsible for:

• Client trust accounts (IOLTA)

• Ethical compliance and bar rules

• Partner compensation and profit splits

• Forecasting staffing needs while cash flow fluctuates

On top of that, many firm owners also double as manager, HR, finance, and operations. Financial decisions are often made without clean, real-time data, and that’s where lawyers get hit during tax season.

The solution doesn’t start with better tax forms. It starts with better foundations.

6 Tax Prep Tips for Lawyers

#1: Hire a CPA who actually understands law firms

A CPA who files tax returns is not the same as a CPA who helps you run a law firm.

What to look for in the right CPA

The right CPA should be more than a once-a-year compliance partner. Look for someone who:

• Specializes in law firms (not just professional services broadly)

• Understands trust accounting and IOLTA requirements

• Offers proactive tax planning, not just filing

• Can help interpret your numbers for business decisions

Law firms operate under tighter ethical and regulatory constraints than most businesses. A CPA who understands those nuances helps protect both your finances and your license.

Trust accounting is nonnegotiable

If your CPA isn’t fluent in trust accounting, that’s a risk.

ABA Rule 1.15 violations (mishandling client funds) are among the most common ethical violations across the country. And most violations aren’t intentional; they happen because trust accounting is misunderstood.

A common misconception: “We reconcile cases, so we’re fine.”

Case reconciliation is not the same as trust account reconciliation. Proper trust accounting requires:

• Transaction-by-transaction tracking

• Monthly IOLTA reconciliations

• No commingling—ever

Because lawyers are busy, mistakes do happen. Cutting a check from the trust account instead of operating, letting reconciliations slide…they’re all risks, regardless of the intent.

This is why many CPAs avoid the legal industry altogether. The ones who don’t are invaluable.

#2: Reconcile early and consistently

One habit reduces year-end tax stress more than almost anything else: Reconcile at the beginning of every month.

Why it works:

• Transactions are still fresh

• Errors are caught early

• You avoid the year-end pile-up

Monthly reconciliation sounds like a painful time commitment, but we promise you it’s nothing compared to the, “what happened this year?” panic that waiting until the last minute brings. It’s one of the strongest risk-reduction moves a law firm can make.

#3: Use software that gives you reliable financial data

Strong tax prep depends on strong data. That means using systems that consistently track and automate:

• Income and expenses

• Trust activity

• Time, billing, and collections

• Matter and practice area performance

When financial and operational data live in disconnected tools (or spreadsheets updated once a quarter), it’s almost impossible to plan effectively for the future.

Firms that invest in integrated case management software and accounting workflows have cleaner books, fewer surprises, and far better conversations with their CPA.

#4: Treat tax planning as a year-round activity

The biggest missed opportunity for growing law firms is treating tax planning as an annual task. By the time you meet your CPA in January or February, most tax-saving strategies are already off the table.

What effective tax planning looks like:

• Reviewing financials monthly

• Tracking where the firm is headed, not just where it’s been

• Making adjustments before December 31

Think of tax planning as goal-setting for your firm. Many lawyers operate with survival-based goals like, “I just want to stay afloat and maybe make a little more.” But lawyers can do better!

More intentional firms set measurable targets:

• Increase revenue by 5–10%

• Improve collections

• Add staff without straining cash flow

Without accurate data, you can’t plan. Without planning, you can’t optimize.

#5: Structure your firm for efficiency (and fairness)

Entity structure matters, and it varies by state. For example:

• California requires firms to operate as corporations or sole proprietors

• Texas allows professional LLCs

Your structure impacts:

• Tax liability

• Partner compensation

• Profit distribution

A partnership may split profits based on workload, a corporation distributes profits based on ownership. Neither is universally correct—the right choice depends on firm size, growth goals, and partner dynamics.

When to consider changing your tax election

If your goal is to grow and operate like a business, earlier is recommended.

Yes, corporate structures have more specific requirements than say a sole proprietor has to deal with, but for growing firms, the tax savings and clarity often outweigh the administrative burden of switching it up later on.

#6: Capture deductions, but avoid pushing the line

Commonly overlooked deductions

Not every tax win requires a complex strategy. In fact, many law firms miss deductions simply because no one flags them in the moment.

A common example: employing a family member for legitimate work. If your kid helps with real tasks (organizing files, shredding documents, handling mail, or basic office support) and is paid a reasonable wage, that compensation can be deducted just like any other payroll expense.

Done correctly, it’s a clean, defensible deduction that also teaches financial responsibility. The key is simple: the work must be real, the pay must be reasonable, and the records must exist.

Where firms start to drift into dangerous territory

On the flip side, some firms assume they need clever or aggressive tactics to reduce their tax bill. They don’t, and when done recklessly, this tactic can provide insurmountable risks.  

Issues tend to arise when deductions are justified after the fact instead of planned up front: personal expenses framed as business research or assets used personally but written off professionally.

A good rule of thumb: if the explanation wouldn’t hold up comfortably in front of an auditor, it’s not worth the risk. There are plenty of compliant, well-established strategies available to law firms. Start there and leave the eyebrow raising ideas behind.

How to make tax season boring (in the best way)

Firms that move through tax season smoothly aren’t doing anything flashy, they’re consistent. Use this practical tax-ready checklist for law firms as a gut check heading into (or out of) tax season:

☐ Trust accounts reconciled monthly

☐ Operating accounts up to date

☐ Financial reports reviewed monthly

☐ Clear understanding of firm profitability

☐ Regular CPA check-ins scheduled

☐ Entity structure reviewed for growth goals

If several boxes are unchecked, that’s not a failure, it’s an opportunity.

Tax prep for law firms isn’t about last-minute heroics. It’s about systems, planning, and visibility. When you know your numbers, you reduce risk, uncover savings, and run a better business year-round, not just at tax time.

Disclaimer: This article is for informational purposes only and is not intended as legal, tax, or accounting advice. Tax laws and regulations vary by jurisdiction and individual circumstances. Always consult a qualified CPA or tax professional regarding your specific situation.

Frequently Asked Questions

What financial information should law firms review before hiring?

Before making a hiring decision, law firms should have a clear view of:

• Current financial performance

• Six-month and one-year projections

• The gap between where the firm is today and where it wants to be

A CPA can help translate this data into realistic scenarios, showing what the firm can sustainably support, not just what feels urgent in the moment.

How often should law firms reconcile trust and operating accounts?

At minimum, monthly, and earlier in the month is better.

Reconciling at the beginning of each month helps ensure transactions are fresh, errors are caught early, and year-end cleanup is minimized. Firms that wait until tax season often face unnecessary stress, corrections, and increased risk.

What financial reports should law firm owners review regularly?

Regular reviews should include:

• Profit and loss statements

• Cash flow visibility

• Trust account activity

• Collections and outstanding receivables

Having consistent access to these numbers makes tax prep, hiring decisions, and growth planning far more effective.

When should a law firm consider changing its entity structure?

When the firm starts thinking about growth.

If your goal is to scale, add partners, or operate the firm as a long-term business, entity structure becomes increasingly important. While corporations and professional entities come with additional requirements, they often provide tax advantages and clearer frameworks for ownership and compensation.

A CPA can help assess whether a change aligns with your goals and timing.

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